SPECIAL MEETING of the AUDIT / OPERATIONS COMMITTEE of … · Recommendation: DISCUSSION of 2006 management audit of PFRS administration. 6. Open Forum 7. Future Scheduling Retirement

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- - - ORDER OF BUSINESS - - -

1. Subject: April 26, 2017 PFRS Audit Committee Meeting Minutes From: Staff of the PFRS Board

Recommendation: APPROVE April 26, 2017 Audit Committee meeting minutes.

2. Subject: Administrative Expenses Report From: Staff of the PFRS Board

Recommendation: ACCEPT an informational report regarding PFRS Administrative Expenses from July 1, 2016 through March 31, 2017.

3. Subject: Review of PFRS Rules and Regulations From: Staff of the PFRS Board

Recommendation: DISCUSSION and review of PFRS Rules and Regulations.

4. Subject: Procedures for member hearings involving private medical information

From: Staff of the PFRS Board

Recommendation: DISCUSSION of procedures for member hearings involving private medical information.

5. Subject: Discussion of 2006 management audit of PFRS administration From: Staff of the PFRS Board

Recommendation: DISCUSSION of 2006 management audit of PFRS administration.

6. Open Forum

7. Future Scheduling

Retirement Systems 150 Frank H. Ogawa Plaza Oakland, California 94612

All persons wishing to address the Board must complete a speaker's card, stating their name and the agenda item (including "Open Forum") they wish to address. The Board may take action on items not on the agenda only if findings pursuant to the Sunshine Ordinance and Brown Act are made that the matter is urgent or an emergency. Oakland Police and Fire Retirement Board meetings are held in wheelchair accessible facilities. Contact Retirement Systems, 150 Frank Ogawa Plaza, Suite 3332 or call (510) 238-7295 for additional information.

AUDIT COMMITTEE MEMBERS

John C. Speakman Chairman

Christine Daniel Member

Robert J. Muszar Member

*In the event a quorum of the Board participates in the Committee meeting, the meeting is noticed as a Special Meeting of the Board; however, no final Board action can be taken. In the event that the Audit Committee does not reach quorum, this meeting is noticed as an informational meeting between staff and the Chair of the Audit Committee.

Wednesday, May 31, 2017 – 9:30 am One Frank H. Ogawa Plaza, Hearing Room 3

Oakland, California 94612

SPECIAL MEETING of the AUDIT / OPERATIONS COMMITTEE of the OAKLAND POLICE AND FIRE RETIREMENT SYSTEM (“PFRS”)

AGENDA

PFRS Audit/Operations Committee Meeting Minutes April 26, 2017

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D R A F T

D R A F T

A SPECIAL AUDIT/OPERATIONS COMMITTEE MEETING of the Oakland Police and Fire Retirement System (“PFRS”) was on held Wednesday, April 26, 2017 in Hearing Room 3, One Frank Ogawa Plaza, Oakland, California.

Committee Members Present:

• John C. Speakman, Chairman • Robert J. Muszar, Member • Christine Daniel, Member

Additional Attendees: • Katano Kasaine, Plan Administrator • David Low & Teir Jenkins, Staff Members • Pelayo Llamas, PFRS Legal Counsel

The meeting was called to order at 9:34 AM

1. Approval of February 22, 2017 Audit Committee meeting minutes – Member Muszar thanked staff for reviewing and editing the February 22, 2017 Audit Committee meeting minutes. Member Muszar made a motion to approve the February 22, 2017 Audit Committee meeting minutes, second by Member Daniel. Motion passed.

[SPEAKMAN – Y / DANIEL – Y / MUSZAR – Y ] ( AYES: 3 / NOES: 0 / ABSTAIN: 0 )

2. Approval of March 29, 2017 Audit Committee meeting minutes –Member Daniel made a motion to approve the March 29, 2017 Audit Committee meeting minutes, second by Member Muszar. Motion passed.


3. PFRS Monthly Administrative Expenses Report – Investment Officer Teir Jenkins presented the details of the PFRS administrative expenses report from July 1, 2016 through February 28, 2017. Member Daniel asked staff questions regarding budgeted projections of administrative expenses by the end of the fiscal year. Following committee discussion, Member Daniel made a motion to accept the Administrative Expenses Report from July 1, 2016 through February 28, 2017, second by member Muszar. Motion passed.


4. Review of PFRS Rules and Regulations – Member Muszar discussed his recommendation to schedule a review and recommendation to modify the PFRS rules and regulations by the October 2017 Board meeting. He suggested staff first take the lead with inquiring with the PFRS board members any Rules & Regulations update-related concerns to be brought back to the PFRS Audit Committee for further review at upcoming audit committee meeting.

Plan Administrator Katano Kasaine and the Audit Committee discussed this matter to clearly form the committee’s instruction to staff on regarding this matter. Member Muszar noted that the recent confusion in procedure he experienced was the lack of organization regarding Member Hearings which he felt were illustrated the need for such a review/update. He also felt the election procedures are antiquated and can should be updated. Member Muszar added that a ‘periodic review’ mechanism should be built into the Rules and Regulations.

Member Muszar made a motion that the Audit Committee inform the PFRS Board of their plan to review and possible update the PFRS Rules and Regulations, and the need for PFRS Board members to submit their review questions related to this update to staff by May 15, 2017 for inclusion of the audit committee discussion at the next PFRS audit committee, second by member Daniel. Motion passed.



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5. Review of PFR Protocols regarding closed session process for disability hearings – Member Muszar stated his concerns regarding the closed session process used last month on the Carlisle hearings regarding service/non-service cause of death. Legal counsel will provide the board members with a California Attorney General Opinion which addresses the issue.

Member Daniel made a motion to continue this item to the May 2017 meeting, second by member Muszar. Motion passed.


6. Review possible administrative/management audit of PFRS Administration – Member Muszar requested the audit committee recommend the Board approve a management audit of the PFRS system. Member Daniel moved that staff provide for committee review the following items: (1) The prior management audit Final Report ; (2) Board response to the audit items; (3) the RFP for the management report consultant, and (4) the cost for the service, second by member Muszar. Motion passed.


7. Resolution No. 6965 - Travel Authorization for Board Member R. Steven Wilkinson – Member Daniel made a motion to recommend Board Approval of Resolution No. 6965 - Travel Authorization for Staff Member R. Steven Wilkinson to Travel and Attend the 2017 NASP Pension and Financial Services Conference (“2017 NASP Conference”) from/on June 26, 2017 to June 28, 2017 in Los Angeles, CA with an Estimated Budget of One Thousand Seven Hundred Fifty-Seven Dollars ($1,757.00), second by member Muszar. Motion passed.


8. Resolution No. 6968 - Travel authorization for Staff Member Pelayo Llamas – Member Daniel made a motion to recommend Board approval of Resolution No. 6968 – Travel authorization for Staff Member Pelayo Llamas to travel and attend the 2017 CALAPRS Attorneys' Roundtable Conference (“2017 CALAPRS Conference”) from/on June 2, 2017 in Burbank, CA with an estimated budget of Eight Hundred Nine Dollars ($809.00), second by member Muszar. Motion passed..


9. Resolution No. 6969 – Travel authorization for PFRS Board Member R. Steven Wilkinson – Member Muszar said he had some questions for Member Wilkinson regarding his requested attendance to this conference. Member Muszar made a motion to recommend carrying action on Resolution No. 6969 for Board consideration to the Board meeting, second by Member Daniel. Motion passed.


10. Resolution No. 6970 – Travel authorization for PFRS Staff Member Katano Kasaine – Member Daniel made a motion to recommend Board approval of Resolution No. 6970 – the travel authorization for PFRS Staff Member Katano Kasaine to travel and attend the 2017 IIR Public Funds Roundtable Conference (“2017 IIR Conference”) from/on April 26, 2017 to April 28, 2017 in Los Angeles, CA with an estimated budget of One Thousand Two Hundred Seventeen Dollars ($1,217.00), second by member Muszar. Motion passed.



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D R A F T

D R A F T

11. Open Forum – No Report.

12. Future Scheduling – The next audit committee meeting was scheduled for May 31, 2017.

The meeting adjourned at 10:04 AM

JOHN C. SPEAKMAN, COMMITTEE CHAIRMAN DATE

Table 1

OAKLAND POLICE AND FIRE RETIREMENT SYSTEMAdministrative Budget Spent to Date

Fiscal Year as of March 31, 2017

Amended

Budget March 2017 FYTD Remaining Percent Remaining

Internal Administrative CostsPFRS Staff Salaries 984,865$ 82,564$ 637,666$ 347,199$ 35.3%

Board Travel Expenditures 52,500 2,491 5,385 47,116 89.7%

Staff Training 10,000 - 1,647 8,353 83.5%

Staff Training - Tuition Reimbursement 5,000 3,280 4,580 420 8.4%

Annual Report & Duplicating Services 4,000 - 60 3,940 98.5%

Board Hospitality 2,600 211 1,236 1,364 52.5%

Payroll Processing Fees 35,000 35,000 35,000 - 0.0%

Miscellaneous Expenditures 25,000 2,760 23,329 1,671 6.7%

Contract Services Contingency 50,000 - 1,200 48,800 97.6%

Internal Administrative Costs Subtotal : 1,168,965$ 126,306$ 710,103$ 458,862$ 39.3%

Actuary and Accounting ServicesAudit 45,000$ -$ 41,750$ 3,250$ 7.2%

Actuary 45,000 - 28,156 16,844 37.4%

Actuary and Accounting Subtotal: 90,000$ -$ 69,906$ 20,094$ 22.3%

Legal ServicesCity Attorney Salaries 169,956$ 14,754$ 108,106$ 61,850$ 36.4%

Legal Contingency 150,000 35,724 65,585 84,415 56.3%

Legal Services Subtotal: 319,956$ 50,478$ 173,691$ 146,265$ 45.7%

Investment ServicesMoney Manager Fees 1,326,646$ -$ 536,449$ 790,197$ 59.6%

Custodial Fee 116,500 - 33,800 82,700 71.0%

Investment Consultant (PCA) 100,000 25,000 75,000 25,000 25.0%

PCA: Asset & Liability Study 30,000 - - 30,000 100.0%

Investment Subtotal: 1,573,146$ 25,000$ 645,249$ 927,897$ 59.0%

Total Operating Budget 3,152,067$ 201,784$ 1,598,950$ 1,553,117$ 49.27%

Table 2

OAKLAND POLICE AND FIRE RETIREMENT SYSTEM

Cash in Treasury (Fund 7100)

As of March 31, 2017

FY 2016 - 2017

Beginning Cash as of 2/28/2017 2,702,818$

Additions:

City Contributions -$

Investment Draw (Incoming Wire) 5,000,000

Misc. Receipts 6,977

Total Additions: 5,006,977$

Deductions:

Pension Payment (February Pension Paid in March) (4,796,224)

Expenditures Paid (93,244)

Total Deductions (4,889,468)$

Ending Cash Balance as of 3/31/2017 2,820,328$

Table 3

CITY OF OAKLAND POLICE AND FIRE RETIREMENT SYSTEM

Census


COMPOSITION POLICE FIRE TOTAL

Retired Member:

Retiree 381 239 620

Beneficiary 139 132 271

Total Retired Members 520 371 891

Total Membership: 520 371 891

COMPOSITION POLICE FIRE TOTAL

Retired Member:

Service Retirement 346 199 545

Disability Retirement 161 157 318

Death Allowance 13 15 28

Total Retired Members: 520 371 891

Total Membership as of March 31, 2017: 520 371 891

Total Membership as of June 30 2016: 545 384 929

Annual Difference: -25 -13 -38

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 FYTD

Police 705 690 672 653 630 617 598 581 558 545 519

Fire 568 549 523 500 477 465 445 425 403 384 372

Total 1273 1239 1195 1153 1107 1082 1043 1006 961 929 891

300

350

400

450

500

550

600

650

700

750

800

Oakland Police and Fire Retirement System Pension Plan Membership Count

As of March 31, 2017 (FY 2007 - FY 2017)

CITY OF OAKLAND

TO: Oakland Police and Fire Retirement Board

AGENDA REPORT

FROM: Katano Kasaine

SUBJECT: Discussion of PFRS Rules and Regulations DATE: May 24, 2017

BACKGROUND

At its April 26, 2017 meeting, the PFRS Board directed Staff to request each PFRS Board member to list and send back to Staff each section of the PFRS Rules and Regulations for which they have some questions, comments, and/or concerns which they would like to discuss. Staff was directed by the Board to bring these board questions, comments, and/or concerns to the May 31, 2017 Audit Committee for discussion and evaluation.

To date, staff received comments from only one PFRS Board member (attached).

Attachment: • PFRS Rules and Regulations effective 24SEP2014.

Respectfully submitted,

/G.h,,,J ~-?Ill~ 1

Katano Kasaine, Plan Administrator Oakland Police and Fire Retirement System

• PFRS Board Member submission(s) of sections of the Rules and Regs for discussion.

Agenda Item 13 2. PFRS Board Meeting

May 31, 2017

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OAKLAND POLICE AND FIRE RETIREMENT SYSTEM RULES AND REGULATIONS

1050062.2 Enacted 09/24/2014 PAGE 19/19

DIRECTORY OF AMENDMENTS

Amendment ID Date Notes

09/24/2014 Creation of New Rules and Regulations approved by PFRS Board.

07/29/2015 Passage of PFRS Board Resolution No. 6856 affirming, “that the September 24, 2014 Rules and Regulations are the only Rules the PFRS board uses to govern, until amended.”

ATTACHMENT A

OAKLAND POLICE AND FIRE RETIREMENT BOARD CITY OF OAKLAND, CALIFORNIA

RESOLUTION No. 6856

ON MOTION OF MEMBER Wtlk-tn J 6 n SECONDED BY MEMBER Jf eak_ma<n,

RESOLUTION AFFIRMING THE BOARD'S MOTION OF SEPTEMBER 24, 2014 WHEREIN IT APPROVED AND ADOPTED THE OAKLAND POLICE AND FIRE RETIREMENT SYSTEM RULES AND REGULATIONS

WHEREAS, in the period of July 2011 through September 2014, the PFRS Board conducted public meetings to consider revising and amending its Rules and Regulations as authorized by Charter section 2601(e), with the goal of creating an all-encompassing set of rules, regulations, and procedures; and

WHEREAS, the PFRS Board invited any interested persons to provide oral and written input, comments, and suggestions to the board about certain terms of the Rules and Regulations; and

WHEREAS, the Retired Police Officers Association (ROPOA) provided extensive oral and written input, comments, and suggestions to the board about certain terms of the Rules and Regulations; and

WHEREAS, PFRS staff provided written responses, comments, and revisions in light of the written and verbal commentary and suggestions received during the course of the multiple public meetings about the revision of the Rules and Regulations; and

WHEREAS, on September 24, 2014, the PFRS Board passed a motion (motion by Member Speakman, Second by Member Cooper) by a vote of 7 Aye:O Nay: 0 Abstain, to approve and adopt said rules and regulations; and

WHEREAS, Charter section 2601 (b) states that the Board exercises its powers under Article XXVI by order or resolution; and

WHEREAS, passage of this resolution will eliminate any ambiguity that the Rules and Regulations adopted by unanimous motion of the Board on September 24, 2014 are in full force, now therefore be it

RESOLVED: That the comprehensive Rules and Regulations approved and adopted by unanimous motion of the PFRS Board on September 24, 2014 is hereby affirmed and made part of this Resolution; and be it

FURTHER RESOLVED: that the September 24, 2014 Rules and Regulations are the only Rules this Board uses to govern, until amended.

IN BOARD MEETING, CITY HALL, OAKLAND, CA ______ ---'J'""U'"""L .... Y .... 2 .... 9'-'-=20..._1-..;5'"------

PASSED BY THE FOLLOWING VOTE:

AYES: JOHNSON, GODFREY, SPEAKMAN, COOP!ER, -ez~m'A'IG~. WILKINSON, SOLITEI

NOES:

ABSENT: C o op~ 1 0 2:,, ow '~ l!.

ATTACHMENT A

ATTACHMENT B

1

Date: May 15, 2017 To: Katano Kasaine Teir Jenkins Pelayo Llamas From: Robert J. Muszar Subject: Submissions Regarding Audit/Operations Committee Review of PFRS Rules and

Regulations

At its April 26, 2017 meeting, the Audit/Operations Committee (“Committee”), pursuant to the responsibilities assigned to the Committee by Section 8.2 of Oakland Police and Fire Retirement System Rules and Regulations (“PFRS Rules” or “Rules”), decided to conduct a review of the Rules with the goal of submitting any recommendations which may result from this review to the PFRS Board for consideration at its October 2017 meeting.

At the Board meeting on the same date, Board members and staff were invited to “flag” Rules sections for review and asked to submit them along with any other comments or suggestions to PFRS staff by May 19, 2017. Staff was directed to compile the information received and present it to the Committee at its May 2017 meeting.

Please include the following Articles and/or Sections of the PFRS Rules on the list of those to be reviewed: Article 2. All.

Article 3. Sections 3.1 and 3.4.

Article 4. Section 4.6.

Article 7. Sections 7.1, 7.3, 7.4 and 7.5.

Article 8. Section 8.2.

Article 9. Sections 9.4, 9.8, 9.9, 9.10, 9.13, & 9.14.

Article 10. All.

Article 11. All.

Article 12. All

Also, please include the following topics for possible addition to the Rules:

Article/Sections setting forth hearing procedures for Board hearings conducted pursuant to Sections 2603 and/or 2604 of the City Charter.

Article/Sections setting forth hearing procedures for public hearings conducted for purposes other than Sections 2603/2604 of the Charter.

Article/Sections requiring periodic review of the PFRS Rules and setting forth the schedule/timing of such reviews.

I will comment regarding all of the above during discussion at the May 2017 meeting of the Audit/Operations Committee.

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CITY OF OAKLAND


AGENDA REPORT


SUBJECT: Procedures for member hearings involving DATE: May 24, 2017 private medical information

BACKGROUND

At its April 26, 2017 meeting, discussion regarding the review ofretiree medical records at the closed session of the PFRS Board meeting. PFRS Legal Counsel Pelayo Llamas was directed to deliver to the Audit Committee members the legal opinion of the Attorney General of the State of California, No. 04-408 (February 23, 2005), which was delivered to the Board Committee members outside of the meeting.

Attachment: •None

Respectfully submitted,

ti.bn 0 l~IJ/t" I Katano Kasaine, Plan Administrator Oakland Police and Fire Retirement System

Agenda Item B.3 PFRS Board Meeting

May 31, 2017

CITY OF OAKLAND


AGENDA REPORT


SUBJECT: Discussion of 2006 management audit of PFRS administration

DATE: May 24, 2017

BACKGROUND

At its April 26, 2017 meeting, the PFRS Board discussed the previous management audit of the PFRS System completed in 2006 by Independent Fiduciary Services (IFS). Staff was instructed to bring the Audit Committee information related to the previous 2006 management audit, specifically (1) Request for Information (RFI), (2) Final management audit report, (3) the cost for the report, and ( 4) Responses to the report finding. As instructed, staff is presenting the following:

1. Attachment 1: Request for Information (RFI) Management I Governance Audit Request for Information (December 1, 2004).

2. Attachment 2: Final Report on the Management Audit of the City of Oakland Police and Fire Retirement System by IFS (May 22, 2006).

3. Cost of Audit: Final PFRS' costs paid for the management audit services provided by IFS was $157,500.

4. Attachment 3: Action Report Summary to date (May 26, 2010) and an additional Action Report Summary for Investment Committee (May 18, 2011).

Attachments (3): • Items 1, 2 & 4 listed above.

Respectfully supmitted,

{~ j 14~/lt- ' Katano Kasaine, Plan Administrator Oakland Police and Fire Retirement System

Agenda Item Bf PFRS Board Meeting

May 31, 2017

City of Oakland

Police and Fire Retirement System

Request for Information

Management/Governance Audit Services

December 1, 2004

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INTRODUCTION PURPOSE The City of Oakland’s Police and Fire Retirement System Board of Administration (PFRS) is seeking a firm to conduct a management/governance audit of the Police and Fire Retirement System. Note: this is not a request for a firm specializing in financial audits. BACKGROUND City of Oakland Police and Fire Retirement System (PFRS) Article 2600 of the City Charter and its subsequent amendments established PFRS and its Board of Administration. The Board consists of seven members; the Mayor or his designated representative, a life insurance executive of a local office, a senior officer of a local bank, a community representative, a police elected member, a fire elected member, and an elected Police-Fire retired member whose position alternates between the fire and police membership. All members of the Board serve without compensation. PFRS is a closed plan covering uniformed employees hired prior to July 1976. As of June 30, 2003, there were 1,425 retirees and beneficiaries receiving monthly benefits from the system. The Board’s purpose is to provide sound and efficient systems to ensure payment and continuity of members' retirement benefits. The Board oversees the administration of the plan and the management of its investment portfolios. It is responsible for formulating policies for the investment and reinvestment of monies in the fund along with the acquisition, retention, management, and disposition of the investments in the investment funds. The Board, as the system’s fiduciary, must manage the system’s portfolio as a prudent investor would do, under the prevailing circumstances and in light of the purposes, terms, distribution requirements, and laws governing each investment fund. In addition, the Board must act with prudence when selecting agents and delegating authority. All costs associated with the administration of PFRS are paid from the retirement fund. The Board meets monthly and, in compliance with the Brown Act and the Sunshine Ordinance, holds it’s meeting in a manner which is open to the public, where all persons are permitted to attend. Public notice, including a meeting agenda, is provided to interested persons as well as news media, which have requested notice. Written minutes and recordings are taken of all meetings. Over the past several years, the Board has focused significant effort on the establishment, review, and modification of formal, written policies and procedures governing all investment and administrative activity. As funds under management have grown significantly, these more formal guidelines have become invaluable to the professional management of PFRS funds. The

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Board also regularly reviews various aspects of investment policy, performance of investment managers and accounts, asset allocation. POLICE AND FIRE RETIREMENT SYSTEM BOARD MEMBERS: Robert Crawford, President Active Police Department Representative Term expires: Expires: 8/31/08

Elected

Jamie Godfrey, Vice President Banking Industry Term expires: Pending 6/23/03

Appointed

Kenneth Brooks Community Representative Term Expires: 4/15/08

Appointed

Deborah Edgerly Mayor’s Designee Term Expires: 5/25/08

Appointed

William Hubartt Retired Police-Fire Representative Term Expires: 08/31/07

Elected

David McArthur Retired Fire Representative Term Expires: 8/31/05

Elected

Vacant Insurance Industry

Appointed

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SCOPE OF WORK 1. Identification of Responsibilities

Are the responsibilities for the governing body (PFRS Board), administrative staff, and the plan sponsor clearly identified?

Is there a clear identification and assignment of operation and oversight responsibilities (Board, internal staff and external experts)?

Is the structure adequate to meet the needs of the system for carrying out its mission in the following areas: collection of contribution, record keeping, benefit payments, asset-liability management, asset management, and reporting?

2. Governing Body

What is the role of the governing body (PFRS Board) in the administration of PFRS? Does the governing body have complete authority over the administration of all

operations and oversight responsibilities of the PFRS pension fund? Does the governing body select and compensate internal staff with operational

responsibilities and external service providers (money managers, actuaries, custodians, auditors, etc)?

Is it in compliance with the charter and other regulating policies (California Pension Protection Act)?

3. Accountability

Does the governing body hold regular meetings and keep records of such? Does the PFRS Board utilize established criteria in its decision making process? Is there appropriate disclosure of the decisions reached in the meeting of the governing

body to plan members and beneficiaries? Are the actions/decisions of the PFRS Board reported? Is the selection process for members of governing body transparent? Does this process

meet the requirements of the Charter and other associated regulations? Is there an appropriate succession planning process?

4. Expert Advice

Does the governing body seek and employ the use of independent experts in the following areas: Investment Consultant, Actuary, Custodian, Auditor, and Legal Representation?

5. Suitability

Are the members of the governing body suitable to serve on the PFRS board? (Specifically, they have not been convicted of fraud, or other criminal offences, gross mismanagement of a pension fund or personal bankruptcy).

Develop a list of comparable pension funds base on number of members and total amount of fund assets. Survey the selected pension funds to determine pertinent policies and procedure, performance characteristics and other such relevant information.

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Review the administrative costs of operating the pension system including internal administrative costs and City overhead charges levied against the pension fund. Compare these costs to comparable pension funds. Evaluate the cost effectiveness of existing administrative structure, policies, and procedures.

6. Internal Controls

Are appropriate internal controls in place? Regular assessment of the performance of the persons and entities involved in the

operation and oversight of the pension fund. Regular review of compensation mechanisms, in order to ensure that they provide the

correct incentives for those responsible for the operation and oversight of the pension fund.

Regular review of information processes, operational software systems, and accounting and financial reporting systems.

Identification, monitoring and where necessary, correction of conflicts of interest situations.

Mechanisms to sanction the improper use of privileged information Implementation of an adequate risk measurement and management system including

effective internal audit. Regular assessment of regulatory compliance systems. The establishment of objective performance measures for all persons and entities

involved in the administration of the PFRS fund. 7. Reporting

Are reporting channels established between all persons and entities involved in the administration of the PFRS fund in order to ensure the effective and timely transmission of relevant and accurate information?

Does the PFRS fund comply with federal and state reporting requirement? Are audit, actuary, and financial reports completed annually or as required?

8. Disclosure

Does the governing body disclose relevant information to all parties in a clear, accurate, and timely manner?

9. Investment Analysis

Review investment policies, procedures, and periodic reporting to the PFRS Board. Determine if the investment portfolio complies with the City Charter and Board investment policy. Compare investment performance with other California city and county public pension funds. Calculate annual investment cost as a percent of annual investment purchases and compare to other funds. (Note: Staff suggests that our Investment Consultant has the ability and resources to complete this task).

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RESPONSES TIMELINE RFI Release December 1, 2004 Responses Due January 5, 2005 Selection of Finalists *March 2, 2005 *PFRS staff will make a recommendation to the PFRS Board on this date. The PFRS Board may choose to invite finalists to make presentations at a future date. The PFRS board shall make the final decision as to the consultant selected. CANDIDATES The ideal firm will have experience in the following areas: Auditing Public Pension Plans Working with Local Government/Plan Sponsor Knowledge of Proposition 162 – California Pension Protection Act Making presentations to Boards Writing clear and concise reports with options and recommendations

RESPONSE SUBMISSION Ten (10) copies of the response, including fee schedule, must be submitted in a sealed package(s) or envelope(s). To ensure proper identification and handling, each package(s) or envelope(s) should be clearly marked with “City of Oakland Police and Fire Retirement System – Governance/Audit Consulting Services Response”. Responses must be received by 5:00 p.m., on January 5, 2005 at the Retirement Systems Office—no faxed responses will be accepted. Responses should be directed to: Jim Brown Retirement Systems Manager City of Oakland Police and Fire Retirement System 150 Frank Ogawa Plaza, Suite 3341 Oakland, CA 94612 Any questions relating to this RFI should be directed to Jim Brown. He can be reached via: telephone (510) 238-2913, facsimile (510) 238-7129, and email at [email protected].

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QUESTIONNAIRE The following questionnaire must be completed and included with your response to this RFI to be considered. LIMIT YOUR RESPONSE TO THIS QUESTIONNAIRE TO NO LONGER THAN 20 PAGES IN TOTAL. Location and History What is your firm’s complete name, address, web address, voice telephone and fax numbers? Include the name and title of your proposed primary contact and the location from which the consulting work will be done. Please provide a brief history, from inception, of your firm and any parent organization. Within the past three years, have there been any significant developments in your organization, such as changes in ownership, restructuring, or personnel reorganizations? Do you anticipate future significant changes in your organization? If yes, please describe. Organization, Ownership, and Independence Describe the ownership structure of your organization giving specific details with regard to any parent or affiliates. Include an organizational chart. Describe the line(s) of business of your firm, any parent organization, and any affiliated companies. How many employees are involved in each line of business? What is the percentage breakdown of revenues from each line of business? What percentage of total, after-tax profit is derived from each line of business? Within the last five years, has your organization or an officer or principal been involved in any business litigation or other legal proceedings relating to your consulting activities? If so, provide an explanation and indicate the status or disposition. Please describe the level of coverage for errors and omissions insurance and any fiduciary or professional liability insurance your firm carries. List the insurance carrier(s) supplying the coverage? Disclose any other affiliations, strategic alliances, joint ventures, and referral arrangements, if not previously disclosed in this RFI. Provide a copy of your firm’s code of ethics and conflicts-of-interest policies. (Note: the number of pages of this response will be excluded when determining response compliance to the 25-page maximum). If none exist, explain how you manage potential conflicts of interest. Employees Provide biographies of the key individuals who would be assigned to our audit, as well as other key human resources of your firm. List senior staff hires and departures over the last three years.

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Do any of your consultants have experience and knowledge of public pension plans (retirement systems) plan sponsor experience? Please give details and identify such individuals. Describe your firm’s compensation arrangement for professional staff. How does this arrangement encourage the retention of key individuals? Clientele Please provide a current list of the appropriate contacts at each client organization. After first informing you of our intentions, the PFRS staff may contact any of these clients for references. Please provide the names of all clients who have terminated your firm’s services in the last three years. In each case, detail the reason for termination and the services that were being provided. Fee Schedule Please detail the cost for providing the services for the areas requested in the scope of work.

ADDITIONAL INFORMATION

1) All proposals will become the property of the Police and Fire Retirement System and will not be returned to Contractors. PFRS reserves the right to reject any and all proposals. PFRS is not liable for any costs incurred by contractors prior to issuance of an agreement, contract or purchase order. Costs of developing the proposals, oral presentations or any other such expenses incurred by the contractor in responding to the RFI are entirely the responsibility of the contractor, and shall not be reimbursed in any manner by PFRS.

2) No materials or labor will be furnished by PFRS. Only an officer of PFRS can legally

commit to the expenditure of funds in connection with this proposed procurement. Further, it is understood that respondents must independently evaluate the information in this RFI and that PFRS makes no guarantee of data accuracy.

3) PFRS reserves the right to waive or permit cure of minor informalities and/or insignificant

mistakes such as matters of form rather than substance, and to conduct discussions and negotiations with any qualified respondent in any manner deemed necessary by PFRS to serve its best interests. PFRS also reserves the right, based on its sole judgment and discretion, to award a contract based upon the written proposals it receives without conducting discussions, interviews, or negotiations.

4) PFRS reserves the right to cancel this RFI, in whole or in part, reject all proposals submitted

in response, or decide to award a contract to perform only some of the services outlined in this RFI.

5) If, in the opinion of PFRS, a proposal contains false or misleading statements or references, it

may be rejected.

ATTACHMENT A

Page 9 of 9

6) PFRS reserves the right to obtain written clarification of any point in a Contractor’s proposal or to obtain additional information necessary to properly evaluate a particular proposal. Failure of a Contractor to respond to such a request for additional information or clarification may result in rejection of the Contractor’s proposal.

7) Failure to comply with these instructions, and the other specific provisions of the RFI, may

result in the Contractor’s proposal not being reviewed. 8) PFRS reserves the right, without qualification, to select a Contractor for further discussions

based solely on the content of the RFIs and relevant information obtained from others concerning the respondent’s respective records of past performance.

9) Elaborate brochures, sales literature, and other presentations beyond that which is sufficient

to present a complete and effective response are not desired. 10) The RFI shall not be made contingent upon uncertain events or engineering, which shall not

have occurred until after the RFI is completed. 11) In the event that it becomes necessary to revise any part of this RFI due to inquiries raised, an

addendum, supplement, or amendment to this RFI will be provided to Contractors who received an original invitation to submit a proposal.

ATTACHMENT A

Independent Fiduciary Services®

Final Report

On the Management Audit of the City of Oakland


May 22, 2006

ATTACHMENT B

City of Oakland Final Report – May 22, 2006 Police and Fire Retirement System Management Audit

Table of Contents

Page(s)

Introduction 1-2

Section I. Executive Summary 3-6

Section II. Background and Methodology 7-10

Section III. Discussion & Analysis 11-136

A. Identification and Responsibilities 11-28 B. Governing Body 28-36 C. Accountability 36-46 D. Expert Advice 46-64 E. Suitability 64-69 F. Internal Controls 70-77 G. Reporting 78-81 H. Disclosure 81-82 I. Investment Analysis 83-107 J. Performance Benchmarks 107-111 K. Investment Performance 112-122 L. Investment Reporting and Monitoring 122-136

Section IV. Exhibits

A. Summary of Recommendations B. Summary of Survey Results

ATTACHMENT B


Page 1

Independent Fiduciary Services®

Final Report

On the Management Audit of the City of Oakland


Introduction

This report is presented in four sections: an executive summary, background information

and methodology, detailed discussion, and exhibits.

Section I, the Executive Summary, offers a high level overview of the major themes in

the report. The Executive Summary should be used in the context of the full report.

Section II, Background and Methodology, describes IFS and the methodology we

followed in performing this assignment. It then explains the overall format of the Report, and

concludes with caveats and observations about the substantive sections of the Report.

The next Section III, Discussion and Analysis, comprises the body of the report. The

discussion and analysis sets forth the Board’s stated question or scope are, the standard being

applied by IFS to the evaluation of the area under discussion, observed conditions, risks, and

recommendations of IFS based on the review we conducted in coordination with the Board, the

Retirement System Manager, and the staff. The discussion sections address each task area.

Since each task area is addressed as a separate section, there is some redundancy within the

discussion.

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Section IV, Exhibits, contains supporting material that is referenced within the body of

the report. A summary of the report recommendations is provided as Exhibit A. The summary of

the peer survey is provided as Exhibit B.

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Section I.

Executive Summary

The Board of Trustees (the “Board”) of the City of Oakland Police and Fire Retirement

System (“PFRS”) concluded that it was prudent and in the best interest of the Board and its

numerous fund stakeholders and beneficiaries to have an independent, experienced financial

services organization assist them in evaluating their role as fiduciaries and various other aspects

of PFRS’ operations and investment program.

Independent Fiduciary Services, Inc. (“IFS”) was hired through a competitive bidding

process in November 2005 by the Board to perform a fiduciary audit (aka “Operational Review”)

of specified areas of the investment and administrative operations of PFRS.

A review of this nature has never been conducted by PFRS. While the IFS Operational

Review has become a common practice for large public pension funds, and the overall needs for

such a review are basically the same regardless of size, few public pension funds of the size of

PFRS have made the decision to seek an operational review. In that regard, the PFRS Board is a

pioneer in the smaller fund arena and IFS commends the PFRS Board for being proactive. The

IFS Operational Review has proven time and again to provide a valuable road map for public

fund boards.

IFS delivered the first draft report on March 6, 2006, and received comments from staff

and Board members that are reflected in this final Report.

The following paragraphs describe in summary fashion some of the highlights of our

Report.

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First, we wish to draw attention to the need for independent legal counsel to the Board.

As described in more detail in Section III.B., page 31, and Section III.D., pages 46 through 51, of

our Report.

A public pension fund’s fiduciaries require legal advice and services from qualified

attorneys for whom the public pension fund is, and is perceived as, the client. The laws in many

jurisdictions dictate that the statutory attorney for the unit of government sponsoring the public

pension fund (e.g., state, county or municipality) is also the statutory counsel of record for the

pension fund, even though the interests of the fund and the unit of government may conflict on

issues of funding, budgeting, personnel practices, procurement and even investments.

Best practices for public pension funds include granting to the fund’s board the exclusive

authority to contract for legal services.1 Such legal counsel can either be a member of staff

selected by the pension fund board and serving at its pleasure, or through outside counsel

retained by the board. Where statutory provisions dictate that the attorney for the sponsoring

government also serve as the fund’s attorney, precise and enforceable procedures should be

established for identifying situations in which conflicts of interest or lack of specific expertise

require the engagement of separate counsel. Indeed, a board given authority and discretion to

select its legal counsel could also choose to use the sponsoring government’s attorney for certain

issues when a combination of expertise, convenience and cost renders such a choice prudent.

The risk to PFRS is that issues creating a conflict between PFRS and the city which

would render the City Attorney an inappropriate provider of legal services to PFRS arise from

time-to-time. Our Report discussion provides several examples of areas where conflicts may

arise. Moreover, the Board and staff’s ability to satisfy their duty of loyalty is compromised by

the absence of legal counsel for whom the PFRS is unambiguously their client. In that regard,

we recommend, among other things, that the Board should seek and implement legal authority to

1 Uniform Management of Public Employee Retirement Systems Act, Sec. 5(a)(2).

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hire outside counsel who would be appointed by and serve at the pleasure of the Board. Such

action should be taken in conjunction with appropriate amendments to relevant statute.

Second, we wish to draw attention to the need for legislative change regarding investment

constraints imposed by the City Charter. As described in more detail in Section III.A. of our

Report on pages 14 - 16, the Oakland City Charter contains provisions that restrict the categories

of investments available to PFRS.

The trend in the pension fund industry is away from “legal lists” and toward trustee

autonomy and full discretion and control over the management of pension fund assets, in

accordance with the “prudent investor” standard. The autonomy advocated for pension trustees

is intended to ensure that they have a level of independence sufficient to permit them to perform

their duties effectively and efficiently. In exchange for this autonomy, trustees are subject to

stringent fiduciary standards and liability for the breach of such standards, as well as reporting

and disclosure requirements.

The risk to PFRS is that inadvisable statutory asset class restrictions or misinterpretation

of asset class restrictions could cost the system in terms of reasonable market opportunities. In

that regard, we recommend that the Board should seek amendments to the Charter to delete the

“legal list” restrictions on its authority to invest the System’s assets.

There are several other issues discussed in our report. These items deserve careful

attention by Board and staff as it moves forward. These include, but are not limited to, the

following:

Need for Written Documents Describing System Governance and Administration

As discussed on pages 44 - 45 PFRS has not developed governance documents, such as a

governance statement that defines the roles, responsibilities, and authority of key parties

ATTACHMENT B


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involved in the administration of PFRS and a standard operating procedures manual. In that

regard, we recommend the Board develop a governance statement which sets forth the roles and

responsibilities of the key parties involved in the management of PFRS. Additionally, the Board

should instruct staff to develop a standard operating procedures manual made up of a

compilation of existing policies, procedures, and operative practices of OPRM staff, including

functional position descriptions for every PFRS related position.

Annual Reports

An annual report has not been published for two years. The last annual report was issued

in March 2004 and covered the period 2002-2003. The Board should issue the late reports as

soon as possible.

Custody and Securities Lending

We have reported numerous issues regarding the System’s current custody and securities

lending arrangements beginning on page 57 – 63 of our Report. In that regard, we recommend

that the Board request proposals for these services.

These are a few of the more notable items contained in our lengthy report. Interested

parties should devote time to a thorough reading of its content to obtain a full picture of the

review we conducted.

IFS thanks Ms. Yvonne Hudson for her helpfulness and cooperation in developing our

report. We also thank Ms. Jennifer Foster and Mr. Teir Jenkins, and all of the other staff of

OPRM and the City of Oakland who participated in our interviews, provided us with information,

and generally gave us all the cooperation and hospitality we could hope for. Finally, we want to

thank and commend the PFRS Board for their time and foresight in performing this review.

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Section II.

Background, Review Methodology, and Limitations on the Report

IFS specializes in evaluating the organization, administration, and investment programs

of pension systems using combined expertise in investment practices, fund operations and

fiduciary responsibility. In operation for over 20 years, we have performed similar evaluations

for numerous other public and private pension funds.

In most sections of the Report, we set forth a ‘principle’ that we used as criteria for the

area being evaluated. In some cases the principle comes from some authoritative industry

publication; in other cases the principle may be what we have deemed an industry or ‘best’

practice based on our experience performing similar reviews.

The analysis leading up to this Report progressed through the following stages:

Document Collection

The first stage in our process was collection – with the staff’s cooperation – of

information regarding the Board’s operations, and investment program and practices. This

included amassing extensive data and documents, such as the Board’s enabling and related

statutes, written operating policies and procedures governing the organization, written

investment policies and guidelines, service provider contracts, and other materials. This phase

was conducted in November and December, 2005.

Analysis & Interviews

The next stage of our process, which continued throughout the project, was analysis. In

undertaking this review, IFS employed a team approach, assigning certain of its personnel to

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concentrate on particular subject areas. Throughout the process, we coordinated and integrated

our efforts and maintained communication with representatives of the Board. The main

interview phase was conducted from January 30, 2006 through February 1, 2006. Subsequent

information was obtained by telephone and other correspondence.

Discussions

The third stage of the process was to hold a series of discussions with people directly

associated with the Board. These included face-to-face and/or telephone interviews with Board

members, the retirement manager, staff members, and legal counsel. These discussions occurred

from January through March, 2006.

Survey

IFS developed a concise survey directed at certain ‘peer’ pension funds. The survey was

sent to seven funds and three responded. The results of the survey are incorporated in the

Discussion and Analysis section of the report and are also summarized at Exhibit B.

Draft and Final Report

The written report also progressed through several stages. We submitted a first draft

report to the Retirement Manager and staff on March 6, 2006. Comments on the draft were

received from the Retirement Manager and staff on March 27, 2006 and from Board members,

staff and the investment consultant at various times thereafter. After reviewing and considering

those comments we revised and issued this Final Report for the Board.

This process of draft, comment and redraft enabled relevant parties to point out matters

that, in their view, were either factually or conceptually inaccurate, incomplete or misleading,

and enabled us to obtain additional information and prepare a final report that took into account

all relevant comments. The final product reflects the combined analytical and writing efforts of a

diverse team of investment professionals.

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Report Caveats

This Report should be read and evaluated with several caveats in mind.

First, many of the subjects addressed in this Report are inherently judgmental and not

susceptible to absolute or definitive conclusions. When we express a judgment or make a

recommendation, we also set forth the observed conditions and rationale that led us to that

viewpoint. Many of our conclusions are less in the nature of definitive recommendations than

they are alternatives for the Board and staff to consider in light of PFRS’ evolving investment

program, management and practices now and over the coming years.

Second, in conducting this review, we necessarily relied to some extent on oral and

written representations of the people we interviewed and on the contents of the documentary

information we obtained. We sought to cross-verify certain information among different

interviewees and documents, but the process of cross-verification was limited. We were not

hired to detect or investigate fraud, concealment or misrepresentations and did not attempt to do

so. We were not hired to, and did not attempt to conduct a formal or legal investigation or

otherwise to use judicial processes or evidentiary safeguards in conducting our review. Our

findings and conclusions are based upon our extensive review of documents, the interviews we

conducted with the Board, staff, and others associated with PFRS, independent analysis, and our

experience and expertise.

Third, this Report does not and is not intended to provide legal advice.

Fourth, our observations are necessarily based only on the information we considered as

of and during the period we performed our review. Our Report cannot and does not attempt

either to assess the manner in which any of our recommendations may be implemented or

observed in the future, or predict whether PFRS’ practices, as represented to us, will be observed

in the future. Nor does our Report supplant or reduce the ongoing independent fiduciary duty of

the Board and staff to structure and evaluate their investment program or policies and

procedures.

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Fifth, although this Report sets forth observations and recommendations regarding PFRS’

internal controls, we did not conduct – or attempt to conduct – a full or formal examination of

PFRS’ internal control system. This Report is not intended as a substitute for such an

examination, if one is appropriate. The scope of our work was limited by our contract with the

Board.

Sixth, our approach to various organizational issues in this Report is in terms of public

pension policy, from the perspective of participants and beneficiaries. We have not attempted to

assess such issues from all practical and political perspectives running across all aspects of

Oakland city government.

Finally, although we have discussed our findings with, and submitted draft versions of

our Report to the Board and staff, its final form and content reflect the independent judgment of

IFS. The extent to which our Report and recommendations are implemented is the Board’s

decision.

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Section III.

Discussion and Analysis

A. Identification and Assignment of Responsibilities 1. Evaluate whether the responsibilities of the governing body (PFRS Board),

Administrative staff and the plan sponsor are clearly identified. 2. Evaluate whether there is a clear identification and assignment of operation

and oversight responsibilities (Board, internal staff and external experts).

Principles

“Best Practice” principles of governance require clarity of roles, objectives and

responsibilities and periodic review of governance procedures. The development of governance

documents helps to ensure that the authority, accountability and management of an organization

are clearly defined and understood. Good governance adds value. Poor governance is typically

ranked as the principal barrier to excellence within an organization, followed by inadequate

resources and lack of focus or of a clear mission.

A retirement plan’s governing documents should set forth clearly the duties and

responsibilities of the parties responsible for establishing the plan, administering the plan, and

investing its assets. Those parties typically consist of:

• The sponsor of the plan (“plan sponsor”), i.e., the employer of the plan

participants, who is also typically responsible for funding the plan, in whole or in

part.

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• The plan’s governing body or “named fiduciary,” typically a board of trustees

who is legally responsible as a fiduciary for administering the plan and investing

its assets.

• The plan’s staff, responsible for implementing the policies established by the

governing body.

A public pension fund’s governing documents typically consist of statutes enacted by the

legislature, and regulations and resolutions adopted by the governing body. Best practice

requires that the fund’s board of trustees possess broad discretion and autonomy to operate the

fund, subject to a rigorous standard of fiduciary responsibility, subject to accountability through

reporting and disclosure requirements. [See, for example, the Uniform Management of Public

Employee Retirement Systems Act (“UMPERSA”), published by the National Commission on

Uniform State Laws.]

Risk

Unclear or incomplete documentation of the duties and responsibilities of the plan

sponsor, the governing body and the staff can lead to confusion as to who is responsible for

critical plan functions; what the scope of discretion given parties may exercise; and what are the

limits of the parties’ authority. In addition, inadequate documentation may leave certain critical

functions unassigned, and therefore not performed.

Restrictions on a board of trustees’ autonomy can compromise the retirement fund’s

ability to perform its central mission – to provide benefits and services to its participants – by

subordinating that purpose to other governmental or political concerns.

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Observed Condition

• The California Pension Protection Act, an amendment to the California constitution

enacted in 1992 as Proposition 162 (“Prop. 162”), grants to the retirement board of public

pension systems such as the PFRS Board “plenary authority and fiduciary responsibility

for investment of moneys and administration of the system.” The word “plenary” means,

“Complete, entire, perfect, not deficient in any element or respect; absolute,

unqualified.”2

• Prop. 162 requires that the board administer the system “in a manner that will assure

prompt delivery of benefits and related services to the participants and their

beneficiaries.”

• Prop. 162 provides that retirement system assets “are trust funds and shall be held for the

exclusive purpose of providing benefits to participants in the . . . system and their

beneficiaries and defraying reasonable expenses of administering the system.”

• While “minimizing employer contributions” is one of the interests Prop. 162 requires that

a retirement board serve, Prop. 162 states that the board’s “duty to its participants and

their beneficiaries shall take precedence over any other duty.”

• Prop. 162 gives the board “the sole and exclusive power to provide for actuarial services”

for the system, and PFRS has contracted directly with an actuarial firm to provide those

services. However it is unclear whether the Board actively participated in the selection of

the actuarial firm. (Please see Section D, below.)

• The autonomy given to retirement boards by Prop. 162 is compromised by the provision

of Prop. 162 authorizing the Legislature “to continue to prohibit certain investments by a

2 The New Shorter Oxford English Dictionary, (Oxford University Press, 1993), p. 2249.

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retirement board if it is in the public interest to do so, and provided that the prohibition

satisfies the standards of fiduciary care and loyalty required of a retirement board. . . .”

Prop. 162 does not assign to any particular body the authority to determine whether a

particular legislated restriction on permissible investments satisfies the fiduciary standard.

• Article XXVI of the Oakland City Charter (the “Charter”) echoes Prop. 162 by stating, at

Section 2601(e), “The Board . . . shall have exclusive control of the administration and

investment of the fund established for the maintenance and operation of [PFRS].”

• The Charter contains provisions limiting the PFRS Board’s discretion to invest the PFRS

assets by setting forth a “legal list” which, inter alia, limits investments in equities,

including shares of mutual funds (apparently regardless of whether the mutual fund

invests in equities or other assets) to 50% of the PFRS assets, and limits the kinds of

mortgage debt investments the PFRS Board may make. Charter Sec. 2601(e).

• Notwithstanding the “plenary” authority Prop. 162 gives the Board, the Charter

designates the City Treasurer as the PFRS custodian, although subject to the exclusive

control of the Board as to the administration and investment of said fund.”

• Although Charter Sec. 2601(d) provides, “The amount necessary for the administration of

the System shall be paid out of the Police and Fire Retirement Fund,” Section 1.7(B) of

the Board’s own Rules and Regulations provide for appropriation from the City’s general

fund “the amount necessary for the administration of the System,” and in fact the

System’s administrative budget is subject to the appropriation process applicable to the

administration of city agencies not covered by Prop. 162’s autonomy provisions,

although the actual costs are paid from the PFRS assets and not from tax revenues. Until

approximately 2004, the PFRS Board played no role in preparing the System’s

administrative budget, a process carried out by staff assigned to administer the System.

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• The PFRS Investment Policy Statement (“IPS”) allocates responsibility for investment of

the PFRS assets among the Board, the investment consultant and the investment manager.

Although the Board is responsible for monitoring “investment performance and

compliance with this policy [i.e., the IPS] by third parties,” the IPS does not assign to

staff any authority to assist the Board in this regard, and in fact the PFRS does not have

staff with specific investment expertise to assist the Board in this monitoring function (or

any other aspects of the investment function reserved to the Board under the IPS).

• Although Charter Sec. 2601(c) authorizes the Board to “appoint . . . such additional

clerical and other assistants as the City Council may authorize,” in fact all of the

administrative services the PFRS receives are provided by employees of the City’s Office

of Personnel Resource Management (“OPRM”), which is a part of the City’s Finance and

Management Agency (“FMA”). There are no staff dedicated exclusively to PFRS and

there is no staff directly accountable to the PFRS Board.

• The PFRS Board plays no role in selecting, evaluating or setting the compensation of any

of the employees who are the System’s administrative staff, including the Human

Resource Manager, Retirement and Benefits, whose job description includes the duty “to

manage directly and through subordinate staff, all activities relative to benefits and

retirement, including. . . PFRS. . .”

• The PFRS Board does not play an active role in assigning tasks or priorities for the work

done by staff. Rather, the Director of OPRM sets those priorities for all of OPRM, and

none of OPRM’s “Key Projects for FY 2005-06” relate to PFRS.

As appears from the foregoing, Prop. 162 gives the PFRS Board broad authority to

administer the System and invest its assets. However, in several important respects the Board

does not in fact exercise that authority. The Charter has provisions which undercut that authority,

such as the “legal list” provisions restricting the investments available to the System and the

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designation of the City Treasurer as the custodian. In addition, the Board’s own Rules and

Regulations and the resulting practice render the PFRS administrative budget subject to an

appropriation process controlled by the Mayor and the City Council, notwithstanding Prop. 162

and Charter provisions which would appear to give the PFRS Board control over its budget. And

the process by which the PFRS staff is selected and managed has created a situation in which the

system is, in effect, administered by a third-party administrator, OPRM, which the Board does

not control. Finally, issues related to the legal advice and representation and use of experts

available to the Board are discussed in Task Area D below.

The Board does not have staff resources it controls with investment expertise that can

assist the Board in effectively carrying out the investment policy-making and monitoring

functions which the IPS appropriately assigns to the Board. The Board is thus required to rely

solely on its outside consultant for that assistance and the Board members’ own expertise and

experience. In this regard, we note that only two of the seven members of the PFRS Board are

required to have financial industry expertise.3 Further, one of the two slots required to have

industry expertise, the life insurance executive position, has been vacant for several years. To

facilitate its ability to educate itself, the Board has received from its consultant a list of

educational conferences for trustees which include reputable organizations which provide quality

training on relevant subjects.

Recommendations 1-4 The Board should seek amendments to the Charter to delete the “legal list” restrictions on its authority to invest the System’s assets and to grant to PFRS authority to select the custodian of the System’s assets. The Board should continue to consider and approve the System’s administrative budget, and staff should provide to the Board all the data necessary for the Board to make prudent budget decisions.

3 Charter Sec. 2601 provides that one member of the seven-member Board shall be “a life insurance executive of a local office” and one shall be “a senior officer of a local bank.” The position for a life insurance executive is currently vacant and has been since August 2001. A third trustee is “a community representative.” It happens that the current incumbent of that position has substantial experience in institutional investment, but such experience is not a statutory pre-requisite for appointment to that position.

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Recommendations 1-4

The Board should participate in the process by which the staff assigned to PFRS are selected, evaluated and compensated, and should obtain a commitment from OPRM and FMA that no staff assigned to PFRS shall be employed without input from the Board. The Board should seek the assignment to PFRS of staff with investment expertise to assist the Board in setting investment policy and monitoring the performance of the System’s investment managers and consultant.

3. Evaluate whether the structure is adequate to meet the needs of the system

for carrying out its mission in the following areas:

a. Collection of Contributions

Risk

None as there are separate staffs for receipts and disbursements.

Observed Condition

There are currently only three remaining active participants in the Police and Fire

Retirement System (PFRS) as an amendment to the Charter effective July 1, 1976 provided that

the membership would be limited to only those police officers and firefighters employed before

July 1, 1976.

The City of Oakland issued Pension Obligation Bonds equal to the actuarial present value

of all of the City's expected contributions to the System from March of 1997 through June of

2011. The System received a deposit of $417 million in lieu of the City contributions for this

"holiday period". The next City contribution to the System will be in July of 2011, if necessary,

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as determined in the actuarial valuation as of July 1, 2010. However, in the fiscal year ending

June 30, 2005, the City made an early contribution of approximately $17.7 million.4

Based upon the actuarial valuation as of July 1, 2005 the Fund is 69.6% funded. The

2010 actuarial valuation will recommend a schedule of future contributions to be made by the

City beginning in July, 2011.

Individual pension contributions for the three active participants are deducted each

payday (semi-weekly) and the information is downloaded onto an excel file by the City payroll

department and forwarded to the Office of Personnel Resource Management (OPRM)

Accountant 1 for posting onto an electronic spreadsheet. The active participants receive an

annual statement of their contributions.

The contribution information can be downloaded in less than a day; the receipt of the

information is dependent on a time frame determined by the payroll department.

Recommendation None.

b. Record keeping

We reviewed the OPRM procedures for the documentation and filing/storage of the

following plan documents: the PFRS Charter and amendments, Board meetings minutes, and

pre-meeting notices, meeting agendas, actuarial reports, annual reports, OPRM organizational

chart, OPRM Rules and Regulations document, Standard Operating Procedures manual, pension

application, pensioner files, vendor listings and other relevant plan documents. We discussed

with Staff all policies and procedures regarding the review, approval, processing and payment of

vendor fees and expenses.

4 Milliman Actuarial Report July 1, 2005

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i. Pensioner records

Risk

Un-filed pensioner documents increase the risk of loss, from simple neglect to natural

disaster, as well as the risk of a pensioner’s personal information being compromised (i.e.: SSN

if left exposed in plain view).

Observed Condition

We reviewed the pensioner file folders and the eligibility data maintained in the Oracle

system. The pensioner files are maintained in an alphabetically coded filing system in unlocked

file drawers contained in the office space of the Benefits Representative. We reviewed several of

the pensioner files, including a sampling of the oldest retirees and beneficiaries receiving

benefits. It was noted that several large stacks of documents and paperwork pertaining to the

pensioners remained on top of the file cabinets to be filed. These files are the only official

record of pensioner benefits. We also reviewed a sampling of the pensioner’s data records as

maintained in the Oracle system.

Recommendations 5-7 Pensioner records filing should be made a priority project. All pensioners’ filing information received in the future should be filed in a timely manner – i.e.: within one week of receipt. Pensioner record file drawers should be locked at all times when unattended by the Benefits Representative. Use of a scanner for document storage is also recommended. Certain paper documents could then be shredded for security purposes.

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ii. Pensioner address changes, change of beneficiary forms and death notification

Risk

There is the risk of fraud in accepting a phone call to change an address as someone with

access to the pensioner’s personal information (SSN and current address) could call in and

redirect a paper check to their own address, such as a former spouse.

Beneficiary forms could be completed by someone other than the pensioner and without a

notary to verify the pensioner’s signature it would not necessarily be realized by OPRM.

Observed Condition

It was noted that address changes can be changed without written notice. A phone call is

sufficient and only one member of the OPRM staff is able to change addresses. Address change

can also be made by e-mail notification.

A change of beneficiary form must be completed to revise a pensioner’s beneficiary. A

notary’s signature is not required on the form.

Pensioner death notices are obtained either through family notification, through

communication with the police and fire organizations, or via notification by Pension Benefit

Information (PBI), a vendor that provides a monthly verification report to OPRM.

Recommendations 8 & 9 It should be required that all address changes are to be made in writing and signed by the pensioner only. It should be required that a notary’s stamp and signature appear on all beneficiary forms verifying the signature is that of the pensioner.

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iii. Meeting Minutes, Notices, Agendas, and Materials

Principles

• The minutes of an organization document the deliberative process of its governing body

(here, the Board of Trustees). Trustees are judged, at least in theory, in light of their

decision making process.

• Minutes are an excellent tool that can be used to disclose and detail the facts on which the

trustees acted, the lines of reasoning they explored and the rationale and specific decision

they finally reached, as evidenced by the motions or resolutions they adopt.

• Good governance calls for boards to periodically evaluate their performance. Since

minutes are a record of the actions taken by a Board, they are also an effective tool the

board can utilize to measure subsequent progress (or lack of progress) relative to their

earlier decision.

Risk

Meeting minutes that lack sufficient detail may lead to an incorrect application or follow-

up of the Board’s direction.

Absence of a written records retention policy may result in the untimely destruction of

plan records and materials.

Observed Condition

The Board meetings are held monthly. The audit and financial committee meetings are

held on the same day.

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All meetings are tape recorded and transcribed from the recording by the HR Technician

prior to the next meeting. While staff may be able to locate four years of meeting minute

cassettes, it would require some effort to do so.

The City Charter requires that the Board exercise it powers by “order or resolution”.5

The written minutes are usually not prepared until one week prior to the next meeting. Meeting

minutes are recorded in a general outline format without much detail. Meeting minutes are not

reviewed by Counsel prior to presentation to the Board for approval.

The HR Manager, HR Technician, Retirement Plan Accountant, and Benefits

Representative attend the Board meetings. The HR Technician drafts the agendas and oversees

the receipt of the staff reports for the Board meetings. Meeting notices are forwarded to the City

Clerk by the HR Technician at least 72 hours in advance of the meeting for posting. We noted

that a signature block is not reflected on the meeting minutes.

Recent meeting materials are stored in folders in file cabinets and boxes in the OPRM

offices, with older materials stored in another location in the building. PFRS follows the City of

Oakland’s records retention policy. The System does not have a separate records retention

policy. Each folder contains meeting minutes, provider reports and any other materials presented

at the meeting. A lack of storage space results in a less than appropriate storage system.

Minutes are reviewed by the Manager of OPRM prior to inclusion in the Board packet to

ensure the direction of the Board, as well as other items requiring follow-up, have been

completed. As an example, the minutes of February 23, 2005 meeting reflect the request of the

Board President for a management letter pertaining to the actuary’s statement that for every 1%

earned over the 8% assumed rate of return the City of Oakland’s annual contribution would be

reduced by approximately $8 million dollars. A review of subsequent meeting minutes did not

5 City Charter §2601)

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reflect whether or not this management letter had been requested and received. During our

interviews with OPRM staff, no one knew whether this task had been completed, and a review of

records found no such letter.

Recommendations 10-14

OPRM should develop a written record retention policy that incorporates City requirements but addresses the special needs of a retirement system. While this will aid in preventing the untimely destruction of plan materials, with the limited availability of storage space, it may allow for the disposition of unnecessary materials. The Board meeting cassettes should be located for the past four years so that the System is in compliance with the Brown and Sunshine requirements to maintain meeting minutes for a minimum period of four years.6 Should the practice of recording meetings be maintained, new technology, such as a CD recorder, should be utilized to avoid loss due to deterioration of cassettes over time. Written minutes should provide more detail, especially in areas where the Board provides direction. For example, if the Board approves transfer of assets from one investment manager to another, or makes a policy decision, the minutes should reflect the effective date of the transfer or policy. It is also recommended that the meeting minutes reflect the signature of the President of the Board to attest to the approval of the minutes as drafted. Use of a scanner for document storage is also recommended. Scanning of meeting materials would reduce the need for use of the limited storage space. It would also protect against the loss of older records due to natural disaster.

iv. Expense Payments

Risk

None, as this is a multi-step process requiring more than one staff member to verify and

approve payments.

6 Staff reports that this recommendation has been completed.

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Observed Condition

Invoices are initially received by the HR Manager. They are then sent to the Benefits

Representative for review and processing. The Retirement Plan Accountant reviews investment

manager invoices. After invoices are confirmed as proper and correct, the Benefits

Representative prepares a request to the Accounts Payable department, which must be approved

and signed by the HR Manager. Checks are prepared by the Accounts Payable department,

signed by the City Treasurer on check stock, and upon notification, picked up from a lock box by

the Benefits Representative for delivery to the vendors.

The PFRS vendor list is maintained in a master file by Accounts Payable. The

appropriate paperwork must be completed by a new vendor; a contract submitted and signed in

order to have a new vendor account established and a vendor account set up.

Recommendation 15 Establish a written procedure, for inclusion in the Standard Operations Manual (SOM), for expense payments.

v. Board Elections

Observed Condition

The HR Technician facilitates nominations and elections of Board members in

accordance with the Rules and Regulations. We reviewed the documentation from the last two

elections of Board members. In both cases, the proper procedures were followed and in each

election there was only one formal candidate. Since there was no opposition to these candidates,

no participant voting took place, and the candidates were awarded the positions.

It was noted that there is an empty appointed position on the Board for an Insurance

Representative.

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Recommendation 16

The Board seat of Insurance Representative should be filled as soon as possible.

c. Benefit payments

Risk

The risk exists for a pensioner’s benefit amount in the spreadsheet to be inadvertently or

intentionally altered.

Additionally, there is a risk of pensioner payments being directed into the bank account

of someone other than the pensioner.

Observed Condition

Benefit payments are made on a monthly basis. The Benefits Representative produces a

report of benefits payable which is provided to Accounts Payable by the 23rd of the month so that

checks and direct deposits are ready by the 1st of the following month. All applications for

pension benefits, changes to the pensioner’s benefit, or death benefits are approved by the Board

at the monthly meetings.

Applications are received by the Benefits Representative. Benefit calculations are

performed by an actuary. A sample of pension applications were reviewed and found to be in

good order.

Currently 90% of the pensioners have direct deposit. Changes to the bank account

information can only be made in writing by the pensioner. The Benefits Representative makes

these revisions to the banking information, but these changes are not verified.

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A mailing is planned for the 10% of pensioners with paper checks to recommend they

establish direct deposit of their pension benefit.

A pensioner benefit spreadsheet is produced by the Accountant I. This spreadsheet

contains the actuarially determined percentage benefits. These percentages are entered manually

into the spreadsheet by the Accountant 1. A copy of the “master” spreadsheet is provided to the

Benefits Representative for pension benefit payment processing. We noted that the Benefits

Representative was able to alter the benefit percentages in the spreadsheet. Ultimately, the

responsibility for verifying the accuracy of the percentage amounts belongs to the Accountant.

During the annual benefit calculation audit, a sampling of pensioner benefit percentages is

verified against the pensioner record and the spreadsheet.

Changes in bank routing for direct deposit can be made by either Benefits Representative,

without additional oversight. Such change requires written notification by the pensioner, along

with banking information (e.g., cancelled check).

Recommendations 17 - 18 The pension payment spreadsheet should be password protected by Accountant 1. Any proposed changes to the file by the Benefits Representative should be provided to and entered by Accountant 1, prior to submission to the accounting department for final payment. All changes to the banking information for direct deposits should be verified and confirmed for accuracy. Changes to bank routing information should be approved by a second staff member.

i. Asset-liability management and asset management

Observed Condition

PFRS relies on external service providers to advise and assist the Board with asset-

liability management and asset management decisions. The System uses an investment

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consultant, Pension Consulting Alliance (“PCA”), to conduct asset-liability studies (the last one

was conducted in May 2005) and to assist in the selection and monitoring of investment

managers.

It is appropriate and typical for a fund the size of PFRS to rely heavily on external

experts to perform these investment functions. However, as we discuss in Task Area L on

Investment Reporting and Monitoring, PFRS should increase its monitoring capabilities as the

current staff is not able to monitor effectively all of the investment managers’ compliance with

their guidelines and the IPS. If the staff were expected to take on additional responsibilities in

these areas, e.g., being more active in determining or recommending asset allocation or selecting

and recommending investment managers, there would be a need for additional staff with an

investment background.

Current staff performs primarily administrative and accounting functions in the

investments area and is not directly involved in investment decisions. Since the Board is a

volunteer board with “lay” members, it would be beneficial for the Board to have at least one

staff member with investment expertise to offer advice in addition to that provided by PCA.

However, the cost of adding staff must be balanced with the benefit obtained and in all

likelihood, the staff position would only require a part-time commitment for PFRS business.

Please see further discussion on the use of experts in Section D., below.

ii. Reporting

Observed Condition

In August 2005, the Manager of Retirement and Benefits provided detailed cash reports

and administrative budgets for 2005/2006. Previously, information on budgets, cash flow, and

administrative matters presented to the Board was less detailed. It was also noted that routine

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administrative management reports such as contributions, expenses, budget status, pension

payments, membership statistics, etc. are not provided to the Board.

There has not been an Annual Report produced by OPRM since the 2002 – 2003 Plan

Year reportedly due to the lack of personnel available to address this assignment.

Recommendations 19 - 21 An administrative management report providing the following information should be provided to the Board on a monthly or quarterly basis: (1) the number of pensioners receiving benefits, (2) benefit payment totals, (3) the number of active participants and their contributions, (4) beginning and ending investment and cash balances, (5) death benefit payments and (6) operating expenses. The administrative budget reports should continue to be shared with the Board. It is recommended that the completion of an Annual Report (AR) for the Plan Year 2005 be made a priority. The completed AR could be put online to reduce staff time and costs related to photocopying the report. An internet site could also be established for the PFRS and all pertinent information could be maintained there including the AR.

B. Governing Body

1. Does the governing body have complete authority over the administration of all operations and oversight responsibilities of the PFRS pension fund?

2. Does the governing body select and compensate internal staff and external service providers with operational responsibilities (money managers, actuaries, custodians, auditors, etc.)?

Principles

• Best practices advocate pension fund autonomy as a fundamental principle necessary to

ensure that boards are able to perform their duties effectively and efficiently, subject to

strict fiduciary standards, clear reporting and legislative oversight. Indicia of autonomy

include not only exclusive authority and control over investment of the plan’s assets, but

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also authority over personnel (e.g., the ability to hire, evaluate, compensate, and

reorganize staff), procurement (including contracting), establishment of the system’s

operating budget, as well as the ability to retain legal counsel.

• In order to carry to its mission and assure prompt delivery of benefits and related services

to the participants and their beneficiaries in service delivery, it is critical that the trustees,

as fiduciaries, who have ultimate legal responsibility for the trust also have the necessary

authority and programmatic control over the pension fund.

• To impose fiduciary responsibility on the trustees for the management of the pension

fund without granting them exclusive authority and control to effectuate the management

of the funds assets efficiently and effectively is inconsistent with best practices.

• Because the pension fund is a “trust” the trusts, as fiduciaries, are obligated to see that the

pension fund is managed in the exclusive interest of the participants and beneficiaries.

• Trustees should be endowed with more autonomy than other agents of the state or

municipality because in exercising that autonomy the trustees are subject to a more

extensive and stringent set of fiduciary obligations than other agents of the state or

municipality.

Risk

If an organization does not have the autonomy to control its budget, staffing, and

procurement, its ability to accomplish its mission, goals, and objectives is diminished and placed

at risk.

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Observed Conditions

• It is our understanding that the intent of Proposition 162 was to insulate the

administration of retirement systems from oversight and control by legislative and

executive authorities and grant retirement systems with sole and complete authority over

investments and administration of their systems, as opposed to being subject to direction

from state and local legislative and executive matters. [See, Singh v. Board of Retirement,

41 Cal.App. 4th 1180, 1192 (1996).

• As pointed out in Section A above, the City of Oakland Charter echoes Proposition 162

vesting the PFRS Board with exclusive control of the administration and investment of

the fund.7

• It is our understanding that Proposition 162 did not supersede the provision of the City

Charter. However, if provisions of the City Charter are in direct conflict with the terms

of Proposition 162, then the City Charter provisions will be nullified. [See, May 29, 2002

Legal Opinion from the City Attorney to the Police and Fire Retirement Board Regarding

PFRS Ability to Seek Outside Counsel, page 3.]

• Based on information obtained during the interview process, as well as our review of the

documents provided, while the Board of Trustees does exercise its authority to select,

monitor, and if prudent, terminate money managers, it does not appear that the Board of

Trustees is aware of, nor has been allowed by the City to fully exercise, the extent of its

constitutional and statutory authority and control over the selection of other external

service providers or the administration of the pension fund. For example –

o The Actuary - the Board has the authority to retain its actuary.

7 Article XXVI of the Oakland City Charter at Section 2601(e).

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o The Custodian – The Treasurer is the statutorily designated custodian. However, the

custodian is “subject to the exclusive control of the Board as to the administration

and investment…” Yet, it does not appear that the Board is involved in the selection

or monitoring the custodial bank.

• It is our understanding that the rationale behind the City’s influence in procuring these

service providers is based on the economies of scale. Notwithstanding, since control of

these service providers is subject to the control of the PFRS Board, the trustees

acceptance of this City’s course of action should be documented.

• It does not appear that efforts have been made to harmonize the City Charter with the

plenary authority granted to retirement systems by Proposition 162. Rather, it appears

that the Office of the City Attorney and the Office of the City Manager has interpreted

Proposition 162 and the City Charter in a manner that lessens the control (i.e., the plenary

authority) of the PFRS Board and fosters control by the City. For example –

o Legal Counsel - the Board appears to have the authority to retain outside legal

counsel. An opinion of the City Attorney supports this indicating the Board has the

authority to retain outside legal counsel “when it feels it is necessary in order to fulfill

its fiduciary or on those occasions when the City Attorney’s Office has a conflict of

interest regarding a particular matter”. [Emphasis added.] [See, May 29, 2002 Legal

Opinion from the City Attorney to the Police and Fire Retirement Board Regarding

PFRS Ability to Seek Outside Counsel, page 3.] Yet the Board has not been allowed

to exercise this authority (e.g. requiring that the Office of the City Attorney approve

the PFRS’ selection of outside legal counsel).8 [See discussion of legal counsel in

Task Area D below.]

8 In a recent case, in another Charter City, a San Diego Superior Court judge ruled that city attorney could not replace the legal counsel for the San Diego City Employees’ Retirement System (SDCERS), indicating that state law grants the pension fund trustees "sole and exclusive fiduciary responsibility" over the pension fund and that its board "has the power to use its assets to retain counsel of its own choosing.

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o PFRS Staff - As noted in Section A above, the Board has the authority to “appoint a

Secretary who shall hold office at its pleasure” and “appoint . . . such additional

clerical and other assistants as the City Council may authorize. 9 The Board is

required to pay a percentage of the compensation for several OPRM staff members.

Yet, the Board has not been allowed to exercise its authority to select this staff.

Rather, the City has taken the position that selection and supervision of all PFRS staff

(including the Secretary) is under the jurisdiction of the City Administrator. (See also

discussion is Task Area A above.)

Recommendations 22 - 26 The Board should retain independent fiduciary legal counsel. The Board should utilize independent fiduciary legal counsel to assist it in objectively harmonizing the provisions of Proposition 162 and the City Charter and then to update its rules and regulations to specifically delineate the extent of the Board’s authority and control regarding the administration of the pension fund, including PFRS’ authority to (a) establish its budget; (b) select outside counsel; (c) select and evaluate the PFRS Secretary and additional staff; (d) select and evaluate the actuary; and (e) select and evaluate the custodial bank. The Board should develop a memorandum of understanding with the City which would facilitate the Board’s ability to exercise the authority granted to it by Proposition 162 and the City Charter by agreeing how the two documents will be harmonized and make plain the authority of the Board to set forth and establish, at a minimum, the authority of the Board to select and evaluate a Secretary to the board, additional staff (e.g., a staff member with investment experience), to retain outside legal counsel, to retain the actuary, and to establish its budget. The Board should explore the cost/benefit of once again becoming a distinct entity within the Oakland City Government rather than being a part of the Office of Personnel. The Board should become more cognizant of the full extent of its fiduciary responsibility, authority and control regarding the pension fund by periodically holding compulsory educational sessions (for current and new trustees) for the purpose of becoming more knowledgeable about the governing documents applicable to the administration of the pension fund and the investment of pension fund assets, including but not limited to the provisions of Proposition

9 City of Oakland Charter Sec. 2601(c).

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Recommendations 22 - 26 162, the City Charter, as amended, the Board’s Rules and Regulations, the Brown Act, the Board’s Investment Policy Statement, and any reporting and disclosure requirement applicable to the Board (e.g., Form 700).

a. Survey results regarding authority of the governing body.

Our recommendations above attempt to apply best practices to PFRS’ situation while

being practical considering the economic and political environment. The tables below

demonstrate that PFRS authority in several areas is similar to the peer funds.

Governance Questions:

Governance Questions

Marin County ERA

City of Fresno

Retirement Systems

Tulare County ERA

Oakland PFRS

Have you adopted a governance policy? Yes No Yes Yes

Do you have authority to establish your own budget? Yes Yes Yes Yes

Do you have authority to spend the amount budgeted? Yes Yes Yes Yes

Does state or local law mandate that a State Attorney act as a legal counsel or appoint a legal counsel to the fund and/or its board? Yes No No Yes

If yes, does the board have a written agreement with the attorney on identifying & dealing with conflict of interest issues that might require separate counsel for the board? No No

Does the board have authority to hire a staff attorney that serves at pleasure of board? Yes No Yes Yes

If yes, has board hired such an attorney? No No No

Does the board have authority to retain outside law firm that contracts with the board? Yes Yes Yes Yes

If yes, do they have to receive consent from govt. attorney or another agency? No No No Yes

Has the board hired an outside law firm or firms? Yes Yes Yes No

Does an indemnification arrangement or insurance policy for board members require adherence to advice of counsel as a condition for coverage? Unknown No No No

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Compensation Authority questions:

Compensation Questions Marin County ERA

City of Fresno

Retirement Systems

Tulare County ERA

Oakland PFRS

Is compensation subject to the discretion of your governing body? No No No No

Is your org. subject to state civil service requirements regarding compensation? Yes Yes Yes Yes

Is compensation subject to legislative approval? Yes Yes Yes Yes

Personnel Authority Questions:

Personnel Questions Marin County ERA

City of Fresno

Retirement Systems

Tulare County ERA

Oakland PFRS

Is the authorized number of staff positions subject to approval by the plan sponsor? No Yes Yes Yes

Do they have independent personnel authority in hiring, promotion and termination? Yes Yes Yes No

Is your staff employed by and made available to you from another agency? No No No No

Does your Board appoint the Plan's Executive? Yes Yes Yes No

How many board members out of the total members does the head of the plan sponsor, select or appoint? 33% 40% 44% 57%

Procurement Authority Questions:

Does your organization have independent procurement authority to select and contract with: Marin County ERA

City of Fresno

Retirement Systems

Tulare County ERA

Oakland PFRS

Invest. Management firms? Yes Yes Yes Yes

Investment Consultants? Yes Yes Yes Yes

Law Firms? Yes Yes Yes Yes

Auditors? Yes Yes Yes Yes

Actuary? Yes Yes Yes Yes

General overhead (telephones, office space, and computers)? Yes Yes Yes No

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3. Evaluate whether the governing body is in compliance with the Charter and other regulating policies (California Pension Protection Act). (Please see section B and D for discussion of Proposition 162 as it relates to PFRS.)

Principle

A retirement system’s board should comply with the statutes governing the system.

Risk

Non-compliance with legal requirements can jeopardize the soundness and security of the

retirement system’s assets when the legal requirements at issue are the duty to manage the

system and its assets prudently and in the interest of the system’s participants. More generally, a

pattern of non-compliance can – and should – result in oversight by outside governmental

agencies and even law enforcement agencies, and undermine the confidence that the system’s

stakeholders should have in the board.

Observed Condition

As indicated in the discussion in Task Area A and in section 1 and 2 of this Task Area,

the PFRS Board has not historically exercised all of the “plenary authority” over the System.

That said, IFS did not identify any failure to comply with the Charter, the Pension Protection Act

or other laws governing the System that is material to the soundness of the System and its

administration.

We note, however, that Charter Sec. 2601(e)(3) provides that, to be eligible for

investment by the Board, common stocks must have paid cash dividends for the five years

preceding the investment unless the Board expressly approves the purchase in advance. It does

not appear that the Board has a process for granting approval of such purchases.

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Recommendation 27

In consultation with the Investment Consultant and the equity Investment Managers, the Board should develop and implement a process for considering and acting upon proposed investments in equity securities which have not satisfied the five year dividend history set forth in the Charter.

C. Accountability 1. Evaluate whether the governing body holds regular meetings and keeps

records of such.

Principles

Most of a board’s work is conducted at its regularly scheduled board and committee

meetings. Members of a governing body (e.g., a board of trustees) must meet often enough to

adequately conduct the business of the organization10 Consequently it is important that members

attend scheduled meeting, particularly when the size of the board is small (fewer than the

average board size of 9 to 11 members).

A survey of 50 public retirement system boards conducted by NCTR and NASRA

(January 2003) reported that most public retirement system board meet at least monthly.11

Risks

• The board members do not meet frequently enough to perform their functions and

fiduciary responsibilities.

• There are not enough board members present to constitute a quorum.

10 According to article entitled Boardroom Excellence: Board and Committee Meetings, from Hale and Dorr LLP, by Paul P. Brountas, in the post-Enron era, the average time devoted to board matters of large corporations (including non-meeting attention to meeting preparation) by an independent director has grown to approximately 150 to 250 hours a year. 11 http://www.nasra.org/resources/boardmeetingfrequency.htm

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• A few members are required to bear the burden of conducting most of the business of the

board because others do not attend the meeting.

Observed Condition

To determine the frequency of meetings as well as the frequency of members’ attendance

at such meetings, IFS reviewed the PFRS’ website and minutes of the meetings for a 16 month

period, August 2004 through November 2005. Table C-1 below reflects what we observed.

(Note in 2004, William Hubartt replaced James Cooper.)

Space intentionally left blank

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Table C-1: Board meeting frequency and attendance

2004 2005

Trustee Name A

ugu

st 2

5th

Sep

tem

ber

29

th

Oct

ober

27th

Nov

emb

er

17th

Dec

emb

er

Jan

uary

26th

Feb

ruar

y

23rd

Mar

ch 3

0th

Ap

ril 2

7th

May

25t

h

Jun

e 2

9th

July

27t

h

Aug

ust

3

1st

Sep

tem

ber

28

th

Oct

ober

26t

h

Nov

emb

er

30th

Tot

al

Att

end

ed

Tot

al M

isse

d

Robert Crawford

14 1

Ken Brooks

13 2

Deborah Edgerly

10 5

Jaime Godfrey

14 1

*William Hubartt

11 2

*James Cooper

2 0

Dave McArthur

11 1

John Speakman

Mee

tin

g ca

nce

lled

2 1

* Mr. Hubartt replaced Mr. Cooper in September 2004. Mr. Speakman replaced Mr. McArthur in 2005.

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• At the beginning of each year PFRS posts the schedule of upcoming meetings for the

year on its website. This is an excellent practice.

• Board meetings are typically held monthly. At the time of review, meeting minutes were

available for all but one of the meetings.

• Most members missed at least one meeting during the 16 month period. However, one

member missed five meetings during the measurement period.

Recommendation 28

We recommend that the Board seek a legal opinion regarding whether or not it has the legal authority, through rulemaking, to remove a trustee. If it is determined that the Board has such authority, then we recommend that the Board amend its rules and regulations to require that a member who misses more than four meetings in a 12 month period must either resign from the Board or obtain the approval of the Board, evidenced by a majority vote, to continue on the Board.

2. Evaluate whether the PFRS Board utilizes established criteria in its decision making process.

Principle

Effective decision making is facilitated by having established criteria and processes in

place.

Risk

The absence of established decision making criteria complicates the process and lessens

the likelihood that the decision making body will achieve a well-reasoned, positive outcome.

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Observed Conditions

• The Board has a number of governing documents that frame its decision making process,

including but not limited to Proposition 162, the City Charter, the Brown Act, its Rules

and Regulations, and PFRS’ Investment Policy Statement.

• As noted earlier, the Board does not appear to be aware of the full extent of its authority

conferred by its governing documents or the full extent of the criteria set forth in such

documents.

• The Rules and Regulations of the Board appear to be outdated.

• We observed that the Board is guided in its decision making process primarily by the

representative of the Office of the City Attorney (who is required to attend the PFRS’

meetings and by its staff.

Recommendation 29 We recommend that the Board’s Rules and Regulations be updated.

(See also recommendations regarding memorandum of understanding, hiring of legal

counsel, and training and education.)

3. Evaluate whether there is appropriate disclosure of the decision reached in the meeting of the governing body to the plan members and beneficiaries.

4. Evaluate whether the actions of the PFRS Board are reported.

Principles

• Reporting and disclosure of an entity’s actions facilitate transparency. Transparency is a

critical element of good governance and consistent with best practices.

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• Plan members and beneficiaries should have confidence in the board of trustees and view

them as excellent providers of investment management and administration services at

reasonable risk and cost.

• Minutes are the most common means a board uses to document and report it actions.

Minutes of an organization document the deliberative process of its governing body.

Trustees are judged in light of their decision-making process (as much or more so than in

light of the outcome of that process). Thus, minutes are an excellent tool that can be used

to disclose the facts on which the trustees acted, the lines of reasoning they explored and

the rationale and decision they finally reached. Minutes may also help a board measure

subsequent progress (or lack of progress) relative to their earlier decision.

• Periodic newsletters, a website, and an annual report are also means used to report a

board’s actions to beneficiaries and participants and the public.

Risk

The oversight process as well as the confidence of the beneficiaries and participants in

the prudence and integrity of a board’s decision-making may be eroded if the board’s actions are

not transparent.

Observed Conditions

• PFRS agendas from prior meetings and the meeting schedule for the year can be found at

http://www.oaklandnet.com./government/opd-frs.

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• PFRS meetings are recorded and minutes of its meetings are prepared and presented to

the board of approval. The meeting tapes dating back eight years (9/97) are on file.

Approved minutes are not reported on PFRS’ website.

• PFRS does not provide a periodic newsletter to its membership regarding the actions it

has taken or the condition of the fund.

• PFRS does publish an annual report. However, an annual report has not been published

for two years. The last annual report was issued in March 2004 and covered the period

2002-2003.

Recommendations 30 - 31 In addition to the meeting agenda, the Board should also publish the minutes of each meeting on its website. The Board should issue a current annual report as soon as possible.

5. Evaluate whether the selection process for members of governing body is transparent. The process meets the requirements of the Charter and other regulations.

Principles

• As noted above, transparency is an essential element of good governance.

• Transparency sheds light on a pension fund’s practices, helps to provide comfort to the

pension fund’s beneficiaries and participants as well as the public that the board and staff

are managing the system with integrity and effectiveness in meeting its mission, and

facilitates oversight.

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Risk

Lack of transparency impedes oversight and erodes the confidence of the beneficiaries

and participants and the public that the pension fund is being operated in an effective, efficient,

ethical manner.

Observed Conditions

• Article XXVI, section 2601 of the city charter establishes the composition requirements

of the PFRS board, including selection criteria.

• Section 12 of the PFRS’ rules and regulations governs the election process for active and

retired members to the PFRS board.

• Based on information obtained during the interview process it appears that the selection

process of appointed members is being followed. However, there has been a vacancy in

the life insurance experience board member slot for several years.

• With regard to the selection process for the active and retired members of the board, an

issue was raised regarding whether or not the election process for the active member was

in compliance with the regulations. The rules and regulation (section 12.3) set forth the

nomination process. Both active and retired members may vote for an active or retired

candidate. The regulations provide that the nomination papers shall be signed by 10

active or retired members.

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Recommendations 32 - 33

The Board should amend its Rules and Regulations to require that the notice of election, petition, election criteria, etc., be posted on the PFRS website.

The Board should go on record and request the City Council to fill the current vacancy on the Board. If it is determined that the vacancy can not be filled then we recommend that the City Charter be amended to change the experience requirement from an individual with life insurance experience to one that has experience in benefits administration or investment management experience.

6. Evaluate whether there is an appropriate succession planning process. Principles

• Succession planning requires determining what the pension fund's management and skill

set needs are going to be in the future, knowing which professionals could potentially

assume the needed roles and responsibilities, and preparing them to assume the position

(e.g., through mentoring, leadership training, professional certification courses, etc.).

• Leadership (e.g., the board of trustees) must be strategic and proactive in their succession

planning effort.

• Governance documents (e.g., a governance statement, by-laws, a standard operating

procedures, etc.) facilitate succession planning and help to mitigate governance and

implementation risk.

• A standard operating procedures manual is an efficient and comprehensive means to

locate and verify policies and standard operating procedures that have been adopted by an

entity. A consolidated manual can also serve as an educational tool to facilitate effective

transitions during staff and board turnover.

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Risk

The absence of a succession plan subjects the pension fund to unnecessary and avoidable

governance and implementation risk. “Governance risk” refers to the risk that staff (or the board

or agents of a public pension fund) will, either intentionally or unintentionally, through their

management actions or lack thereof, cause the assets of the pension fund to under perform

expectations. “Implementation risk” is the risk that policies and procedures may not be

implemented properly. 12

Observed Conditions

• The board does not have a succession plan for PFRS. As part of its key projects for

2005-06, OPRM has identified succession planning and the development of a desk

manual on all of OPRM’s key functions. It is unclear whether and if so how PFRS’

needs factor into OPRM’s key projects.

• PFRS has not developed governance documents, such as a governance statement that

defines the roles, responsibilities, and authority of key parties involved in the

administration of PFRS and a standard operating procedures manual.

• Over the last several years, PFRS consecutively lost its two most senior staff members,

responsible for the day to day administration of the system. Both employees possessed

significant institutional memory regarding the administration of the system. The

departure of these individuals caused a significant void and exposed PFRS to governance

and implementation risk.

12 Public Pension Systems Statements of Key Risks and Common Practices to Address Those Risks, July 2000. Endorsed by the Association of Public Pension Fund Auditors (APPFA), the National Association of State Retirement Administrators (NASRA), and the National Council on Teacher Retirement (NCTR).

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• Based on our interviews, it is clear that Board and staff would benefit from greater clarity

regarding who has authority in several areas of the management and administration of

PFRS.

Recommendations 34 - 36 The Board should develop a succession plan and implementation protocol. The Board should develop a governance statement which sets forth the roles and responsibilities of the key parties involved in the management of the PFRS. The Board should instruct staff to develop a standard operating procedures manual made up of a compilation of existing policies, procedures, and operative practices of PFRS staff, including functional position descriptions for every PFRS position.

D. Expert Advice 1. Evaluate whether the governing body seeks and employs the use of

independent experts in the following areas:

a. Legal

Principles

Managing pension fund assets requires expert legal advice. The trustees of a public

pension fund need attorneys knowledgeable in the interpretation and application of the

complicated laws governing their funds, experienced in reviewing and negotiating agreements

with investment managers, consultants and service providers and familiar with the legal issues

surrounding emerging investment issues such as private equity, venture capital, class action

litigation and corporate governance. And given that a public pension board typically consists of

trustees who, although appointed by various stakeholders, owe a duty to the fund’s participants

and beneficiaries, the attorney for the board should have unconflicted loyalty to the fund. While

fund attorneys are generally not considered “fiduciaries” in the same way that trustees are, they

have a similar duty of loyalty derived from the professional canons of ethics which govern the

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legal profession. As the Official Comment to Rule 1.7 of the American Bar Association’s Rules

of Professional Conduct states, “Loyalty and independent judgment are essential elements in the

lawyer's relationship to a client.”

It has become a recognized best practice for a public retirement system to have the

authority to engage its own legal counsel.13

Risk

If a public fund’s attorney’s loyalty and independence are compromised, the fund is at

risk of being guided by legal advice colored by conflicting obligations and the attorney’s need to

accommodate interests other than the interests of the fund’s participants and beneficiaries.

Observed Conditions

The Oakland City Attorney acts as the attorney to the PFRS and its Board.

Some members of the Board are of the view that the City Attorney, as an elected official,

suffers an inherent conflict of interest when it comes to acting as attorney for PFRS and the

Board since the Board owes a fiduciary duty to the PFRS participants, not to the City and its

taxpayers as a whole.

The Oakland City Attorney has advised the Board that the Board may engage outside

legal counsel when (1) the City Attorney’s Office has a conflict of interest or (2) the City

Attorney’s Office has exhibited bias, incompetence or other behavior that causes the Board to

determine that reliance on this office’s counsel would be inconsistent with the Board’s discharge

13 UMPERSA Sec. 5(a)(2).

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of its fiduciary duties or would prevent, impair or interfere with the Board’s fulfillment of its

fiduciary obligations.14

With the consent of the City Attorney, the Board sought an opinion from outside counsel

as to the Board’s authority to engage outside counsel. The opinion from outside counsel asserted

the Prop. 162 grants the Board the authority to engage outside counsel.15

The City Attorney and the Board’s Audit Committee attempted to resolve the impasse by

agreeing that the Audit Committee, acting for the Board, could engage outside counsel from the

Board from a list of attorneys compiled by the Committee and the City Attorney, provided the

selected firm was acceptable to the City Attorney. The City Attorney’s Office advised the Audit

Committee that all the firms on the list were qualified to provide legal services to the Board.

However, the City Attorney determined that one attorney on the list had a conflict of interest

under Government Code section 1090, in view of the fact that the attorney had issued the opinion

to the effect that the Board had authority to engage outside counsel.16 As of the date of this report,

the Committee has not made a recommendation to the Board regarding the engagement of

outside counsel. We understand they have delayed action pending receipt of this Report.

IFS is not a law firm, and we express no legal opinion on the technical legal question

under the Charter and Prop. 162 as to the Board’s authority to engage outside legal counsel. We

note in this regard that the issue is the subject of litigation with respect to other California

retirement systems, most notably in San Diego where a tentative decision has been rendered.

(Please see footnote 4). As a policy matter, however, IFS believes that the Board should have

the authority to engage independent legal counsel. It is regrettable that the solution to the

impasse devised by the City Attorney and the Audit Committee has foundered over the question

of whether the attorney identified by the Board to serve as outside legal counsel is eligibility to

14 See Memorandum dated May 29, 2002 from the City Attorney to the Board. 15 See Memorandum dated September 17, 2002 from Russell L. Richeda, Saltzman & Johnson Law Corporation, to the Board. 16 See Memorandum dated June 22, 2005 from the City Attorney to the Board.

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serve in that capacity. We express no view as to qualifications the attorney identified by the

Board to serve as outside legal counsel, the qualifications of other candidates or the City

Attorney’s opinion that the attorney identified by the Board to serve as outside legal counsel is

ineligible. That said, four years having passed since the competing legal opinions were issued on

the subject, the issue should be resolved promptly.

Recommendation 37

If the Audit Committee persists in the view that the attorney identified by the Board to serve as outside legal counsel should serve as the Board’s outside counsel, the Audit Committee and the City Attorney should agree to submit the issue of eligibility to a mutually acceptable, qualified attorney to issue a definitive opinion on the point. If that attorney determines that the attorney identified by the Board to serve as outside legal counsel should not be selected, the Audit Committee should promptly select another candidate from the panel, and the City Attorney should not unreasonably withhold his consent to that selection.

If outside legal counsel is retained, the following is a list of sample services that the

Board may use as a checklist to develop a scope of work for the engagement. It is provided for

informational purposes only.17

Attend Board and Committee meetings, as requested by the Board;

Provide legal opinions and advice, as requested by the Board, including advice

regarding their fiduciary duties and obligations;

Review, draft and negotiate service provider agreements relating to benefits

administration and investment of fund assets;

Advise the Board and PFRS staff regarding applicable and relevant provisions of

California Constitution, laws, regulations, City Charter requirements, court

rulings, and any significant changes and developments in same; make

17 Source: National Association of Public Pension Attorney’s Educational Material.

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recommendations to Board regarding such matters, including advise regarding

open meeting requirements regarding noticing, agenda-related materials, etc; and

recommend procedures and steps to comply with same;

Provide specific, written recommendations on amendments to statues, rules and

regulations, policies, and procedures to ensure the system is in full compliance

with the Internal Revenue Code qualification criteria and state and local laws, as

well as procedures and steps to comply with same;

Advise the Board and PFRS staff at hearings regarding disputes pertaining to

retirement;

Upon the Board’s or PFRS staff’s request, provide advice on threatened and

pending litigation;

Upon the Board’s request, represent the Board and PFRS in litigation regarding

PFRS retirement disputes, and represent the City of Oakland18 (assuming City has

no adverse interest) and City approves such representation;

Periodically providing education sessions to the Board and staff regarding the

applicability of governing laws (e.g., Proposition 162, the City Charter, the Brown

Act, etc.) and assist the Board and staff in establishing and identifying appropriate

training programs for Board and staff;

Assisting in the communication of concerns involving pension fund issues to

trustees, staff, consultants, advisors and other parties, including testifying before

18 The City of Oakland is routinely named as one of the defendants/ respondents in litigation challenging PFRS retirement board decisions.

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or responding to elected or appointed officials such as the City Council, Mayor,

City Manager, etc.;

Providing advice, review and drafting services concerning legal documents

necessary to consummate investment transactions, including negotiating and

drafting investment contracts and developing a model contract; and

Presenting legal opinions concerning benefits and investment transactions

including obtaining necessary opinions, letter rulings, and other documents from

the Internal Revenue Service or other state or federal regulatory or governing

bodies as requested by the Board.

b. Investment Consultant

Principle

Most public pension funds employ an investment consultant to provide the Board with

information, analysis and advice that enables the Board to make an independent assessment of

the performance of its investment program. The role of the consultant has evolved to include

advice regarding:

• Asset allocation;

• Investment policy;

• Investment structure and roles for investment managers;

• Manager selection;

• Account guidelines and compliance;

• Calculate investment returns;

• Compare those returns to benchmark returns and peer group performance;

• Portfolio risks; and

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• On-going manager monitoring and compliance

Consultants are also frequently called on to provide advice about custodial operations,

trading and brokerage practices of investment managers, proxy voting, and the educational needs

of the Board itself. Use of an independent investment consultant is considered a best practice.

The essential service provided by the consultant is a broad “field of vision”. The

consultant should be able to bring experience with a wide range of investment strategies,

investment managers and fund performance, beyond the experience the Board and its own staff

are able to achieve within the confines of their own investment program.

To be effective, the consultant’s reports must be accurate, comprehensive and clear. The

Board also needs to be able to have a very high degree of confidence in the advice and analysis

provided by its consultant.

Risk

Most public fund Boards rely on an independent investment consultant because they

know that thoughtful, careful and comprehensive due diligence procedures improve the

likelihood that the Board will be successful when selecting investment managers. Absent the

broad perspective provided by consultants, a fund may find that it has employed investment

managers who lack skill or whose style of management is inappropriate for its investment

program. Effective due diligence on the “front end” by a consultant can help reduce the risk that

a fund may later mistakenly decide to terminate or replace a good manager who is experiencing a

period of weak performance.

Regular, comprehensive portfolio monitoring is essential to prudent management of a

fund’s assets. An investment consultant should be required to produce clear reports that provide

sufficient information to make sound decisions about investment performance, manager skill,

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and diversification. Lacking that, a fund’s Board will be unable to maintain the appropriate

balance of risks, returns and costs, and the fund’s financial condition may suffer.

If the investment consultant does not serve in the capacity of a fiduciary, a fund risks that

the quality of advice it receives from its consultant may not be the highest.

Observed Condition

Under the terms of an agreement dated July 1, 2004, the PFRS Board employs Pension

Consulting Alliance (“PCA”), a nationally known investment consulting firm to advise it on the

structure of its investment program and on the performance of the investment managers that

serve PFRS. PCA was hired through a competitive search process.

Based on data provided by PFRS’ custodian, BoNY, the investment consultant reviews

the rates of investment return for the total portfolio and for each of the investment accounts

within the total portfolio.

The investment consultant prepares quarterly investment performance reports for the

Board. These reports supply the Board with the information most commonly used by institutional

investors to monitor performance of PFRS’ investment managers and its overall investment

program.

The investment consultant meets with PFRS’ managers from time to time to review the

managers’ organizations and performance.

The following table lists the services required in the agreement between PFRS and PCA

with the services actually provided in practice to PFRS by its retainer consultant.

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Table D-1: Comparison of Consulting Services General Consulting Services Required by

the consultant’s

contract

Provided in

practice by the consultant

FIDUCIARY STATUS • Consultant acknowledges fiduciary status

ESSENTIAL SERVICES Asset Allocation and Asset/Liability Studies

• Produce capital markets assumptions19 • Produce asset allocation study and recommendations • Produce asset/liability report

Investment Policy and Structure • Prepare or review fund’s Investment Policy Statement • Review and recommend fund’s investment structure • Recommend performance benchmarks for asset classes and

investment managers

Periodic Investment Performance Reports • Produce investment performance reports • Calculate investment rates of return for total fund

• Calculate investment rates of return for asset classes • Calculate investment rates of return for external investment

managers

• Rank fund and managers against appropriate peer universes

IFS did not observe this being

provided20

• Produce portfolio characteristics or risk analytics for each asset class

• Produce portfolio characteristics or risk analytics for each investment portfolio

• Reconcile return calculations with external managers • Monitor personnel, process and business issues at external

managers

Selection of External Investment Managers • Recommend external investment managers • Prepare profiles or analysis of recommended external

managers

• Prepare guidelines for managers hired by Fund • Assist in contract and fee negotiations

19 PCA produces capital market assumptions on an annual basis. 20 PCA commented that peer rankings are available through the custodian. However, PCA’s contract requires PCA to provide the information.

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Table D-1: Comparison of Consulting Services General Consulting Services Required by

the consultant’s

contract

Provided in

practice by the consultant

COLLATERAL SERVICES Real estate analysis or manager selection Hedge fund analysis or selection Private equity analysis or selection Check compliance of external managers with Fund guidelines Education and Research

• Conduct educational programs for Board and staff • Provide research papers on investment topics

SECONDARY SERVICES Custodial evaluation or monitoring Securities lending analysis Brokerage analysis Commission recapture or brokerage discount analysis Proxy voting or analysis of other party’s voting record

The services provided by the consultant are consistent with the basic services required by

PFRS and by other similar institutional investors. (Please see Section L below for a review of the

consultant’s quarterly report format.)

PFRS, however, would benefit from having PCA provide advice on other collateral and

secondary issues noted in the Table D-1. While these issues are not central to the structure of

PFRS’ investment program (asset allocation, investment structure, manager selection, etc.), PCA

may be able to help PFRS achieve greater efficiencies in custody services and compliance

monitoring, generate additional revenue (securities lending enhancements), reduce costs

(brokerage and transition management) and strengthen performance of fiduciary duties (proxy

voting).

PCA’s contract with PFRS indicates that it serves PFRS as a fiduciary. The inclusion of

fiduciary responsibility in the PCA contract reduces risk for PFRS. In this respect, PFRS’

contract with PCA conforms to best practices in the consulting industry.

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Recommendations 38 - 40

The Board should continue to employ an investment consultant to provide a comprehensive range of consulting services. PFRS Board should consider expansion of PCA’s contract to include advice on other collateral and secondary services about which the current agreement is silent. (Refer to report Table D1.) Should PFRS elect to retain third party vendors to provide additional investment related services, PCA should provide PFRS with a periodic review of the work of these vendors.

c. Actuary

Principle

Managing pension fund assets in such a manner that the plan’s obligations to its

pensioners and beneficiaries are met timely requires expert actuarial advice. The trustees of a

public pension fund need actuaries knowledgeable in the interpretation and application of plan

benefit provisions and the development and application of rational actuarial assumptions.21

Recognized best practices for a public retirement system board include having the

authority to engage its own actuary and to periodically submit the regular actuary to an external

review by a qualified independent actuary.

Risk

As in any relationship that extends over a lengthy period there is a possibility that long-

standing processes can become stale and that familiarity with the client can result in laxity in the

approach to the engagement.

21 IFS is not an actuarial firm. IFS was not hired to review the accuracy of the actuarial report or the validity of actuarial assumptions. Accordingly, we offer no opinion on those matters.

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Observed Condition

PFRS has engaged its actuarial firm, Milliman, for many years. To our knowledge

Milliman’s work has not been subjected to a third party review by another actuarial firm.

Recommendation 41 While we have no reason to question the validity of the actuarial work performed currently, PFRS should consider obtaining a periodic ‘second opinion’ on the work of its actuary. Some funds do this every five years. Short of going to bid for the actuarial services, the Board’s monitoring process of its actuary could consist of hiring another reputable actuary to perform a one-time review.

d. Custodian

Principle

Pension master trust and custody is a highly systems intensive business that requires

continual investment in hardware, software, communications systems and personnel. As the need

to automate the process has increased, dozens of major regional banks have stopped offering this

extensive and costly level of service, and limited themselves to the low volume, limited reporting

needs of local personal and corporate trust. Only about six or seven U.S. banks, including PFRS’

custodian, The Bank of New York (BoNY), have made the strategic decision and continue to

make the investment to develop and maintain a competitive position in this market and attract the

volume of business necessary to support it.

In most cases, public pension funds that have global investments are better served by a

custody bank that has made a commitment to the provision of global custody services rather than

hire a local bank that must sub-contract with a global custodian.

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Observed Condition

PFRS maintains a contract dated March 4, 1998 with the Bank of New York for custody

services. No termination date or duration of the contract is specified.

BoNY provides PFRS with basic securities custody services. BoNY’s agreement with

PFRS identifies their responsibilities with regard to receiving, delivering, and safeguarding cash

and securities, collecting income, pricing the portfolio, and maintaining accounting records. As a

top-tier global custody bank, BoNY is able to provide PFRS with other services such as global

custody, securities lending, portfolio analytics, trading cost measurement, on-line support and

analytics, and risk management.

Feedback to IFS from staff regarding BoNY indicated less than satisfactory service is

being provided. Other factors such as changes in BoNY personnel, closing its San Francisco

office, poor client relationship management and emails that go unanswered indicate that the

service is less than the level that should be provided.

Contractually speaking, PFRS position with BoNY leaves much to be desired as well. In

fact there is little in the contract that is not in favor of BoNY to the disfavor of PFRS. For

example:

• Section III 1a – Securities and cash held by sub-custodians are held subject to

conditions of BoNY’s agreement with the sub-custodian.

• Section IV 1 – Transactions are accounted for on the actual settlement date rather

than the contractual settlement (while for convenience BoNY may settle

transactions on contractual date, payments are not “final” until available funds are

received).

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• Section VI 1a - BoNY assumes virtually no liability for sub-custodians.

• Section VI 1b - There are no contractual limitations on the use of affiliates by

BoNY.

• Section VI 1c - PFRS grants BoNY a very broad indemnification.

• Section VI 2 - BoNY assumes no liability for identification of phony securities.

• Section VI 3 - BoNY is “fully protected” simply by following the advice of its

attorney.

• Section VI 4 - BoNY has no obligation to collect on securities payables.

• Section VI 6 - The contract has no flat fee for services. PFRS simply pays

scheduled standard rates.

• Section VI 7 - BoNY has set off rights without notice to PFRS.

• Section VI 11 – BoNY is not responsible for failure or delay caused by its own

computer systems or communications.

• Section VI 1a – PFRS grants BoNY a 90 day termination clause after which all

obligations of BoNY cease.

• Amendment 1 – BoNY may hold cash uninvested and shall not be liable for

interest.

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• Amendment 1 – BoNY is entitled to an investment management fee on its Short

Term Investment Fund.

Fees

Fees for custodial services are notoriously difficult to assess. They may be charged

individually based on actual volume of assets, accounts, and transactions, bundled into a single

fixed fee, or combined. Costs usually vary by volume, so different size or different complexity

clients may legitimately be paying different fees.

Total fee activity between a custody bank and client may also be muddled by packaging

other services, particularly securities lending income, into a single price arrangement. While this

does not apply directly to PFRS, who uses a third party securities lending agent exclusively, it

renders funds that do inappropriate for comparison. In some jurisdictions, custody arrangements

with a single bank apply to sister funds in the state as well. The increased volume reduces unit

costs, but makes measuring each participating fund’s share less precise.

Given this lack of uniformity, the best means to assure competitive pricing is to test price

and services periodically through a search process. Total fees paid to BoNY for custody services

in 2005 and 2004 were $283,815 and $289,226, respectively. However, these custodial fees are

significantly higher than three peer funds on an absolute dollar basis which reported fees ranging

from $63,228 to $101,516.

Recommendation 42 - 43 PFRS should seek competitive proposals for a new custody arrangement. The Board’s legal counsel should be closely involved in negotiating the custody agreement. Simultaneously, PFRS should seek competitive bids on its securities lending program. (See next section and recommendation.)

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e. Securities Lending

Risk

The approval action could weaken the Board’s case in the event of actual borrower

default. Further, we are not aware that the staff does any credit review of borrowers that would

justify approval.

Observed Condition

Under terms of an agreement dated May 1, 1991 Met West Securities, LLC, as successor

to Security Pacific NB, acts as securities lending agent for PFRS. The agreement was

subsequently assigned on November 2003 to Wachovia Bank NA after MetWest became a

wholly owned subsidiary. As of December 31, 2005, the market value of securities on loan was

approximately $29 million. Income from the securities lending program is split between the

agent and the lender. The current split between MetWest and PFRS is 35% and 65%,

respectively. A 35/65 fee split is not unusual for a small loan program, although such a split is

usually accompanied by more favorable indemnification provisions.

Approval of Borrowers

Generally approved loan limits per borrower are determined through the agent’s credit

assessment process, taking into consideration each borrower’s financial strength and past lending

history. Typically the agent maintains an aggregate credit limit for each qualified borrower from

all the agent bank’s lenders. The agent’s credit committee generally controls this credit process,

not its securities lending group.

A list of changes to the list of approved borrowers is provided periodically to the OPRM

Retirement Manager for signature approval. The Manager last approved a modification in June

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2004. The agreement for Securities Lending Services does not require the Board’s approval of

borrowers.

Recommendation 44

The Board (and staff) should refrain from approval of borrowers. Staff or the investment consultant should periodically review the list of borrowers approved by MetWest and only bring to the Board’s attention any that may be questionable.

The agreement for Securities Lending Services does not specify a requirement to allocate

securities lending business equitably among the agent’s customers. Because not every customer

holds each security that is requested for borrowing, such allocation systems are complex.

Lenders should understand the mechanism used by the Lending Agent to ensure equitable

lending.

Recommendations 45 - 46 PFRS should request and obtain contractual assurances from MetWest that its securities are loaned equitably. MetWest should also provide a description and explanation of the queuing mechanism that allocates loans among lenders. Since the agreement for Securities Lending Services has been assigned at least three times, we suggest that it be renegotiated to incorporate certain key provisions of the Securities Lending Agreement (SLA) such as requirement for maintenance of collateral, and to reflect the current agency and more favorable terms concerning, e.g.: • Indemnification against borrower default; • Liability on the part of agent for failing to act in accordance with PFRS

instructions; and • Restrictions on borrowing activities of parent/affiliate of agent.

It is interesting to note that Wachovia and affiliates are approved borrowers, thus

enabling Wachovia to act as agent and borrower should it so choose. On December 31, 2005,

Wachovia was not one of the borrowers of PFRS securities.

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Recommendation 47

PFRS should seek to restrict the terms and conditions under which MetWest can lend PFRS securities to its parent and affiliates, i.e., Wachovia.

On December 31, 2005, the MetWest securities lending report noted that loans to MS

Securities were under-collateralized by $12,550. It is not unusual for loan collateral to fall below

the required 102% threshold minimum based on market value fluctuations. While these loans

may have been fully collateralized on the next business day, IFS did not inquire about whether

that was the case.

Recommendation 48 MetWest should provide explanations in their report when loan transactions fall outside general loan program guidelines.

In footnote 4, Securities Lending Transactions, to the fund’s June 30, 2004 financial

statements, PFRS states “The System’s contract with [MetWest] requires it to indemnify the

System if borrowers fail to return the securities (and if the collateral is inadequate to replace the

securities borrowed) or fail to pay the System for income distributions by the securities’ issuers

while the securities are on loan.” We did not see such an indemnification provision in the

agreement for Securities Lending Services.

Recommendation 49 The footnote on securities lending should be corrected as appropriate.

f. Auditor

Principle

Audits of a fund’s financial statements should be conducted annually by an independent

certified public accounting firm with personnel having knowledge and experience in public fund

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matters and in accordance with generally accepted accounting and auditing standards. Such

audits are both common and best practice.

The fund’s fiduciaries should determine which firm is selected on the basis of the firm’s

demonstrated knowledge and experience and the cost of the audit.

Observed Condition

PFRS’ financial statements are audited annually by the independent CPA firm of Macias

Gini and Company. The firm is hired by the City rather than the PFRS Board and the PFRS audit

is ‘tacked’ on to the city’s annual audit. Such an arrangement, whereby the Plan Sponsor hires

the auditor, is not unusual or untenable. In fact, the larger bargaining power of the plan sponsor

may result in a more cost effective result. IFS has no recommendations regarding the external

audit process.

Recommendation

None.

E. Suitability

1. Evaluate whether the members of the governing body are suitable to serve on the PFRS board? (Specifically, whether they meet the background criteria appropriate for the seat they hold, i.e., appointed reps, insurance rep, banking rep, etc.; also whether they are adequately trained by attending educational seminars, conferences, etc. to stay current on trends, best practices, investment strategies in the industry.)

Principles

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• Most state and local systems are managed by an appointed retirement board with

authority for investment decisions, actuarial matters, day-to-day operations, and

sometimes, benefit design as well as benefit payment.22

• Board members typically fall into three categories: (1) trustees elected by plan members

(who may themselves be active or retired members; (2) trustees appointed by the

government (e.g., executive or legislative branch officials); and (3) ex-officio trustees

who serve by virtue of the position they hold (e.g., the treasurer, comptroller, mayor,

governor, etc.). These categories focus on membership and plan sponsor representative

rather than professional qualifications of a trustee.

• Issues involved in the area of public pension fund investments and benefits

administration require informed judgment and significant expertise at the staff and board

levels. Consequently, best practices calls for some members of the board, ideally a

majority, to have experience in the investment and administration of employee benefit

funds.

• Ongoing education and training is essential to a trustee’s ability to learn and stay abreast

of new investment and benefits administration topics consistent with the fulfillment of

their fiduciary responsibilities to the system.

• A pension fund should have a well articulated travel policy, approved and periodically

reviewed by the board of trustees, which covers board member and staff travel. The

policy should be consistent with any statutorily imposed requirements, include a process

for requesting approval in advance of travel and designate an individual to review and

approve travel request. The individual designated to approve travel should not be

authorized to approve their own travel. In addition, the policy should include a

22 State and Local Pension Plan Developments, by Olivia S. Mitchell and David McCarthy, February 2000.

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monitoring component to ensure that board members and employees are in compliance.

Entertainment in connection with the travel should also be addressed part of the policy.

Risk

• Unless at least some members of the board have expertise in investments and benefit

administration, the board members may become too reliant and the decision making

process may be unduly influenced by staff and/or external service providers.

• Without a travel policy, board members and staff may find themselves in the position of

accepting prohibited travel or failing to properly disclose travel as required by the city of

Oakland conflicts of interest provisions and form 700.

Observed Conditions

• Currently the board’s enabling statute requires that two of its members have professional

qualifications. The qualifications for a majority of the trustees focus on the

characteristics the membership and include a plan sponsor representative. Since this is a

closed fund, we do not believe that a change in board member qualifications to require

more defined investment and benefit expertise is warranted.

• Based on information obtained during the interview process, we found the current board

to be aware of the need to educate itself, stay abreast of developing industry trends and

investment vehicles, and network with members of other pension funds. Further, the

members have also adopted a travel policy.

Recommendation 50

We recommend that the Board amend its travel policy to (a) clarify that travel must be approved in advance,(b) require that all international travel be approved by the full board in advance of such travel (c) expand the policy to cover staff assigned to PFRS, (d) include a list of approved conferences, (e) limit the total

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Recommendation 50 number of trips that may be taken in any one year, and (f) require that members and staff that attend an educational conference provide a written overview of the conference to the board and make the conference materials available to others upon request.

2. Develop a list of comparable pension funds based on number of members

and total amount of fund assets and other pertinent factors. Survey the selected pension funds to determine pertinent policies and procedure, performance characteristics and other relevant information.

In consultation with Board and staff of PFRS, IFS identified the following pension funds

for inclusion in the survey.

Peers State Asset Size (Millions)

Status Report Date

Us Equity

Non-Us Equity

US Bond

Non-Us

Bond

Other

Marin County ERA CA $834 A multiple employer plan with 5 tiers out of which, 2 tiers are closed

6/30/02 47% 21% 22% 0% 10%

City of Fresno Fire & Police CA $789 A 2 tier plan. The 1st tier is closed to new entrants.

6/30/02 46% 16% 26% 0% 12%

City of Fresno ERS CA $715 Open 6/30/02 46% 16% 26% 0% 12% City of Oakland Police & Fire CA $673 Closed 6/30/02 31% 14% 54% 0% 1% Minneapolis Firefighter’s Relief Association Minneapolis Police Relief Association

MN $654 (combined)

Closed 12/31/03 67%23 2624 0% 7%

Tulare County ERA CA $640 Open 6/30/03 42% 20% 30% 2% 6% East Bay Municipal Utility District Retirement System

CA $543 It has a 2 tier plan with the 1st tier closed to new

entrants.

6/30/03 50% 10% 9% 1% 30%

City of Sacramento City Employees’ Retirement System

CA $386 Closed 6/30/03 30% 0% 24% 0% 46%

Sources: 2004 Wilshire report on City & County RS, California State Controller’s 25th edition of the Public Retirement Systems Annual Report for fiscal year ended June 30th, 2003, and NASRA and NCTR Public Fund Survey 2003-2004;2004 CAFR, City of Minneapolis.

23 The Source does not specify whether the percentage allocated to equity represents just domestic equity or both domestic and international equity. 24 In the fund’s asset allocation, this number was allocated to domestic fixed income. The assumption was made in this case that domestic fixed income comprises solely of domestic bonds.

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Funds we researched but decided not to include because of their size:

Peers State Asset Size (Millions)

Status Report Date

Us Equity Non-Us Equity

US Bond Non-Us

Bond City of Pasadena Fire and Police Employees’ Retirement System

CA $99 Closed 6/30/03 58.03% 0% 27.34% 0%

City of El Cerrito Employees’ Pension Trust Fund

CA $58.76 Closed 6/30/03 0% 0% 42.35% 0%

City of Concord Retirement System

CA $54.48 Closed 6/30/03 0% 0% 0% 0%

City of Richmond Police and Firemen’s Pension Plan

CA $16.08 Closed 6/30/03 0% 0% 36.36% 18.8%

City of Albany Police and Fire Relief Pension Fund

CA $14.33 Closed 6/30/03 30.75 0% 23.9% 0%

City of Oakland Municipal Employee RS

CA $8.8 Closed 6/30/03 45.6% 7.15%

City of Eureka Fire and Police Retirement System

CA $1.33 Closed 6/30/03 0% 0% 0% 0%

This list of closed funds is included for your information regarding other California

closed plans.

The results of our survey, including return and fund structure statistics, staff FTEs,

participant statistics, funding ratios and numerous other data are summarized and included for

review at Exhibit B. We have incorporated those results, where relevant in the discussion

sections of the report. Please see Section I for comparison of costs and performance.

3. Review the administrative costs of operating the pension system including

internal administrative costs and City overhead charges levied against the pension fund. Compare these costs to comparable pension funds. Evaluate the cost effectiveness of existing administrative structure, policies and procedures. Please see also the cost analysis table in Section I. Please see our recommendation on the

staff salary allocation percentages in Section F, below.

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Staffing FTEs:

Total full-time employees

Marin County ERA

City of Fresno

Retirement Systems

Tulare County ERA

Minneapolis Police Relief

Association Oakland

PFRS

Office of the Executive 3 2 2 2.3 .68Investment Staff 0 1 0 0.3 0Accounting Staff 2 1 1 1.3 1.4Systems and Office Services 1 0 1 0.7 0Legal 0 0 0 0.0 .6Benefit Management Services 1 5 4 3.3 1.85Internal Audit 0 0 0 0 0Other - - - - -

Total FTEs 7 9 8 8 4.53# of Participants to FTEs 773 592 866 N/A 295

Compared to survey respondents, the PFRS staff size appears adequate based on the

number of plan participants serviced. However, it is not known whether the survey respondents

divide their staff time among other funds as does OPRM.

Participants in fund and plan funded percentage:

No. of participants/funded %

Marin County ERA

City of Fresno

Retirement Systems

Tulare County ERA

Minneapolis Firefighter’s

Relief Association

Minneapolis Police Relief

Association Oakland

PFRS Active members 3,355 3,353 5,119 3Retired members & beneficiaries 2,056 1,979 1,808 1,332Total participants 5,411 5,332 6,927 1,335Funded % of plan 85.00% 123.00% 95.40% 90.20% 70.70% 69.60%

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F. Internal Controls Evaluate whether appropriate internal controls are in place:

1. Regular assessment of the performance of the persons and entities involved in the operation and oversight of the pension fund.

Principle

When done properly, regular periodic and timely performance evaluation and assessment

of individual employees against reasonably achievable goals set earlier enables management to

provide feedback to employees to improve performance.

Risk

There is a risk of unclear understanding of assigned job duties and actions necessary for

successful performance of the job. Inherent with collectively bargaining pay systems not tied to

job performance, employee will receive the same pay increase regardless of their performance.

Observed Condition

We noted that annual performance evaluations are provided to all personnel in the OPRM

department. Staff evaluations are prepared by the HR Manager of Retirement and Benefits. The

HR Manager of Retirement and Benefits is reviewed by the Director, OPRM. Overall, the

consensus was that these evaluations are not of much use as they do not necessarily provide a

constructive review of current performance nor future performance and career goals. However,

the reviews are tied to pay increases since step/merit increases are dependent upon satisfactory

performance appraisals.

There is no formal training program in place for any PFRS staff position, nor is there

currently a staff handbook covering operations. All learning is on-the-job. A Standard Operating

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Manual (“SOM”) has been drafted by the Benefits Representative and includes copies of all

PFRS forms. All other PFRS Staff are in the process of preparing SOM for their positions, with

first drafts due to the HR Manager in April 2006.

Recommendation 51 & 52 While it is only possible to revise the method of distribution for annual pay increases through the collective bargaining process, providing clear, well-defined, and obtainable staff objectives for acceptable job performance and future career growth at each annual evaluation may increase employee performance and productivity. In addition to the SOM, an Administrative Manual should be completed that describes each position and the related job responsibilities. The Manual should also describe the primary and secondary responsibilities for each job title so that a clear back-up is designated in the absence of the primary personnel.

2. Regular review of compensation mechanisms, in order to ensure that they provide the correct incentives for those responsible for the operation and oversight of the pension fund.

Risk

Incorrect assignment of administrative expenses to PFRS.

Observed Condition

Compensation paid to OPRM staff is provided through a budgetary procedure that links

percentages of each staff member’s time as assigned to PFRS. A question as to the validity of

these assigned percentages was presented. We reviewed the assigned time percentages for each

of the following OPRM staff positions: Human Resource Manager, Retirement and Benefits;

Benefits Representatives; Human Resources Technician; Executive Assistant to the Director of

Personnel; Benefit Analyst; Retirement Systems Accountant; and Accountant 1. We also

interviewed the current employees in these positions.

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Recommendation 53 The percentages used for allocation purposes should be changed as follows:

Reduce the percentage for the Executive Assistant to the Director of Personnel from 15% to 8%;

Reduce the percentage for Human Resources Technician from 80 to 65%. Increase the percentage for Retirement Systems Accountant and

Accountant 1 from 70% to 80%; and All other reviewed percentages appear appropriate.

(Note: The revised recommended percentages are based solely on our judgment based on the interviews conducted.)

3. Regular review of information processes, operational software systems, and accounting and financial reporting systems.

The Board currently hires three outside experts, the investment consultant, the actuary,

and the independent auditor to conduct regular reviews and assessments in their areas of

expertise. The main short-coming of the reviews is that they are all conducted “around the

computer.” That means that these experts look at inputs into the computer and outputs from the

computer but rarely look at what goes on inside the computer.

More often than not, computer programming glitches can be caught by looking at

erroneous output. In that respect PFRS likely has adequate resources devoted to regular review

of its information processes, operational software systems, and accounting and financial

reporting systems. However, a properly functioning internal audit activity would normally

include audit of the computer as an integral supplement to the work of staff, the financial auditor,

the actuary, and the investment consultant. Please see Section D, where we discuss the role of,

and make recommendations regarding, internal audit.

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4. Identification, monitoring and, where necessary, correction of conflicts of interest situations.

Principles

• The potential for conflicts of interest in the financial services industry is abundant.

Therefore, public pension fund trustees should install processes to effectively identify

such conflicts and properly manage them.

• Trustees should distinguish between actual and potential conflicts. An actual conflict of

interest is a situation where the quality or objectivity of a service provider’s services is

actually, in practice, compromised, because of conflicting duties, either between its self-

interest and its duty to a client or between its various duties to different clients. A

potential conflict of interest is a situation where the quality or objectivity of services

could conceivably be compromised because of such conflicts, although in fact, it may

never manifest itself – it may never become “actual”. In both cases processes to identify

and manage such conflicts are key. Sufficiently identifying and managing potential

conflicts may prevent them from ever becoming actual conflicts.

Risk

The knowledge that the trustee has been involved in conflicts of interest, or the

appearance thereof, will erode the confidence of the pension fund members and beneficiaries and

the public at large.

Observed Condition

• Section 9.9 of the board rules and regulations prohibit members and employees of the

board from having an “interest direct or indirect in the making of any investment or in the

gains or profits accruing there from.”

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• Board members file form 700, Statement of Economic Interests. The form requires the

reporting of investments, interests in real property, certain loans, and gifts. It does not

require reporting of political contributions. Further, while consultants must file form 700,

it does not appear that investment managers would be required to file. PCA does not file

Form 700.

• Currently, it does not appear that the board has anyone (e.g., a designated trustee or staff,

including legal counsel) that reviews the form 700 disclosures or disclosures that may be

made on the record during a meeting. The City Clerk handles this process for the entire

City. PFRS staff is not involved in the process.

Recommendations 54 - 55 The Board should develop contractual language for inclusion in each service provider’s agreement requiring extensive, prompt, written disclosure from the investment consultant (including filing of Form 700 if required) and each service provider regarding the amounts of all revenues the investment consultant receives from any incumbent or proposed service provider. The Board should designate a specific individual (e.g. legal counsel), in addition to the City Clerk, to review and monitor conflicts of interest, actual and potential, including Form 700 reports as allowed by law.

5. Mechanisms to sanction the improper use of privileged information

Because the PFRS administers health benefits and grants disability pensions, its files

contain personal and private health care information. The federal Health Insurance Portability

and Accountability Act of 1996 (HIPAA) imposes strict rules for the handling of an individual’s

identifiable health information. It does not appear that a compliance study of PFRS’ compliance

with HIPAA has been performed.

Recommendation 56 A HIPAA compliance study should be performed, and steps should be taken to remedy any deficiencies in PFRS’ HIPAA compliance.

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6. Implementation of an adequate risk measurement and management system

including effective internal audit. 7. Regular assessment of regulatory compliance systems.

Appropriate risk management and measurement systems and processes are in place for

the fund’s investment program. Please refer to our discussion of these below in Sections J., K.

and L.

To the extent that operational and business risk management and measurement systems

including internal audit exist, they are currently supplied by the City of Oakland. PFRS has no

staff or systems “of its own”, i.e., all services are provided by City employees from different City

departments and agencies, or by outside experts.

IFS did not determine whether the City has a comprehensive enterprise risk management

system that would encompass the operations of PFRS. However, we understand that the City has

an internal auditing function of approximately 10 employees under the direction of the elected

City Auditor. As far as we can determine, no internal audits of the aspects of OPRM that handle

PFRS activities have been performed in recent years. That said, PFRS has no effective internal

audit function.

The PFRS Board has recognized the need for internal review and, to that end, has

engaged an independent firm to perform narrow scope audits of benefit calculations (and IFS to

perform its first management audit). Without reviewing the details of the procedures followed by

the benefits auditing firm, we believe that the concept is a good one that should be continued.

PFRS could benefit from continued reviews by external experts in certain specific areas.

Recommendations 57 - 61 PFRS should continue the annual external audit of benefit calculations. PFRS should hire an external actuarial firm to review the work of its current actuary. (Please see discussion in Section D above regarding the actuary.)

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Recommendations 57 - 61 PFRS should discuss a program of regular internal auditing of PFRS’ activities with the City Auditor. The internal auditing activity should be performed in accordance with generally accepted standards for the practice of internal auditing and should include compliance auditing. We suggest that PFRS’ external auditor be consulted on the design of such a program before it is implemented. Observations and recommendations from this Operational Review should be tracked and monitored by staff and the Board should be updated regularly on the progress of recommendations that it chooses to implement. The Board should undertake a periodic management audit such as the one performed to develop this report.

8. The establishment of objective performance measures for all persons and

entities involved in the administration of the PFRS fund. Principles

• Performance measures are an essential management tool as well as an instructional tool,

helping staff to develop their goals and objectives for the coming year and providing

feedback on work performance during the year. At a minimum, all persons and entities

(e.g., service providers) involved in the administration of the pension fund should be

done on an annual basis.

• Performance guidelines for staff should be tailored to their functions.

• The performance measures to be designed so as to align the interests of staff with the

interests of the board – insuring that the system is administered in an effective and

efficient manner which allows the board to accomplish its primary mission and strategic

goals.

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Risk

The board’s ability to accomplish it mission will be hampered because the staff charged

with the implementation of the board’s policies in the day to day administration of the System

will be unclear regarding their respective goals and objectives.

Observed Conditions

• The Office of Personnel Resource Management has established a mission, vision and

organizational values and standards statement. PFRS did not participate in the

development of the statement (i.e., it was not provided to them for review and comment)

nor does the statement reference any goals or objective for PFRS.

• The “employee performance appraisal form and performance plan” is a generic,

somewhat general, city government wide performance form. It is not geared toward the

specific nature of the functions the staff provides to the board.

• Although the PFRS board, as fiduciaries, has ultimate responsibility for the

administration of the pension fund, functionally it must delegate responsibility for the

system’s day to day operations to a staff which it has not authority over, including the

ability to establish performance measure criteria or to provide performance evaluation

input.

Recommendations 62 - 63 Staff’s performance measurement criteria should identify goals and objectives specifically related to the management and administration of PFRS. The criteria should be designed to align the interest of the board and staff and facilitate PFRS’ ability to accomplish its mission and strategic objectives. Board members should provide input in the establishment of the performance measurement criteria for the staff assigned to carry out PFRS’ day to day administration, as well as the input in such staffs’ annual performance review.

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G. Reporting

1. Reporting channels are established between all persons and entities involved in the administration of the PFRS fund in order to ensure the effective and timely transmission of relevant and accurate information.

a. Board to PFRS Staff

Observed Condition

Currently the Human Resource Manager, Retirement and Benefits, along with the Human

Resources Technician, Retirement Systems Accountant and Benefits Representative attend the

monthly Board meetings. The remaining PFRS staff attends monthly internal staff meetings

following the Board meetings. These meetings provide staff with knowledge of PFRS actions, a

forum for feedback to the HR Manager and the assignment of responsibility for all PFRS issues.

Recommendation None.

b. Board to Plan Members and Beneficiaries

Risk

Failure, whether intentional or inadvertent, to communicate Board decisions affecting

plan members and beneficiaries could have severe consequences.

Observed Condition

Decisions made by the Board that affect the plan members and beneficiaries are disclosed

through newsletters provided by the appropriate local unions. Historical communication channels

between Board members and PFRS staff with the local union are used to disseminate this

information, although it is an informal process.

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Recommendation 64 & 65 Should the current method of communicating these decisions, via the local union channels, remain in place, a formal process of communicating these decisions should be developed. Establishment and maintenance of a PFRS webpage within the City’s portal would allow another means of communicating Board decisions.

2. Whether the PFRS fund complies with federal and state reporting requirements.

3. Whether audits, actuarial and financial reports are completed annually or

as required.

Principle

A public retirement fund should comply with legally imposed reporting requirements.

Risk

A pension fund’s failure to comply with legally imposed reporting requirements exposes

the fund and trustees to potential legal sanctions, as discussed in reference to Task Area B(3)

above. In addition, failure to comply with reporting requirements deprives the fund’s

participants and other interested parties, such as the contributing employers, with relevant

information about the fund.

Observed Condition

OPRM staff reports that PFRS is subject to the following reporting requirements:

• Annual Audit – The City of Oakland requires an annual financial audit to be

performed by independent Auditors. A portion of the PFRS audited financial

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statements are included in the City of Oakland Comprehensive Annual Financial

Report (CAFR).

• State Controller’s Report – Upon the completion of the City’s annual financial

audit, PFRS is required to report its separate audited financial statement to the

State Controller along with a copy of the completed city audit.

• Census Report – Upon the completion of the City’s annual financial audit, PFRS

files a report with US Census.

IFS understands that OPRM has timely complied with these requirements.25

The City’s CAFR includes only a brief section (three pages) devoted to the PFRS audited

financial statement. The “Net Pension Asset” as of the end of the fiscal year and the “Annual

Pension Cost for the year are recorded, along with a summary of the provisions of the plan and

certain actuarial assumptions. The information in the CAFR does not show the funding status of

the PFRS or information regarding the system’s investments, benefit expenses or costs of

administration.

PFRS used to publish its own annual report to the Mayor and the City Council, which

was publicly available and included the entire audited financial statement. No annual report has

been produced since the report for the year ended June 30, 2003. That report presented

comprehensive data and explanations concerning the PFRS’ financial and actuarial status,

investments, income and expenses.

25 PFRS is also required to furnish pensioners with an IRS Form 1099 each year. In 2004 it was reported that a clerical error occurred in the preparation of the Forms 1099 for certain disability retirees in that a box which should have contained a zero was left blank. This error, immaterial in terms of any retiree’s tax liability, was corrected.

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Recommendation 66

PFRS should resume the practice of publishing its own annual report on a timely basis. Reports for 2004 and 3005 should be prepared.

H. Disclosure

1. Evaluate whether the governing body discloses relevant information to all parties in a clear, accurate and timely manner.

Risk

Failure of this communications chain, from governing body to PFRS Staff to plan

vendors, and retirees and beneficiaries, to provide accurate and timely information could have a

negative impact.

Observed Condition

Disclosure by the governing body of relevant information to the PFRS staff is

accomplished by having the Human Resource Manager, Retirement and Benefits, along with the

Human Resources Technician, Retirement Systems Accountant and Benefits Representative

attend the monthly Board meetings. These representatives then disclose relevant information, on

behalf of the governing body, to (1) the remaining PFRS staff at monthly internal staff meetings

following the Board meetings, (2) plan vendors through written and verbal communication, and

(3) the plan members and beneficiaries through newsletters provided by the appropriate local

unions.

Recommendation 67 - 69

All actions taken by the governing body at the monthly meeting should be recorded in detail in the meeting minutes. Draft meeting minutes should be produced within 5 days of the meeting and circulated to the appropriate parties for review and action. The minutes should be reviewed prior to the next meeting to assure all actions requiring follow-up are complete.

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Recommendation 67 - 69 Again, should the current method of communicating governing body decisions effecting retirees and beneficiaries, via the local union channels, remain in place, a formal process of communicating these decisions should be developed. Establishment and maintenance of a PFRS webpage within the City’s portal would allow another means of communicating Board decisions. (PFRS should bear the direct cost of creating and maintaining the web pages.)

Risk

Failure, whether intentional or inadvertent, to communicate Board decisions affecting

plan members and beneficiaries could have severe consequences.

Observed Condition

Decisions made by the Board that affect the plan members and beneficiaries are disclosed

through newsletters provided by the appropriate police and fire unions. Historical

communication channels between Board members and PFRS staff with the local union are used

to disseminate this information, although it is an informal process.

Recommendation 70 & 71 Should the current method of communicating these decisions, via the local

union channels, remain in place, a formal process of communicating these decisions should be developed. Establishment and maintenance of a PFRS webpage within the City’s portal would allow another means of communicating Board decisions.

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I. Investment Analysis

1. Review investment policies, procedures and periodic reporting to the PFRS Board. (Note: individual manager guidelines and reporting are covered in Task L.)

Principle

A thorough and clear investment policy statement (“IPS”) is an industry standard

document that serves as a critical part of the foundation for the ongoing supervision and

management of an investment program. The purpose of the IPS is to articulate the consensus

view of the Board of Trustees regarding the overall investment program and to document

policies and procedures regarding major issues (e.g., developing a long-term strategic asset

allocation, selecting service providers and performing due diligence, monitoring performance

and investing assets consistent with appropriate fiduciary standard).

An IPS formalizes the Trustees’ agreement on the framework from which to direct the

investment program. The IPS should address the following elements:

• The System’s mission and purpose of the IPS;

• The System’s investment objectives;

• The System’s risk tolerance, including the liquidity needs of the System;

• The roles and responsibilities of essential parties, e.g., Board of Trustees, staff,

the investment consultant(s), investment managers, custodian and the decision-

making process;

• The long-term strategic asset allocation, including:

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o Specific targets and ranges for each asset class, and

o The rebalancing process;

• Standards and measures of investment performance, including:

o Benchmarks for each asset class and the System as a whole;

o The process for monitoring and evaluating performance of the System and

individual managers;

• Selection of external investment managers;

• Broad System and asset class investment guidelines, including:

o Permissible and impermissible asset classes, investment strategies and

instruments;

o Reasons and general parameters for each major asset class;

• Criteria and policies (or reference to separate policies and procedures) regarding

specific miscellaneous subjects, including:

o Securities lending,

o Proxy voting, and

o Brokerage practices; and

• A statement regarding the process for periodic review of the IPS.

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Risk

The absence of a clear and complete IPS could cause the Board, staff and service

providers to act outside the determined policies of the Board, which in turn could cause the

System to incur too much (or too little) investment risk or to not follow the Board’s policies in

areas such as manager search, performance evaluation, etc.

Observed Condition

In general, we found the IPS to be fairly complete and to contain most of the essential

elements described above. The IPS goes into great detail in many areas. We discuss the

essential elements below and highlight the areas where we believe the IPS could be enhanced.

Although most of the essential elements are contained in these sections, in our opinion, the

organization of the overall document could be improved (for example, see our recommendation

under Roles and Responsibilities, below). We also found a few sections of the IPS to be

redundant in nature.

a. Mission and Purpose

Principle

An IPS should discuss the mission of the retirement system (e.g., to accumulate funds

exclusively for the benefit of the members and beneficiaries of the System) and the purpose of

the investment policy statement, as discussed above. It should also state the fiduciary standard to

which the Board must adhere (e.g., prudent person or prudent expert).

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Risk

It is important for a board to have a clear understanding of the fund’s mission and

purpose to avoid breaching their fiduciary duty.

Observed Condition

The mission of PFRS is stated in parts of the Prologue, Purpose of Policy, and Context of

Policy sections of the IPS. Specifically in the Context of Policy section it states that “the plan

exists to pay the retirement liabilities of those plan participants and retirees that were eligible for

said benefits as of a date certain.” The Board’s fiduciary responsibility is outlined in the

Prologue. The Purpose of the Policy section describes in detail how the IPS is intended to record

long range policy and to “convey not only the specific guidelines for action, but also the

philosophical foundations for those guidelines.”

b. Investment Objectives and Overall Performance Evaluation

Principle

An IPS should establish the standards and measures of investment performance,

including designating benchmarks that reflect performance expectations for each asset class and

for the pension fund as a whole. Investment objectives should grow out of – and conform to –

the investment horizon of the pension fund, its current and expected future cash flow needs and

take into account liability considerations (namely, funded ratio and employer contributions).

Establishing clear total fund performance objectives, (e.g., “earn a rate of return in excess

of inflation, which meets or exceeds the pension fund’s assumed actuarial rate and is consistent

with the retirement system’s long-term Policy Index”), can help shape the entire investment

program. Establishing objectives for each asset class and strategy likewise can help shape their

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nature and structure. “Best practices” suggest that the Board should establish a Total Fund Policy

Index and a Total Fund Asset Allocation Index (Please see further discussion in Task K

Investment Benchmarks). A Policy Index is comprised of market based benchmarks for each

asset class or composite (e.g., the Wilshire 5000 or Russell 3000 for domestic stocks), which are

aggregated according to the plan’s asset allocation targets to form a total fund performance

objective. An Asset Allocation Index will use those same benchmarks but drift as the asset

allocation of the plan drifts.

Risk

Not designating the most appropriate investment objectives for the System in the IPS

could put the Board at risk for:

• Not evaluating the performance correctly,

• Not structuring portfolios optimally, and/or

• Not achieving the assumed actuarial rate of return which could lead to increased

under funding over the long-term.

Observed Condition

Performance Objectives are addressed in Section IV. of the IPS, which states that “the

overall goal of the retirement system is to generate a long term oriented rate of return for the total

portfolio that equals or exceeds the actuarial investment rate assumption.” The IPS does not

specify what the actuarial rate assumption is (it is 8.0%), nor does it designate any additional

total fund benchmarks or asset class benchmarks using market based indices, i.e., a Policy Index

or an Asset Allocation Index. Investment performance is reviewed quarterly by the Board.

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The IPS also sets basic performance requirements for the individual investment managers

(top half of their style specific peer group over three and five years) and additional style specific

market benchmarks in their guidelines. These are discussed in more detail later in this section.

Recommendation 72 The Board should revise the performance objectives section of the IPS to include additional investment objectives and benchmarks for the total Pension Fund (including a Total Fund Policy Index and Total Fund Asset Allocation Index) and each asset class or composite.

c. Risk Tolerance

Principle

Board members, as the ultimate decision makers, should reach a consensus as to what

types and level of risk are acceptable and have an awareness of the risk level of the pension

fund’s asset allocation. The risk level should be appropriate to generate the necessary expected

return, consistent with the rest of the investment policy statement. It also needs to take into

account current and future cash flow needs.

Risk

Without a good understanding of the appropriate risk level of the fund, the Board risks

setting an inefficient or overly risky policy in order to meet its return objectives.

Observed Condition

The IPS states that the Board understands that markets are cyclical over time and that

those cycles can not be predicted, and therefore the Board takes a long-term investment approach.

Section II Context of Policy contains a discussion of the “Tolerance for Volatility.” This section

relates how the Board understands the volatility of the various asset classes, but that they

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attempted to construct a portfolio “which is expected to capture the higher returns offered by

stocks over time and also control short-term performance volatility.” It also notes that additional

contributions are not required until June 2011, so that short-term volatility of contributions is not

an issue. The IPS also states that the “Board places a high priority upon maintaining a strong

ratio of funded assets to accrued liabilities.” However, in our opinion, “strong ratio” is a rather

vague term and could be better defined.

d. Roles and Responsibilities

Principle

The IPS should outline the assignment of responsibilities and clearly distinguish the roles

and responsibilities of the essential parties, i.e., the Board, investment staff, consultant and any

other service providers.

Risk

Not delineating the roles and responsibilities of the Board and various staff members

could create confusion. It is important to note what staff is permitted to do without Board

approval versus Board approval being required, as well as the role of the consultant in the overall

process.

Observed Condition

The IPS does not contain sufficient detail as to roles and responsibilities of the various

parties. The Prologue to the IPS gives a brief summary of the Board, Investment Consultant and

Investment Managers’ responsibilities. No mention is made of the role of staff in the process.

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Recommendation 73

The IPS should include a distinct section on roles and responsibilities that covers all of the major investment related tasks.

e. Asset Allocation

Principle

Asset allocation is the process of diversifying an investment portfolio among asset classes

(stocks, bonds, real estate, etc.) in order to have a high probability of achieving a particular

investment objective, such as consistently attaining a certain level of total return while

controlling risk (e.g., volatility or standard deviation). The oversight of pension fund assets

typically has two main goals – to assure the safety and security of the pension assets and to

create an environment in which the best returns at an acceptable level of risk can be obtained.

Empirical research has shown that asset allocation generally has a far greater effect on

investment performance than does the selection of investment managers or individuals26. Given

its fundamental importance, “best practices” dictate that asset allocation decisions should be

made at the Board level, where they can be coordinated with funding policies, actuarial condition

and investment objectives.

Major institutional investors, including public pension funds, tend to diversify their

investments across many asset classes, in an effort to maximize expected return at the lowest

feasible levels of risk, and in light of their respective investment policies. The appropriate asset

allocation for any given fund depends on numerous factors, including, its investment policy,

liability structure, cash flow needs, investment horizon, risk controls, organizational structure

26 See for example, Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower, “Determinants of Portfolio Performance,” Financial Analysts Journal (July/August 1986):39-44. “[T]otal return to a plan is dominated by investment policy decisions. Active management, while important, describes far less of a plan’s returns than investment policy.”

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(including staffing and resources appropriate for managing certain types of assets and risks) and

other matters (such as statutory or other legal constraints).

Risk

Not stating the asset allocation targets or the requirements as to how often and how asset

allocation studies should be conducted, could put the Board at risk of giving up part of its control

over the fund’s asset allocation, which is known to be the primary determinant in a fund’s

performance.

Observed Condition

Section III of the IPS addresses the System’s asset allocation. It specifies the asset

classes used, the target allocation to each class, and the permissible range around that target. The

IPS correctly notes the City Charter requirement to be no more than 50% invested in equities, at

cost. This section also gets into a discussion on the structure of the equity and fixed income

portfolios. However, the IPS does not specify a requirement that an asset allocation study (or

asset liability study) be conducted at certain intervals.

In addition, the paragraph on page III-2 that allows investment managers to present

evidence to get permission to pursue tactical short-term allocation shifts seems to be irrelevant.

We understand that the System used to invest with balanced managers (i.e., investment managers

who invested in both stocks and bonds), but they no longer do so.

Recommendation 74 The IPS should specify the frequency with which the asset allocation and/or asset liability studies should be conducted, e.g., at least every three to five years and by whom it should be done.

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f. Rebalancing

Principle

To minimize “drift” in asset class weightings relative to long-term targets, the IPS should

describe the process for rebalancing to target when asset classes fall outside their ranges.

Risk

The lack of a rebalancing policy could cause rebalancing to occur too frequently

(incurring unnecessary transition costs) or not frequently enough, which could lead to significant

policy benchmark risk.

Observed Condition

As noted above, the PFRS’ IPS documents the permissible ranges around the target asset

allocation as follows:

Table I-a: Asset Allocation Rebalancing Asset Class Target Allowable Range

Domestic Large Cap Stocks 30% Domestic Mid/Small Stocks 5%

25% to 50%

International Stocks 15% 10% to 20% Bonds and Other Fixed Income 50% 50% to 75%

In our opinion, these ranges are overly broad and could allow for a considerable amount

of slippage away from the asset allocation targets. For example, we would consider a range of

30% to 40% for total domestic equities and 12-18% for international equities. Allowing up to

75% in fixed income would also greatly alter the risk/return profile of the fund and diminish its

chances of meeting the 8% actuarial assumed rate of return. In addition, it is not possible for the

Fund to be at the maximum allocation to domestic equities (50%) if the minimum allocation to

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international equities is 10% as that would put the Fund at 60% in equities, above the 50%

maximum allowed by the City Charter.

The IPS also states that the consultant is responsible for monitoring adherence to the asset

allocation policy and if an asset class is outside the range for a consecutive three month period

they will rebalance within the next three months. The System will attempt to use cash flows to

effect the rebalancing if possible, which is a good practice that can help to minimize unnecessary

transaction costs. We understand that in practice the asset allocation is looked at during the

monthly Board meetings.

Recommendation 75 We recommend that the rebalancing ranges be tightened and modified.

g. Selection and Monitoring of Investment Managers

Principle

An IPS should designate who has primary and ultimate responsibility for the selection

and subsequent termination of investment managers. Selection of investment managers is one of

the fundamental decisions a Board must make as a fiduciary. Therefore, it is important that the

Board follow an established, thorough and documented process in its selection of investment

managers.

Risk

The lack of an established policy on the selection (and termination) of investment

managers could put the Board at risk of being inconsistent in its approach and not considering all

of the best available managers for the strategy in question.

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Observed Condition

Section VI. Evaluation and Review of the IPS discusses how the Board will perform

ongoing monitoring of its stable of investment managers, including performance objectives and

organizational and philosophical changes taking place at the firms. The Board’s goal is to meet

with each manager at least once annually; however, a manager may be subject to further

“review” if it is having performance or other problems. No mention is made in this policy as to

how investment managers will be selected. The Prologue does state that the Board is responsible

for manager selection and that the investment consultant will assist, however very little detail is

offered on this subject. The Board should adopt a manager search or selection process to be used

for all manager searches. For example, PCA has prescribed “Manager Search Procedures”

outlined in a memo dated December 12, 2005.

Recommendation 76 We recommend that the IPS be expanded to include a more detailed discussion on the manager selection process or, alternatively, reference a separate manager search policy document.

h. Guidelines

Principle

An IPS should contain broad investment guidelines that apply to the entire fund or an

entire asset class (e.g., minimum levels of diversification, prohibited securities or strategies).

The IPS should specify the types of investment strategies/vehicles that are permissible and those

that are prohibited, by policy (e.g., non-dollar denominated stocks or bonds, hedging, below

investment grade fixed income, derivatives, etc.).

To manage risk properly, individual investment managers (whether internal or external)

should have specific guidelines in a distinct document tailored to and agreed upon by the

manager and the Board and they should be assigned a specific performance benchmark.

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Risk

The absence of individually tailored investment guidelines for the various investment

managers would put the Board at risk of having investment managers who may take on undue

risk and/or have style drift. Constraints intended to apply to the entire Pension Fund or

Investment Pool should be included in the IPS.

Observed Condition

The PFRS IPS contains both total Fund and individual manager guidelines (see our

discussion in Task L for a more detailed evaluation of a sampling of individual guidelines).

Some guideline elements are scattered throughout the IPS. For example, Section III.

Asset Allocation includes a general description of the various styles of equity and fixed income

investments (e.g., core versus enhanced core). This section also states that managers are allowed

to hold up to 10% of their account in cash; we view this as a rather high “across the board”

threshold. Generally, when managers are fully invested they will hold no more than 1-3% in

cash, and 5% is a reasonable maximum (this excludes the use of cash equivalents by fixed

income managers).

The IPS contains some guidelines that pertain to all of the equity or fixed income

investment managers, such as the “Operational Guidelines” in Section V. In our opinion, most

of the items included in Section V. of the IPS would be better contained in the individual

manager investment guidelines as they get down to security specific details, for example:

• Setting a maximum of 25% investment in any one single industry group.

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• The Operational Guidelines allow all equity managers to purchase convertible

debt and international equity commingled funds, when these might be securities

never used by a particular manager.

• Portfolio turnover is limited to 30% per quarter - this is another statistic that can

vary significantly from manager to manager, depending on their strategy.

• Duration constraints for fixed income managers should be specific to each

manager’s mandate.

• Derivatives policy is shown as only applying to the fixed income managers.

Recommendation 77

We recommend that the Board include only broad asset class level guidelines in the IPS.

i. Other Policies

1. Proxy Voting Policy

Principle

Shareholders have the right and responsibility to vote proxies. Institutional shareholders

and pension fund trustees were put on notice of the importance of proxy voting in February 1988

when the U.S. Department of Labor published a letter to Helmuth Fandl, Chairman of the

Retirement Board of Avon Products. Known subsequently as the “Avon Letter,” the DOL stated

that proxies were plan assets that should be managed with the same care and prudence as other

plan assets. It concluded that proxies could not be ignored and how they were voted mattered.

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Institutional investors fulfill their proxy voting responsibilities in various ways. Most

assign the responsibility to collect, evaluate, and vote proxies to their equity investment

managers (with each manager responsible for the proxies associated with the holdings in the

manager’s portfolio). Other funds delegate proxy voting tasks to internal staff of the fund and

provide their staff with sufficient resources to accomplish the job. An increasing number hire a

“third party” specialist firm to collect, evaluate, and vote proxies, and they transfer that

responsibility from the investment managers to the specialist firm. Regardless of how this

responsibility is assigned, the Board of Trustees of the fund must determine which party is

responsible for setting the policies that will guide the fund’s proxy voting program.

Risk

If a fund does not have a proxy voting policy, the Board may not be fully availing itself

of its rights as shareholder and the Board risks inconsistent proxy votes.

Observed Condition

Section V of the IPS includes a paragraph on proxy voting. The IPS indicates that the

managers are responsible for voting proxies “in the best interests of the Plan’s participants and

beneficiaries and for the exclusive purpose of providing long-term benefits to participants and

beneficiaries.” Managers are required to document their proxy voting decisions and provide a

quarterly report to the Plan. This is an acceptable practice for a plan such as PFRS.

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2. Securities Lending Policy

Principle

The IPS should indicate whether a pension fund is allowed to participate in a securities

lending program, as well as the broad parameters of the program, e.g., collateral should have a

market value of 102% for U.S. securities and be marked to market daily.

Risk

The absence of criteria for securities lending runs the risk of the Board’s either not

employing a lending program, allowing participation in a sub-optimal securities lending program,

or not adequately structuring or monitoring whatever they do adopt in that regard. Inadequate

structure or monitoring in turn may produce undue risk or sacrifice available returns.

Observed Condition

Section V, Operational Guidelines, contains a paragraph on securities lending, which

states that the Board has allowed the use of a securities lending program for its domestic and

international assets and the collateral should be valued at 102% of the loan amount. Typically,

the collateral amount required for international securities is 105%. The IPS could also address

other important criteria, such as the mark to market policy and type of collateral.

Recommendation 78 Consider revising and expanding the policy on securities lending.

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3. Brokerage Policy

Principle

The IPS should acknowledge that brokerage commissions are a plan asset and that, as

such, PFRS will monitor them, if necessary, with the assistance of an outside investment

consultant. It should indicate external managers are obligated to seek best execution (i.e., best

trade based on share price, commission, available research, etc.) on all trades. Ideally, the IPS

should also specify any policy on soft-dollar, directed brokerage and/or commission recapture

arrangements.

Risk

By not documenting any brokerage policies in the IPS, the Board risks incurring

unnecessary trading costs or managers not operating in accordance with their wishes.

Observed Condition

The general guideline section of the IPS does not contain a policy on brokerage. The

individual manager guidelines, however, state “subject to best execution, the Manager is

expected to comply with any brokerage policy of the Trustees and the Manager is encouraged to

allow City of Oakland based brokers to compete for trades.” We are not aware of any

“brokerage policy of the Trustees.”

Recommendation 79 Add policy on brokerage practices to the total fund section of the IPS, which acknowledges that commissions are a plan asset and, as such, the Board will monitor commission and other trading expenses.

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j. Review Process

Principle

To ensure that trustees and staff are aware of the IPS and to ensure that an IPS remains

current with PFRS issues, the industry standard requires a periodic review of the IPS.

Risk

Over time, the IPS may not reflect the Board’s actual policies and goals. Out-of-date

language could lead to confusion regarding the investment policy.

Observed Condition

Section VII Policy Modification and Revision states that the “Board will use each of their

periodic investment performance evaluations as occasions to consider also whether any elements

of existing policy are either insufficient or inappropriate” and goes on to list examples such as

changes in liabilities, laws or market trends, among other items. In addition the Board is

required to review the policy at least once annually. The policy we reviewed is dated May 26,

2004 and we understand that the IPS is currently being reviewed and revised in early 2006.

2. Determine whether the investment portfolio complies with the City Charter and Board investment policy.

Principle

The PFRS Fund is required to comply with the provisions of the City Charter and Board

investment policy. The Charter requirements are summarized below:

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All funds received by the Board not required for current disbursements shall be invested

in, but not limited to:

(1) Those investments of a character legal for banks in the State of California.

(2) Interest bearing obligations of the United States Government, any agency of the

United States Government, any bank which is a member of the FDIC, or any

corporation whose bonds are eligible for investment by banks in the State of

California.

(3) Common stocks provided that:

a. The total of such investments together with the total of all holdings of shares

of diversified management investment companies (Mutual Funds) (4 next

below) shall not exceed fifty (50) percent of the book value of all invested

funds of the retirement system.

b. Such stock is registered on a national securities exchange, as provided in the

“Securities Exchange Act of 1934” as amended. (This registration is not

required with respect to certain Bank and insurance company stocks (see

Charter for specifications)).

c. Such stocks shall, at the time of purchase, have paid cash dividends for not

less than five years next preceding the date of investment or prior to the

purchase of such stocks, the Board shall expressly approve purchase of same

by motion adopted with not less than five (5) Board members voting in favor

of such purchase.

d. Not more than 2% of the book value of the invested funds of the retirement

system may be invested in common stock of a single corporation.

e. The total number of shares held in a single corporation shall not exceed 5%

of the issued and outstanding common shares of such corporation.

(4) Shares of Mutual Funds provided that:

a. The total of such investments together with the total of all holdings of shares

of common stocks (3 next above) shall not exceed 50% of the book value of

all invested funds of the retirement system.

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b. Such diversified management investment companies shall be registered

under the “Investment Company Act of 1940” and shall each have total

assets of at least $50,000,000.

(5) Preferred stocks and securities convertible into common stocks, provided:

a. That of the funds invested in such stocks or convertibles not more than 2% of

the book value of the invested funds of the retirement system may be invested

in such stocks or convertibles of a single corporation;

b. That the total number of shares or convertibles held in any single

corporation shall not exceed 5% of the issued and outstanding preferred

stock or convertibles of such corporation;

c. That the corporations in whose preferred stock or convertible securities the

funds of the Retirement System are invested shall be only those whose

common stock would qualify for investment of funds of the Retirement System

under subsection 3 above; and

d. That such investments authorized by this sub-section 5 do not exceed ten

percent of the book value of the invested funds of the Retirement System.

(6) F.H.A. mortgages, certificates and shares of state or federal chartered savings

and loan associations if insured as defined in Title IV of the National Housing

Act, provided that such investments shall not exceed fifteen percent of the book

value of the invested funds of the Retirement System.

(7) Equity or mortgage debt investments in existing real property ore in property to

be constructed, except that no mortgage investments may be funded until the

improvements on the property are substantially complete. Such investments shall

not exceed 20% of the book value of the invested funds of the Retirement Systems.

(See Charter for additional detail on real estate.)

Risk

Not following the requirements of the City Charter, would put the Board at risk of breach

of fiduciary responsibility for failure to following applicable legal requirements.

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Observed Condition

PFRS staff monitors the System and the investment managers’ compliance with the IPS

and Charter on a monthly basis. As discussed in Task Area L, each manager has guidelines with

which they must comply and which generally include the appropriate Charter-based restrictions

(see discussion and recommendations in Task Area L). In order to assess general compliance

with the City Charter and investment policy we reviewed the Charter and the IPS as well as the

holdings of the system. There has been significant manager turnover during the timeframe

covered by our review, so our analysis is limited in that respect.

Since the Charter states that investments are not limited to securities listed above, IFS

reviewed the provisions that quantitatively assess the holdings in the portfolio. The list below

addresses compliance with Charter requirements.

Charter Requirement:

1) N/A as this provision does not directly limit PFRS’ investments.

2) N/A as this provision does not directly limit PFRS’ investments.

3a) Limit of 50% of book value of portfolio in equities: as of 9/30/05,

the System was in compliance as the equity portfolio accounted

for approximately 48% of the portfolio at book value (52% at

market value).

3 b, c) Information is not readily available to assess if individual

securities owned by the System are traded on a national

exchange. The System noted that they are currently awaiting a

legal opinion to determine if “national” means United States or

if it represents a National exchange in the global markets.

Additionally, information regarding the historical dividend paid

by each security held in the portfolio was unavailable; therefore

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IFS was unable to assess if the System is in compliance with this

requirement.

3 d, e) As of 9/30/05, the portfolio did not hold any securities that

accounted for more than 2% of the portfolio at book value. IFS

did not observe any documentation that assesses whether the

total number of shares held by the System was less than 5% of

total shares outstanding. According to the System, this

information is included on an account level from each investment

manager on a monthly/quarterly basis, but it is not aggregated.

4 a, b) The System does not currently invest in any “mutual funds”

although they are invested in commingled funds via their short-

term investment funds. Therefore, the System is in compliance

with this provision.

5 a, b, c, d) As of 9/30/05, preferred stocks and securities convertible into

common stock do not account for more than 2% at book value of

the total portfolio. The System currently does not receive any

information detailing what percentage of preferred shares

outstanding their portfolio accounts for on a monthly or

quarterly basis.

6 & 7) The System appears to own only one mortgage loan which

accounts for .01% of the portfolio, therefore, the System is in

compliance with this provision. Staff reports that the mortgage

loan is not FHA insured.

Recommendation 80 The Board should work with the Investment Consultant, custodian bank and investment managers to develop monthly reports that contain sufficient data to determine whether the individual portfolios and Total Fund are in compliance with the City Charter.

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3. Compare investment performance with other California city and county public pension funds. (Performance is analyzed in Task J of this Report.)

4. Calculate annual investment cost as a percentage of annual investment

purchases and compare to other funds. (Please see table and discussion below.)

Principle

The costs of an investment program should be reasonable when compared to

organizations of similar size and complexity. Consideration must be made of:

• Total assets under management;

• The proportion of internally and externally managed assets;

• The investment strategies employed, particularly active versus passive.

Risk

Costs are a double edged sword. An investment organization should seek to minimize

costs and operate efficiently. Institutional investors employ external managers on the assumption

that the returns generated by these managers more than compensate for the additional expense

incurred. Control of manager fees helps manage overall costs of investment management, but the

more significant risk lies in selecting managers who will accomplish the investment return

objectives set for each manager.

Observed Condition

PFRS uses external investment management firms to manage its pool of assets. Staff

provided us with an estimate of the annual investment management fees based on the current

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stable of managers for the 2006 fiscal year. Based on a market value of $590.9 million, the

estimated projected annual investment manager fees are $2.17 million. This equates to 37 basis

points for investment management costs (exclusive of costs of staff and consultant to monitor

these managers). Greenwich Associates produces an annual Investment Management survey of

corporate, public and union pension funds and endowments. The 2005 Greenwich survey shows

an average fee of 34.9 basis points paid to outside investment managers by all public funds (241

funds). This average is slightly higher for municipal funds at 38.3 basis points (144 funds). The

average across all funds surveyed (1,113 funds) was 44.1 basis points. PFRS external

investment management costs appear reasonable in this context.

As shown in the table below, three peer pension fund survey participants provided

investment cost data and we were able to find total investment cost data for two other peers with

publicly available documents. For the most recently completed fiscal year, PFRS reported total

investment costs of approximately $1.5 million, $1 million of which were investment

management fees (fees are projected to rise for fiscal year 2006 on a dollar basis due to asset

growth and changes in manager structure). PFRS’ total investment costs and investment

management costs are the lowest of this sample, while its custodial transaction fees and

investment consultant fees are higher than the peers when measured in basis points. On an

absolute dollar basis, PFRS’ investment consultant fee appears more in line with its peers: PFRS

pays $175,000 per year, while the remaining funds pay a range of $140,000 to $189,200 per year,

although those three funds are all larger than PFRS. The custodial fees reported by PFRS are

significantly higher than the peers on an absolute dollar basis: $283,815 versus a reported range

of $63,228 to $101,516. Like PFRS, all three peer funds use external asset management for

100% of their assets and they use primarily active management as well. Given the very small

sample size, we are unable to draw any definitive conclusions.

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Total Investment Cost Type

Marin County ERA

(in basis points)

City of Fresno

Retirement Systems (in basis points)

Tulare County ERA

(in basis points)

Minneapolis Firefighter’s

Relief Association

(in basis points)

Minneapolis Police Relief Association

(in basis points)

Oakland PFRS

(in basis points)

Total investment cost for the most recently completed fiscal year 47.6 47.0 64.0 40.5 26.2 24.0 Investment Mgmt Fees 44.7 39.0 61.0 NA NA 17.0

Custodial Fees 1.1 0.3 1.0 NA NA 4.0 Investment Consultant Fee 1.8 1.0 2.0 NA NA 3.0 Investment Related Admin Costs 0.0 6.0 0.1 NA NA 0.0

NA – Not available

J. Performance Benchmarks

1. The reasonableness of the performance benchmarks used to evaluate the

Fund’s investment returns

Principle

Performance benchmarks are objective standards used to assist in evaluating a manager’s

or fund’s investment performance. Institutional investors typically use at least two types of

performance benchmarks: “policy” benchmarks and “strategic” benchmarks. As an additional

measure, many funds also (as a matter of policy) establish an “Asset Allocation” index. (Please

see side bar below.)

A fund’s excess or underperformance versus the Asset Allocation Index is mainly

attributable to the performance of the underlying investment managers (internal or external).

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What is the difference?

Policy benchmarks generally represent the investment opportunities of a broad asset class and are used as a reference point against which the investor can compare its total asset class returns. For example, a domestic equity investment structure designed to provide broad asset class exposure may use the Wilshire 5000 Index or the Russell 3000 Index (broad measures of the domestic stock market) as a policy benchmark as opposed to the S&P 500 Index, which is more concentrated in larger-capitalization stocks. Policy benchmarks also help define the types of investment managers that should be used to achieve the System’s investment objectives for the asset class and the nature of the manager’s investment mandate. Strategic benchmarks are generally more narrowly defined and

typically focus on a particular investment “style” within the asset class. They more clearly describe the expected range of investment opportunities for a given manager and more objectively measure the manager’s value added, or the manager’s return independent of its investment style. For example, an investor setting a strategic benchmark for a domestic equity investment manager that seeks to purchase large capitalization stocks that it believes will grow their earnings above the average rate relative to the market (a “large cap growth” manager) may select a large cap growth benchmark such as the Russell 1000 Growth Index as an appropriate strategic benchmark. Therefore, the manager’s excess return above the “comparable style” strategic benchmark is generally due to its active decisions as opposed to its investment style being “in favor” relative to a style-neutral strategic benchmark. An “Asset Allocation” index is constructed using published

market benchmarks. In contrast to the Policy Index, the Asset Allocation Index’s asset class weights change to reflect the actual asset allocation of a fund as it “drifts” or as tactical decisions are made to overweight or underweight an asset class. Therefore, this benchmark adjusts for the asset allocation drift over time.

Risk

An inappropriate benchmark

may not provide the investor

with an accurate and

appropriate measurement with

which to compare their

investment performance and/

or volatility.

Observed Condition

The System currently works

with the investment consultant,

Pension Consulting Alliance

(PCA), in determining

appropriate benchmarks for

each asset class and the Total

Fund. The consultant suggests benchmarks based on their experience and review. The

consultant has also stated they will review potential alternatives to the current benchmarks in

future meetings as mentioned below.

a. Domestic Equity

The System uses the Russell 3000 Index to measure the overall domestic equity portfolio,

as documented in PCA’s quarterly report. The Russell 3000 Index measures the performance of

3,000 U.S. companies based on total market capitalization, representing approximately 98% of

the investable U.S. equity market. Based on IFS’ experience, we have found that the majority of

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public pension funds appear to use either the Russell 3000 or the Wilshire 5000 27 as the

benchmark to represent the broad domestic equity market. IFS believes the Russell 3000 Index

is an appropriate benchmark for its equity allocation.

The System also uses subset indices from the Russell 3000 as strategic benchmarks for

managers that focus on a particular style. For example, the System uses the Russell 1000 Value

Index to measure the performance of its large cap value manager. While IFS did not analyze the

investment strategies of the individual underlying investment managers, based on a holdings

analysis of three of the System’s current investment managers (Barrow Hanley, Rhumbline and

Brown), it appears that the System is using the appropriate strategic benchmark.

b. International Equity

According to the PCA quarterly investment report, the System currently uses the MSCI

ACWI ex US Index as the benchmark for international equity segment. The MSCI ACWI (All

Country World Index) ex US 28 is a free float-adjusted market capitalization index that is

structured to measure equity market performance in both the developed and emerging markets.

As of 1/31/06, the System’s international equity portfolio consisted of two managers that are

benchmarked to the MSCI EAFE Index29. The MSCI EAFE Index (Europe, Australasia, Far

East) is a free float-adjusted market capitalization index that is structured to measure the

performance of the developed international equity markets, excluding the US & Canada. As of

May 2005 the MSCI EAFE Index consisted of 21 developed market country indices.

27 The Wilshire 5000 Index (as of 12/31/05) measures the performance of 4991 U.S. companies based on total market capitalization, representing approximately 100% of the investable U.S. equity market 28 The underlying countries that make up the MSCI ACWI ex US are the following: Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, China, Colombia, Czech Republic, Denmark, Egypt, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Jordan, Korea, Malaysia, Mexico, Morocco, Netherlands, New Zealand, Norway, Pakistan, Peru, Philippines, Poland, Portugal, Russia, Singapore Free, South Africa, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Kingdom, and Venezuela. MSCI targets 85% of the free float-adjusted market capitalization in each industry, in each country for inclusion in the benchmark. 29 The underlying countries that make up the MSCI EAFE Index are the following: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom.

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The System’s use of the MSCI ACWI ex US for the international equity segment and the

MSCI EAFE for the underlying managers appears to be inconsistent. It is our understanding that

the current international equity managers are allowed to invest only in securities within the

MSCI EAFE Index. If the System believes the current investment manager guidelines are

reasonable, it would be appropriate to change the international equity policy index to be

consistent with the underlying investment managers. Through our discussions with PCA, it is

IFS’ understanding that PCA intends to discuss with the Board the risks and rewards of

modifying the current investment mandate to include emerging markets. Should the Board

modify the current international equity mandate to allow emerging market securities (along with

adopting the MSCI ACWI ex US as the appropriate benchmark for each manager), then the

current policy index would be appropriate.

Recommendation 81 In order to evaluate the International Equity portion of the portfolio more consistently, PFRS should consider measuring its international equity segment against the MSCI EAFE Index. If the Board concludes that the MSCI ACWI ex US Index is an appropriate benchmark, it should consider measuring its international equity managers against the MSCI ACWI ex US Index.

c. Domestic Fixed Income

The System currently uses the Lehman Brothers Aggregate30 to measure the domestic

fixed income portfolio. The Lehman Brothers Aggregate Index is made up of four major

segments: Treasury, Government Related, Corporate and Securitized. The fixed income

allocation consists of a core and a “core plus” manager. Core plus managers typically invest the

majority of their assets in securities that are included in the Lehman Brothers Aggregate Index;

however these managers are permitted to invest a portion of their holdings in “plus” sectors such

as below investment grade securities, foreign denominated bonds, and emerging market

30 The Lehman Brothers U.S. Aggregate Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.

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securities. For example, Reams Asset Management can invest up to 15% in both non-U.S. and

below investment grade securities. Since the System invests in securities outside their current

benchmark, IFS believes another benchmark should be considered as the policy benchmark.

The Lehman Brothers Universal Index31 includes all of the securities that make up the

Lehman Brothers Aggregate Index, but also includes other securities such as High Yield

Corporate bonds, 144A securities32 and dollar denominated Emerging Market bonds. This

broader Universal index is more representative of the types of securities that are held within the

System’s domestic fixed income portfolio. Comparing the System’s fixed income allocation

against the Lehman Brothers US Universal would allow the Board to determine 1) if any sector

“bets” are being taken, i.e. highlighting any structural differences between the portfolio and the

market, and 2) how those “bets” have helped or hindered the fund’s overall performance.

Through our discussion with PCA, it is IFS’ understanding that PCA intends to discuss the

merits of using the LB Universal as a performance benchmark at a future meeting.

Recommendation 82 PFRS should consider measuring the fixed income portfolio against the Lehman Brothers Universal Index.

d. Total Fund

The System’s current policy index is composed of 35% Russell 3000 Index, 15% MSCI

ACWI ex-US, 35% Lehman Brothers Aggregate Index. IFS finds this policy index to be

reasonable and representative of the System’s investment universe, subject to some of the

caveats mentioned in the previous recommendations. If the System decides to modify either

their domestic fixed income or international equity benchmarks, then a corresponding change

should be made to the System’s Total Fund policy index.

31 The Lehman U.S. Universal Index represents the union of the U.S. Aggregate Index, the U.S. High-Yield Corporate Index, the 144A Index, the Eurodollar Index, the Emerging Markets Index, the non-ERISA portion of the CMBS Index, and the CMBS High-Yield Index 32 Securities for resale to qualified institutional buyers exempt from the registration requirements of Section 5 of the 1933 Act.

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K. Investment Performance

Principle

A pension fund board should measure and evaluate the performance of each major

segment of the portfolio and the portfolio as a whole against objective market benchmarks and

internally adopted benchmarks over various time periods.

Risk

Poor performance puts a fund at risk of not having sufficient assets to pay benefits and of

having to increase contributions paid by the plan sponsor.

Observed Condition

a. Overview

IFS reviewed the investment performance history of PFRS Total Fund and each

underlying asset class investment. Presented below are summary investment performance tables

for PFRS Total Fund and each asset class, along with their respective policy benchmarks through

December 31, 2005. IFS compared the returns of the Total Fund against a universe of Public

Fund Sponsors (Wilshire Cooperative). IFS compared the segment returns of each asset class

against a universe of Total Funds, compiled from Public, Taft-Hartley, Corporate, and other Plan

Sponsors. IFS also calculated the System’s 5-year standard deviation and Sharpe ratio33 for the

Total Fund and each asset class.

33 The Sharpe ratio is a risk-adjusted return statistic calculated by taking the return of a portfolio, subtracting out the risk free rate (91-Day T-Bill) and dividing that number by the standard deviation of the portfolio. The general rule for the Sharpe ratio is, the higher the number the better (i.e. the higher your return per unit of risk). Currently there

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It is important to note that the returns provided by PFRS are slightly different than the

returns that are used to create the asset class universes. The peer asset class universes are

derived by taking the segment return of a total fund composite, which excludes the cash position.

The data provided by PFRS is a composite return of each asset class which includes cash. This

would most likely result in a lower ranking of PFRS during periods of positive performance, and

an upward ranking in periods of negative performance, due to the contribution of the cash return

on the composite.

1. Total Fund: Cumulative Performance

As can be seen in Table K-1, the System consistently ranked in the middle of the Total

Fund Universe, ranking between 61st to 47th over the one, three and five year time periods. It

appears that the Fund’s asset allocation of 35% Domestic Equity, 15% International Equity, and

50% Fixed Income attributed to a significant portion of its ranking, as the System’s policy index

ranked between the 58th and 34th percentile during the same time periods.

The median asset allocation for the Total Fund Universe was 51.52% Domestic Equity,

10.58% International Equity, 31.58% Domestic Fixed Income, 2.35% Short Term Fixed Income,

and 3.94% Other. (PFRS current asset allocation target is 35% Domestic Equity, 15%

International Equity, 50% Domestic Fixed Income.) On a relative basis, PFRS consistently

underperformed its policy benchmark over the one, three and five year periods. The System’s

five year risk, as measured by standard deviation, was slightly lower than the fund’s policy

benchmark. On a risk-adjusted basis, the System’s return per unit of risk, was slightly lower

than its policy benchmark as measured by the Sharpe Ratio (0.35 vs. 0.38).

is no consensus on the significance of a negative Sharpe ratio, therefore IFS offers no opinion on portfolios with a negative Sharpe ratio.

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Table K-1: Total Fund Returns (%) - Annualized Cumulative Performance – 12/31/05

One Year Three Year Five Year Five Year

Risk

Five Year Sharpe Ratio

PFRS 5.80 11.04 5.16 8.02 0.35 Rank 60 61 47 -- --

Policy Benchmark 5.97 11.46 5.57 8.40 0.38 Rank 57 58 34 -- --

Universe Median 6.45 12.26 5.03 -- -- Note: Performance for periods longer than one year is annualized * Universe: Wilshire Cooperative Total Returns of Total Fund Public Sponsors

As shown in Table K-2 below, two peer pension fund survey34 participants provided

appropriate investment performance history on both a Total Fund and asset class level. This

survey data is presented directly after the relevant Universe comparison. Given the very small

sample size, we are unable to draw any definitive conclusions.

Table K-2: Total Fund Gross Returns (%) - Annualized Cumulative Performance - As of 12/31/05

1 Year 3 Year 5 Year PFRS 5.80 11.04 5.16

Marin County Employees Retirement Association 8.74 14.23 5.74

Tulane County Employees' Retirement Association 10.30 15.91 6.48

2. Total Fund: Consecutive Performance

As can be seen in Table K-3, PFRS ranked in the sixth decile for four of the five annual

time periods from 2001 - 2005. Given the System’s conservative asset allocation, relative to the

median fund, the System’s ranking is not unexpected. Relative to its policy index, the System

underperformed during three of the five annual periods.

34 Investment performance data was requested on a net of fee basis, however the survey participants did not specify if the returns provided were gross or net of fees. Additionally, PFRS investment performance is provided gross of fees, which may result in a positive upward bias in returns relative to peers.

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Table K-3 : Total Fund Returns (%) - Consecutive One Year Performance 2005 2004 2003 2002 2001

PFRS 5.80 9.36 18.32 -2.57 -3.57Rank 60 62 60 16 60

Policy Benchmark 5.97 10.63 18.10 -3.60 -1.77Rank 57 41 63 18 39

Universe Median 6.45 10.11 19.88 -8.33 -2.74* Universe: Wilshire Cooperative Total Returns of Total Fund Public Sponsors

Table K-4: Total Fund Gross Returns (%) - Consecutive One Year Performance ending 12/31

2005 2004 2003 2002 2001 PFRS 5.80 9.36 18.32 -2.57 -3.57

Marin County Employees Retirement Association 8.74 12.29 22.08 -9.30 -2.25

Tulane County Employees' Retirement Association 10.30 13.50 24.40 -9.00 -3.40

3. Domestic Equity: Cumulative Performance35

As can be seen in Table K-5, the System’s domestic equity portfolio ranked between the

74th and 44th percentile over a one, three and five year time periods. Relative to its historical

equity policy benchmark, the System underperformed over the one, three and five year time

periods.

The System underperformed its current domestic equity benchmark, the Russell 3000

Index, over the one and three year time periods, but outperformed the Russell 3000 Index over

the last five years. The System’s domestic equity risk, as measured by standard deviation, was

lower than its historical policy benchmark and the Russell 3000 over the past five years (16.29%

vs. 17.79% vs. 18.81%). On a risk adjusted basis, the System earned a lower level of return per

35 The Domestic Equity Performance review contains two distinct benchmarks. The first benchmark, labeled “Consultant Benchmark” was calculated using five years of quarterly data provided by PCA. (This data appears to be a compilation of various indices) The second benchmark, the Russell 3000 Index, is composed of only of historical returns generated by the Russell 3000 Index.

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unit of risk, as measured by the Sharpe Ratio (0.03 vs. 0.11), compared to the System’s policy

index over the past five years.

Table K-5: Domestic Equity Returns (%) - Annualized Cumulative Performance – 12/31/05

One Year Three Year Five Year Five Year

Risk

Five Year Sharpe Ratio

PFRS 5.58 14.70 2.87 16.29 0.03 Rank 66 74 44 -- --

Consultant Benchmark 6.13 17.24 4.26 17.79 0.11 Rank 61 40 30 -- --

Russell 3000 6.13 15.90 1.58 18.81 -

0.04 Rank 61 61 63 -- --

Universe Median 6.76 16.54 2.36 -- -- Note: Performance for periods longer than one year is annualized * Universe: Wilshire Cooperative Equity Returns of Total Fund Portfolios

Table K-6: Domestic Equity Returns (%) - Annualized Cumulative Performance - As of 12/31/05

1 Year 3 Year 5 Year

PFRS 5.58 14.70 2.87



4. Domestic Equity: Consecutive Performance

As can be seen in Table K-7 below, the System’s domestic equity portfolio ranked in the

lower half of the Wilshire Total Fund Universe for four of the five annual periods, ranking

between 58th to 80th percentiles. The System underperformed its domestic equity policy index

for four of the five annual time periods and the Russell 3000 Index, for three of the four annual

time periods. According to PCA, previous domestic equity managers performed poorly relative

to their performance benchmark. Therefore a significant amount of the underperformance during

the period was may have been related to investment managers who have recently been replaced

by the System.

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Table K-7: Domestic Equity Returns (%) - Consecutive One Year Performance 2005 2004 2003 2002 2001

PFRS 5.58 10.49 29.36 -15.45 -9.70Rank 66 80 68 19 58

Consultant Benchmark 6.13 15.56 31.41 -17.38 -7.48Rank 61 23 52 24 43

Russell 3000 6.13 11.95 31.04 -21.55 -11.46Rank 61 65 55 54 71

Universe Median 6.76 13.07 31.68 -21.14 -8.60* Universe: Wilshire Cooperative Domestic Equity Returns of Total Fund Portfolios

Table K-8: Domestic Equity Returns (%) - Consecutive One Year Performance ending 12/31

2005 2004 2003 2002 2001

PFRS 5.58 10.49 29.36 -15.45 -9.70



5. Domestic Fixed Income: Cumulative Performance36

As can be seen in Table K-9 below, the System’s fixed income portfolio ranked in the top

quartile over the one and three year time periods and in the second quartile for the five year time

period. PFRS outperformed its policy benchmark, the Lehman Brothers (“LB”) Aggregate

Index, over the one, three and five year time periods as well. Over the one and three year

periods, PFRS outperformed the LB Universal Index.

The System’s fixed income portfolio risk, as measured by standard deviation, was lower

than both the LB Aggregate and LB Universal over the five year time period. On a risk adjusted

basis, the System’s return per unit of risk, as measured by the Sharpe Ratio, was equal to the LB

36 The Domestic Fixed Income review contains two distinct benchmarks. The first index, the Lehman Brothers Aggregate, is the System’s current policy index. The second benchmark, the Lehman Brothers Universal Index, has been provided to show the historical returns of a recommended alternative benchmark.

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Universal (1.10 vs. 1.10) and above the LB Aggregate (1.10 vs. 0.93) over a five year time

period.

Table K-9: Fixed Income Returns (%) - Annualized Cumulative Performance – 12/31/05

One

Year Three

Year Five

Year Five

Year Risk

Five Year Sharpe

Ratio PFRS 3.53 4.85 5.94 3.27 1.10

Rank 10 18 42 -- -- LB Aggregate 2.43 3.62 5.87 3.79 0.93

Rank 43 53 48 -- -- LB Universal 2.74 4.50 6.26 3.55 1.10

Rank 31 26 32 -- -- Universe Median 2.33 3.73 5.84 -- --

Note: Performance for periods longer than one year is annualized * Universe: Wilshire Cooperative Fixed Income Returns of Total Fund Portfolios

Table K-10: Domestic Fixed Income Returns (%) - Annualized Cumulative Performance - As of 12/31/05


PFRS 3.53 4.85 5.94



6. Domestic Fixed Income: Consecutive Performance

As can be seen in Table K-11 below, the System’s fixed income portfolio ranked above

Wilshire’s median fund and the LB Aggregate Index over three of the five annual time periods,

ranking between the 10th and 30th percentile. The System’s fixed income portfolio outperformed

the Lehman Brothers Universal Index for two annual periods, matched for one period, and

underperformed for two periods.

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Table K-11: Fixed Income Returns (%) - Consecutive One Year Performance 2005 2004 2003 2002 2001

PFRS 3.53 4.96 6.07 7.87 7.35 Rank 10 30 26 69 76

LB Aggregate 2.43 4.34 4.11 10.26 8.43 Rank 43 46 68 29 48

LB Universal 2.74 4.96 5.83 9.83 8.09 Rank 31 30 29 38 58

Universe Median 2.33 4.24 4.76 9.12 8.1 * Universe: Wilshire Cooperative Fixed Income Returns of Total Fund Portfolios

Table K-12: Domestic Fixed Income Returns (%) - Consecutive One Year Performance ending 12/31

2005 2004 2003 2002 2001

PFRS 3.53 4.96 6.07 7.87 7.35

Marin County Employees Retirement Association 2.41 5.31 6.58 10.01 7.13

Tulane County Employees' Retirement Association 2.40 5.30 6.60 7.00 7.90

7. International Equity: Cumulative Performance37

As can be seen in Table K-13 below, the System’s International Equity portfolio ranked

between the 50th to 73rd percentile over the one, three and five year periods. The System’s

international equity portfolio underperformed its policy benchmark over each of the three time

periods. The international equity portfolio underperformed both the MSCI ACWI ex US Index

and MSCI EAFE Index over the three and five year time periods as well. The International

Equity portfolio’s risk, as measured by standard deviation, was lower than all three benchmarks

over the five year period. On a risk adjusted basis, the System’s return per unit of risk, was

slightly below all three benchmarks.

37 The International Equity review contains three distinct benchmarks. The first benchmark, labeled “Consultant Benchmark” is composed of a series of returns provided by PCA. The second benchmark, the MSCI ACWI ex US is the historical return of the System’s current policy index. The third index, the MSCI EAFE Index, provides the historical returns for an alternative recommended benchmark.

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Table K-13: International Equity Returns (%) - Annualized Cumulative Performance – 12/31/05

One

Year Three

Year Five

Year Five

Year Risk

Five Year

Sharpe Ratio

PFRS 13.74 22.80 4.44 20.45 0.10Rank 66 50 73 -- --

Consultant Benchmark 17.11 25.30 5.50 20.61 0.15Rank 44 23 64 -- --

MSCI ACWI ex US Index 17.11 26.19 6.66 20.75 0.21Rank 44 14 50 -- --

MSCI EAFE Index 13.53 23.68 4.55 20.48 0.11Rank 68 42 73 -- --

Universe Median 16.50 22.83 6.66 -- -- Note: Performance for periods longer than one year is annualized * Universe: Wilshire Cooperative International Equity Returns of Total Fund Portfolios

Table K-14: International Equity Returns (%) - Annualized Cumulative Performance – As of 12/31/05


PFRS 13.74 22.80 4.44



8. International Equity: Consecutive Performance

As seen in Table K-15 below, the System’s international equity portfolio ranked between

the 30th and 83rd percentile on an annual basis over the past five years. On an annual basis, the

System underperformed its policy index, along with both MSCI indices, for four of the five

annual periods.

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Table K-15: International Equity Returns (%) - Consecutive One Year Performance 2005 2004 2003 2002 2001

PFRS 13.74 19.63 36.11 -12.13 -23.63 Rank 66 51 50 30 83

Consultant Benchmark 17.11 20.69 39.17 -15.66 -21.20 Rank 44 36 34 62 75

MSCI ACWI ex US Index 17.11 21.35 41.40 -14.67 -19.50

Rank 44 30 25 49 64 MSCI EAFE Index 13.53 20.24 38.58 -15.94 -21.45

Rank 68 41 37 65 75 Universe Median 16.50 19.69 36.19 -14.71 -17.32

* Universe: Wilshire Cooperative International Equity Returns of Total Fund Portfolios

Table K-16: International Equity Returns (%) - Consecutive One Year Performance ending 12/31

2005 2004 2003 2002 2001

PFRS 13.74 19.63 36.11 -12.13 -23.63



b. Processes used to determine and measure investment performance

Principle

Investment performance should be calculated using data provided by an independent

party, typically the custodian, who serves as the “book of record” for the System. Investment

returns should be reconciled with the investment manager at least quarterly. According to the

Global Investment Performance Standards (GIPS) “time weighted rates of return that adjust for

external cash flows must be used.”

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Risk

Incorrect investment performance data may lead the Board to make decisions they may

not have necessarily made, had they been presented with accurate data.

Observed Condition

Pension Consulting Alliance (PCA) currently is responsible for providing investment

performance for the System. PCA has formed a partnership with LDZ Group, where LDZ

calculates the investment returns for PCA’s clients. According to LDZ, investment performance

is calculated using the market values and transactions stated in the monthly custodial reports.

Investment performance is calculated using the modified Dietz method, which is a GIPS

approved methodology. If the investment returns calculated by LDZ and the investment

manager differ significantly, LDZ will reconcile the difference with the manager and custodian.

IFS finds this process to be appropriate and meets the industry standards in calculating

investment performance.

L. Investment Reporting and Monitoring

1. Whether the nature and scope of the Fund’s performance reports are technically sound and practically useful, as well as the utility of the current reporting method(s) and formats.

Principle

Those charged with responsibility for oversight of sophisticated investment programs

require clear, concise, consistent reports on the performance and risk of the programs. The

reports should be prepared on a regular periodic schedule (e.g., quarterly). Key statistics (such

as investment rates of return) should be verified by a third party that is independent of those

making the investment decisions within the program. These reports serve as one of the most

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important management tools available to

those with oversight of the investment

program. (Please see side bar.)

Risk

Lack of current and accurate performance

data limits the Board’s ability to reliably

evaluate the performance of the total fund,

each asset class, and each investment

manager.

Observed Condition

The System currently receives a quarterly report from their investment consultant

approximately six to eight weeks after each quarter end, which is standard among the industry.

The investment consultant will provide additional reporting on various subjects, depending on

the agenda for the meeting. It appears that both the staff and board find the timeliness of the

consultant’s reporting schedule to be acceptable. IFS reviewed the investment consultant’s

quarterly report and compared its contents to the industry’s “best practices” of investment

performance reporting. Listed below are the ten exhibits that we believe should be included in a

quarterly report and how the current deliverables that the PFRS Board receives meet those “best

practices.”

Good reports are designed to enable Board Membersto answer a set of key investment questions such as:

How does the performance of the investment program and its individual components compare to its objectives? How does the performance compare to other sources

of investment performance? Is the investment program generating appropriate risk-

adjusted returns? What are the magnitude of the risks incurred by the

investment program and its components? How does the risk level compare to its benchmark(s)?

Do the active investment managers generate a return

that is consistently in excess of the return of the appropriate benchmark or market index? Do the active investment managers demonstrate skill

that adds value above what the investment program could achieve by using passive management?, and if so, how does that skill compare to peers? Are the passive investment managers achieving

benchmark returns with benchmark risks at reasonable cost?

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a. General Market Environment Overview

A “Market Environment” report is useful in that it provides insight to both the short and

long term performance of the various asset classes where a Fund has made investments. Typical

information included in these reports ranges from broad based index returns to economic

statistics such as GDP (Gross Domestic Product38), employment data and the current Federal

Funds rate39.

The PCA report includes a “Market Environment” summary along with a “Capital

Markets Highlights” section which reviews current economic data along with short, mid and long

term performance of various asset classes. IFS finds this to be a suitable exhibit to review the

recent market environment.

b. Summary Performance for the Total Fund

Ideally the quarterly report should provide a summary of the performance of the Total

Fund against its policy index, and ideally an asset allocation index (see discussion in Task J on

performance benchmarks). Performance history should include both short, mid and long-term

performance.

The PCA report provides two exhibits reviewing the System’s Total Fund performance

relative to the policy index and “median fund”. The first exhibit presents returns on an

annualized basis over one quarter, one, three and five year time periods. The second exhibit

provides consecutive performance on an annualized ending with the most recent quarter. PFRS

currently does not measure the performance of the Total Fund against an Asset Allocation index.

38 Gross Domestic Product – Total Value of a country’s output produced by residents within the country’s physical borders: “International Investments” Fifth Edition, Bruno Solnik & Dennis McLeavey. 39 Federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight: www.federalreserve.gov.

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Recommendation 83 PFRS should measure the performance of the Total Fund against an Asset Allocation index to allow the Board to determine how much of return was generated due to the investment managers’ skill, as opposed to tactical asset allocation decisions chosen by the Board.

c. Asset Allocation versus Policy Index Exhibit

An asset allocation versus policy index exhibit should document how the fund’s

allocation has changed since the previous time period and how it compares to the fund’s Policy

Index. This exhibit is important to determine whether the fund is in compliance with its asset

allocation policy and whether changes should be contemplated given recent market shifts.

The System receives an “Actual vs. Target Allocations” exhibit that provides the current

percentage invested in each asset class against the System’s target weight, as set by the policy

index. The System is also provided a chart presenting the System’s current asset allocation

compared to the previous quarter.

d. Breakdown of Each Asset Class by Investment Manager

The System currently receives an Asset Allocation report that provides the System’s

current allocation by both asset class and underlying investment manager. On a monthly basis,

the Board also receives a report from staff listing the underlying investment managers of the

fund broken down by asset class. This report also includes the market value of each portfolio

and the percentage it accounts for of the total fund. Information such as the investment

manager’s style, current book and market value, and relative weighting versus the policy is

included in the exhibit.

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e. Cumulative and Consecutive Time Period Performance

In order to maintain a thorough understanding of investment performance, it is important

to review cumulative and consecutive time period performance for the Total Fund, each asset

class and each investment manager compared to their respective benchmarks. Currently the

System receives exhibits documenting the cumulative (one quarter, one, three, and five year time

periods) and consecutive (annual periods over the previous five years) performance for the Total

Fund versus the policy index. The System currently receives cumulative performance for each

asset class and underlying investment manager over a one quarter, one, three and five year time

period.

Recommendation 84 The PFRS Board should request an exhibit that displays the performance for each asset class and investment manager, along with their respective benchmarks on a consecutive time period.

f. Universe Comparisons on a Cumulative and Consecutive Basis

Universe comparisons provide the Board an additional tool in evaluating the performance

of the total Fund, an investment manager or an asset class. While the Board may primarily judge

the manager against its performance benchmark(s), the additional information of a universe

ranking will inform the Board as to how well their current investment manager compares to other

alternative investment options for a particular sub-asset class. This is an important additional

perspective since situations frequently arise where an investment product may outperform its

benchmark but still lag its peers (who are measured versus the same strategic benchmark).

Comparisons on a Total Fund basis are also useful, for political and economic reasons, despite

the fact that the peer funds will likely all have different asset allocations.

Universe comparison should be presented on a cumulative and consecutive basis for the

Total Fund, each asset class and each manager, with benchmarks and appropriate style specific

peer groups and indexes where applicable. The System currently does not receive any exhibits

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that compare the Total Fund or investment managers against a common peer group. The System

does receive an exhibit which provides the median return of the TUCS Total Fund Public

Universe, but this is only on a cumulative basis.

Recommendation 85 PFRS should request from their consultant universe comparisons for the Total Fund, each Asset Class Composite, and underlying investment managers on a cumulative and consecutive time period.

g. Domestic Equity Style Analysis

A holdings based style analysis may help the Board determine if the Fund has taken any

particular bets in structuring its domestic equity portfolio, such as focusing on growth versus

value, or overweighting small cap stocks versus the market. Style analysis (holdings and/or

returns based) for the domestic equity managers and the total domestic equity composite,

preferably over time to show style drift, should be presented on a quarterly basis.

The System currently does not receive any holdings or returns based style analysis

regarding the equity allocation of their portfolio.

Recommendation 86 PFRS should request that its consultant provide holdings and/or returns based style analysis for its domestic equity portfolio.

h. Portfolio Characteristics for each Equity Manager and Total Equity

Composite

The quarterly report should include summary characteristics such as Price/Earnings,

Price/Book, beta, dividend yield, average and median capitalization, number of holdings, best

and worst performers, etc. as compared to the benchmark.

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The System currently does not receive any portfolio characteristics exhibits for either the

underlying investment managers or Total Equity composite.

Recommendation 87 PFRS should discuss with its consultant what equity characteristics it would like to see on a quarterly basis.

i. Portfolio Characteristics for each Fixed Income Manager and Total Fixed

Income Composite

The quarterly report should include fixed income portfolio characteristics such as

duration, yield to maturity, time to maturity, average quality, etc. as compared to the benchmark;

the Board’s ability to evaluate the underlying investment managers would be significantly

enhanced by receiving the previous listed analytics. Statistics such as duration, a measure of

interest rate sensitivity, would give the Board better information to understand the specific

strategies that a manager employees as well as how to expect the portfolio to react in certain

interest rate environments.

The System currently does not receive any portfolio characteristics exhibits for either the

underlying investment managers or Total Fixed Income composite.

Recommendation 88 PFRS should discuss with its consultant what fixed income characteristics it would like to see on a quarterly basis.

j. Risk and Return Analysis for the Total Fund and each Asset Class

It is important to evaluate performance on an absolute basis as well as a risk-adjusted

basis to ensure that the System is following the prescribed investment policy and strategy of the

Board. The quarterly report should show the risk-adjusted return or Sharpe ratio for the total

Fund, policy index and asset class benchmarks.

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The System currently does not receive any type of risk/return exhibit regarding either the

Total Fund or any Asset Class. Risk/return analytics, such as a Sharpe Ratio exhibit, can be

helpful in evaluating how much return the System has earned for a given level of risk.

Recommendation 89

PFRS should request that its consultant provide risk/return exhibits for the Total Fund and each Asset Class.

2. & 3. Whether investment managers have been provided with written investment guidelines? Whether appropriate criteria were used to develop the guidelines for each type of manager?

Principle

Pension fund “best practices” generally indicate that to manage investment risk properly

at the individual manager level separate customized investment guidelines shall be developed

and provided to each investment manager. Guidelines are essential for monitoring, measuring

and analyzing portfolio performance, risk, and structure relative to the objectives.

Such guidelines are typically drafted by the fund’s investment consultant and

incorporated into the manager’s contract, in order to hold the manager legally responsible to

comply. Investment managers should be allowed to provide input into the draft guidelines to

assure they are appropriate without unduly limiting the manager’s ability to manage according to

its style and earn a rate of return above the appropriate market benchmark.

Guidelines should define the style of investment management employed by the manager

and identify specific metrics (such as performance as well as other characteristics) by which the

staff, Board and investment consultant can determine whether the manager is doing what the

manager was hired to do. Best practices indicate that equity and fixed income guidelines should

generally include, among other items:

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• Investment style and stated objectives, including the style specific performance

benchmark and other expectations regarding performance (e.g., perform in the top

half of a designated universe);

• Fiduciary standard of care;

• Diversification requirements, including:

o Limits on the percentage portfolio weight in any one security;

o A requirement that the portfolio’s holdings within industry sectors be limited

to an amount specified in writing pursuant to a system of industry

classification to be agreed upon between the fund and each equity manager;

o A limit on the amount invested in cash;

o Limits on the amount that any manager can own of the securities of a single

corporate issuer (typically 5%);

• Other risk controls, such as requirements for how certain characteristics should

compare to those of the benchmark index, e.g., capitalization, P/E ratios (for

equities), duration (for fixed income), etc. as appropriate;

• Any brokerage requirements;

• Prohibitions on use of certain securities, such as derivatives;

• Prohibitions on margin transactions or any borrowing of money;

• Proxy direction;

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• Action required for breach of guidelines; and

• Communication and reporting requirement

Risk

The lack of consistent, structured guidelines for each investment manager could result in

misunderstandings among the Board, staff, consultant and investment manager. Inadequate

guidelines could potentially allow an investment manager to invest assets in accordance with a

strategy other than that it was engaged to pursue, possibly causing the portfolio to take on

different risk and structural characteristics than desired by the client.

Observed Condition

Each PFRS investment manager is required to accept individual manager guidelines

prepared by the System, with the assistance of its investment consultant. There has been a

significant amount of turnover in the investment manager line-up over the past year and a few of

the new guidelines were not formalized at the time of our review. We understand, however, that

each investment manager is (or will be) provided with a set of guidelines agreed to by the

manager and the System and tailored to their strategy. The System uses a template or standard

set of guidelines that is adjusted based on the individual managers’ mandate, which is consistent

with best practices.

As per the scope of work, we reviewed a sampling of the investment manager guidelines

for the following accounts: the Reams Asset Management Enhanced Core Fixed Income, the

International Equity Manager template and the Rhumbline Advisors Russell 1000 Index

(although we understand that this manager now manages a Russell 1000 Growth Index product).

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Based on our review, the investment manager guidelines contain most of the essential

elements listed above, although as discussed in Task I in the discussion on the IPS, some of those

items are found elsewhere in the IPS, e.g., in Section V. Operational Guidelines, rather than in

the individual guidelines. For instance, the diversification requirements are not specific to the

individual manager; the equity managers are all held to a maximum of 25% investment in any

one single industry group. This could present a problem for managers whose processes are either

tightly controlled to the benchmark and the benchmark has an industry group that makes up more

than 25% or, alternatively, some managers hold a small number of stocks and do not try to

mirror the benchmark weightings.

Some general guidelines are also listed in Section VIII-1, before the actual guidelines and

we find this section to be mostly redundant. For instance, this section contains each manager’s

benchmark and style, which is also shown in their guidelines, and diversification requirements,

e.g., equity managers are not allowed to own more than 5% of the outstanding stock of any one

issuer and any one issue should not make up more than 5% at cost of a portfolio (these limits are

10% for fixed income – and the individual guidelines appropriately lift that restriction for various

government and agency securities). A limit of 5% at cost for an equity portfolio is a

conservative restriction that would not suit all investment managers’ styles, but PFRS’ managers

have agreed to these guidelines.

Another area where we believe the guidelines could be enhanced is in their monitoring of

certain investment risks. This would require setting standards for and evaluating portfolio

characteristics such as price/earnings, price/book and beta (for equity) and comparing them to the

stated benchmark’s characteristics. Volatility is measured for the Rhumbline Advisors passive

portfolio, which has an allowable tracking error of +/- 15 basis points versus its benchmark and

“characteristics of the underlying portfolio should be equivalent to the portfolio characteristics of

the Russell 1000 index.” However, although this is a full replication indexed strategy, the

guidelines are silent on whether the manager is restricted to investing in securities contained in

ATTACHMENT B


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the Index. In addition, derivatives are prohibited, but index managers frequently like to use

futures or options contracts in order to equitize cash holdings and/or manage cash flows.

The fixed income guidelines do set requirements for maturity, duration and credit quality,

although the duration requirements are absolute rather than relative to their benchmark. The

guidelines also do not contain any provisions that specify the extent to which the investment

manager has some flexibility (if any) in the event a corporate security is down-graded to a below

acceptable credit rating (“B” for Reams).

A few other elements that require note are as follows. The equity guidelines allow the

managers to purchase preferred stock with no stated limit; this could result in a violation of the

City Charter (see discussion in Task I on compliance with the Charter). The international

guidelines do not mention brokerage requirements (although the defunct Arial Capital and

Brown Capital ones do).

Recommendation 90 We recommend that the individual manager guidelines be expanded to include the specific guideline elements that are included in the other sections of the IPS (including those specific to the City Charter requirements), tailored to their strategy, as well as additional investment risk elements, as appropriate for the manager.

4. Whether processes are in place to monitor adherence to stated investment guidelines, and if so, whether the monitoring processes are documented in writing and adhered to as written? Whether the processes are sufficient and effective? Whether the Fund monitors the investment managers for investment risk?

Principle

Regardless of the size or complexity of a fund’s investment program, thorough and

comprehensive monitoring of investment managers is widely considered to be essential. Many

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institutional investors rely on their general investment consultant to perform much of this task,

with the Board receiving periodic reports on manager performance. Others have fund staff

deeply involved in the process. Some combination of staff and consultant review is the approach

most commonly pursued by major funds.

In addition to monitoring performance (see discussion above on the nature and scope of

the performance reports), it is essential to monitor compliance with the investment manager’s

guidelines. This involves comparing individual holdings within a portfolio to the guidelines set

for the manager to determine if there are any holdings that lie outside of the permitted securities

for the account; confirming that the account is consistent with any portfolio-wide requirements

established by the guidelines; and identifying any variances and investigate further.

As mentioned above, guidelines often contain expectations for the amount of investment

risk an individual manager will take. Using portfolio holdings, this then requires evaluating

portfolio characteristics such as price/earnings, price/book, dividend yield, earnings growth

ratios (for equity) and maturity, duration, yield, convexity (for fixed income) and comparing

them to the stated benchmark’s characteristics. It is also typically necessary to observe how

portfolio holdings are distributed among sectors and industries; calculate measures of volatility

for the portfolio and compare the diversification and volatility to that of an appropriate

benchmark and manager peer group.

Risk

Failure to monitor investment managers’ adherence to their stated investment guidelines

puts a fund at risk for investing in undesired or prohibited securities or strategies. This could put

PFRS, specifically, at risk of violating the City Charter.

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Observed Condition

PFRS staff is responsible for monitoring investment managers’ compliance with their

guidelines. It is our understanding that staff monitors, on a monthly basis, whether or not the

investment managers are in compliance with their guidelines, primarily the “Operational

Guidelines” in Section V of the IPS. However, the monitoring procedures are not documented in

writing. Staff bases its analysis on the monthly statements provided by the managers, which are

all different and do not contain every data item that requires monitoring, and quarterly reports.

Investment managers generally report when they are out of compliance or staff calls the manager

when he sees something out of line.

The investment risk elements monitored include those in the guidelines, such as the

minimum diversification standards and the risk/reward ratio of the managers; however we

believe that this part of the guidelines could be enhanced (see our discussion and

recommendation above on the essential elements of guidelines). However, certain investment

strategies, such as those that allow use of derivatives, require heightened monitoring. The fixed

income managers must abide by the Derivatives Investment Policy on page V-3 of the IPS,

which requires monitoring of additional concrete requirements such as a limit on 20% of the

account’s market value in Collateralized Mortgage Obligations (CMOs), among other items and

additional implicit risks such as counterparty risk and illiquidity risk (for over the counter

transactions).

The consultant indicated that they monitor the investment managers mainly to see

whether they are meeting performance expectations, but they do not monitor their compliance

with the guidelines down to the holdings level (we understand that they are not required to do

this). PCA indicated that they could do more detailed holdings level compliance monitoring for

an additional fee. The custodian bank, Bank of New York, does not assist in compliance

monitoring either. It is our understanding that BoNY does have an automated compliance

monitoring service available to its custody clients, for an additional fee.

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Recommendations 91 - 92 Staff should work with its investment consultant to develop a monthly manager report format, which includes all the necessary elements that would allow staff to monitor compliance more effectively. The Board should either ask its investment consultant for assistance with monitoring its investment managers’ compliance with their investment guidelines or work with staff and the custodian to enroll in an automated guideline compliance system. In any case, monitoring procedures should be documented in writing.

□ □ □ □ □ □ □

ATTACHMENT B


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Exhibit A

Summary of Recommendations Set forth below are summaries of all recommendations from the preceding report. They are listed in the order they appear in the report with corresponding page number. The Task Area of each recommendation or related series of recommendations is set forth for ease of reference.

Number Recommendation(s) Page A. Identification and Assignment of Responsibilities

1 The Board should seek amendments to the Charter to delete the “legal list” restrictions on its authority to invest the System’s assets and to grant to PFRS authority to select the custodian of the System’s assets.

16

2 The Board should continue to consider and approve the System’s administrative budget, and staff should provide to the Board all the data necessary for the Board to make prudent budget decisions.

16

3 The Board should participate in the process by which the staff assigned to PFRS are selected, evaluated and compensated, and should obtain a commitment from OPRM and FMA that no staff assigned to PFRS shall be employed without input from the Board.

17

4 The Board should seek the assignment to PFRS of staff with investment expertise to assist the Board in setting investment policy and monitoring the performance of the System’s investment managers and consultant.

17

5 Pensioner records filing should be made a priority project. All pensioners’ filing information received in the future should be filed in a timely manner – i.e., within one week of receipt.

19

6 Pensioner record file drawers should be locked at all times when unattended by the Benefits Representative.

19

7 Use of a scanner for document storage is also recommended. Certain paper documents could then be shredded for security purposes.

19

8 It should be required that all address changes are to be made in writing and signed by the pensioner only.

20

9 It should be required that a notary’s stamp and signature appear on all beneficiary forms verifying the signature is that of the pensioner.

20

10 OPRM should develop a written record retention policy that incorporates City requirements but addresses the special needs of a retirement system. While this will aid in preventing the untimely destruction of plan materials, with the limited availability of storage space, it may allow for the disposition of unnecessary materials.

23

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Number Recommendation(s) Page 11 The Board meeting cassettes should be located for the past four years

so that the System is in compliance with the Brown and Sunshine requirements to maintain meeting minutes for a minimum period of four years.1

23

12 Should the practice of recording meetings be maintained, new technology, such as a CD recorder, should be utilized to avoid loss due to deterioration of cassettes over time.

23

13 Written minutes should provide more detail, especially in areas where the Board provides direction. For example, if the Board approves transfer of assets from one investment manager to another, or makes a policy decision, the minutes should reflect the effective date of the transfer or policy. It is also recommended that the meeting minutes reflect the signature of the President of the Board to attest to the approval of the minutes as drafted.

23

14 Use of a scanner for document storage is also recommended. Scanning of meeting materials would reduce the need for use of the limited storage space. It would also protect against the loss of older records due to natural disaster.

23

15 Establish a written procedure, for inclusion in the Standard Operations Manual (SOM), for expense payments.

24

16 The Board seat of Insurance Representative should be filled as soon as possible.

25

17 The pension payment spreadsheet should be password protected by Accountant 1. Any proposed changes to the file by the Benefits Representative should be provided to and entered by Accountant 1, prior to submission to the accounting department for final payment.

26

18 All changes to the banking information for direct deposits should be verified and confirmed for accuracy. Changes to bank routing information should be approved by a second staff member.

26

19 An administrative management report providing the following information should be provided to the Board on a monthly or quarterly basis: (1) the number of pensioners receiving benefits, (2) benefit payment totals, (3) the number of active participants and their contributions, (4) beginning and ending investment and cash balances, (5) death benefit payments and (6) operating expenses.

27

20 The administrative budget reports should continue to be shared with the Board.

27


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Number Recommendation(s) Page 21 It is recommended that the completion of an Annual Report (AR) for

the Plan Year 2005 be made a priority. The completed AR could be put online to reduce staff time and costs related to photocopying the report. An internet site could also be established for the PFRS and all pertinent information could be maintained there including the AR.

27

B. Governing Body 22 The Board should retain independent fiduciary legal counsel. 32 23 The Board should utilize independent fiduciary legal counsel to assist

it in objectively harmonizing the provisions of Proposition 162 and the City Charter and then to update its rules and regulations to specifically delineate the extent of the Board’s authority and control regarding the administration of the pension fund, including PFRS’ authority to (a) establish its budget; (b) select outside counsel; (c) select and evaluate the PFRS Secretary and additional staff; (d) select and evaluate the actuary; and (e) select and evaluate the custodial bank.

32

24 The Board should develop a memorandum of understanding with the City which would facilitate the Board’s ability to exercise the authority granted to it by Proposition 162 and the City Charter by agreeing how the two documents will be harmonized and make plain the authority of the Board to set forth and establish, at a minimum, the authority of the Board to select and evaluate a Secretary to the board, additional staff (e.g., a staff member with investment experience), to retain outside legal counsel, to retain the actuary, and to establish its budget.

32

25 The Board should explore the cost/benefit of once again becoming a distinct entity within the Oakland City Government rather than being a part of the Office of Personnel.

32

26 The Board should become more cognizant of the full extent of its fiduciary responsibility, authority and control regarding the pension fund by periodically holding compulsory educational sessions (for current and new trustees) for the purpose of becoming more knowledgeable about the governing documents applicable to the administration of the pension fund and the investment of pension fund assets, including but not limited to the provisions of Proposition 162, the City Charter, as amended, the Board’s Rules and Regulations, the Brown Act, the Board’s Investment Policy Statement, and any reporting and disclosure requirement applicable to the Board (e.g., Form 700).

32

27 In consultation with the investment consultant and the equity investment managers, the Board should develop and implement a

36

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Number Recommendation(s) Page process for considering and acting upon proposed investments in equity securities which have not satisfied the five year dividend history set forth in the Charter.

C. Accountability 28 We recommend that the Board seek a legal opinion regarding whether

or not it has the legal authority, through rulemaking, to remove a trustee. If it is determined that the Board has such authority, then we recommend that the Board amend its rules and regulations to require that a member who misses more than four meetings in a 12 month period must either resign from the Board or obtain the approval of the Board, evidenced by a majority vote, to continue on the Board.

39

29 We recommend that the Board’s Rules and Regulations be updated. 40 30 In addition to the meeting agenda, the Board should also publish the

minutes of each meeting on its website. 42

31 The Board should issue a current annual report as soon as possible. 42 32 The Board should amend its Rules and Regulations to require that the

notice of election, petition, election criteria, etc., be posted on the PFRS website.

44

33 The Board should go on record and request the City Council to fill the current vacancy on the Board. If it is determined that the vacancy can not be filled then we recommend that the City Charter be amended to change the experience requirement from an individual with life insurance experience to one that has experience in benefits administration or investment management experience.

44

34 The Board should develop a succession plan and implementation protocol.

46

35 The Board should develop a governance statement which sets forth the roles and responsibilities of the key parties involved in the management of the PFRS.

46

36 The Board should instruct staff to develop a standard operating procedures manual made up of a compilation of existing policies, procedures, and operative practices of PFRS staff, including functional position descriptions for every PFRS position.

46

D. Expert Advice 37 If the Audit Committee persists in the view that the attorney identified

by the Board to serve as outside legal counsel should serve as the Board’s outside counsel, the Audit Committee and the City Attorney should agree to submit the issue of eligibility to a mutually acceptable, qualified attorney to issue a definitive opinion on the point. If that attorney determines that the attorney identified by the Board to serve

49

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Number Recommendation(s) Page as outside legal counsel should not be selected, the Audit Committee should promptly select another candidate from the panel, and the City Attorney should not unreasonably withhold his consent to that selection.

38 The Board should continue to employ an investment consultant to provide a comprehensive range of consulting services.

56

39 PFRS Board should consider expansion of PCA’s contract to include advice on other collateral and secondary services about which the current agreement is silent. (Refer to report Table D1.)

56

40 Should PFRS elect to retain third party vendors to provide additional investment related services, PCA should provide PFRS with a periodic review of the work of these vendors.

56

41 While we have no reason to question the validity of the actuarial work performed currently, PFRS should consider obtaining a periodic ‘second opinion’ on the work of its actuary. Some funds do this every five years. Short of going to bid for the actuarial services, the Board’s monitoring process of its actuary could consist of hiring another reputable actuary to perform a one-time review.

57

42 PFRS should seek competitive proposals for a new custody arrangement. The Board’s legal counsel should be closely involved in negotiating the custody agreement.

60

43 Simultaneously, PFRS should seek competitive bids on its securities lending program. (See next section and recommendation.)

60

44 The Board (and staff) should refrain from approval of borrowers. Staff or the investment consultant should periodically review the list of borrowers approved by MetWest and only bring to the Board’s attention any that may be questionable.

62

45 PFRS should request and obtain contractual assurances from MetWest that its securities are loaned equitably. MetWest should also provide a description and explanation of the queuing mechanism that allocates loans among lenders.

62

46 Since the agreement for Securities Lending Services has been assigned at least three times, we suggest that it be renegotiated to incorporate certain key provisions of the Securities Lending Agreement such as requirement for maintenance of collateral, and to reflect the current agency and more favorable terms concerning, e.g.: • Indemnification against borrower default; • Liability on the part of agent for failing to act in accordance with

PFRS instructions; and • Restrictions on borrowing activities of parent/affiliate of agent.

62

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Number Recommendation(s) Page 47 PFRS should seek to restrict the terms and conditions under which

MetWest can lend PFRS securities to its parent and affiliates, i.e., Wachovia.

63

48 MetWest should provide explanations in their report when loan transactions fall outside general loan program guidelines.

63

49 The footnote on securities lending should be corrected as appropriate. 63 E. Suitability

50 We recommend that the Board amend its travel policy to (a) clarify that travel must be approved in advance, (b) require that all international travel be approved by the full board in advance of such travel, (c) expand the policy to cover staff assigned to PFRS, (d) include a list of approved conferences, (e) limit the total number of trips that may be taken in any one year, and (f) require that members and staff that attend an educational conference provide a written overview of the conference to the board and make the conference materials available to others upon request.

66

F. Internal Controls 51 While it is only possible to revise the method of distribution for annual

pay increases through the collective bargaining process, providing clear, well-defined, and obtainable staff objectives for acceptable job performance and future career growth at each annual evaluation may increase employee performance and productivity.

71

52 In addition to the SOM, an Administrative Manual should be completed that describes each position and the related job responsibilities. The Manual should also describe the primary and secondary responsibilities for each job title so that a clear back-up is designated in the absence of the primary personnel.

71

53 The percentages used for allocation purposes should be changed as follows:

Reduce the percentage for the Executive Assistant to the Director of Personnel from 15% to 8%;

Reduce the percentage for Human Resources Technician from 80 to 65%;

Increase the percentage for Retirement Systems Accountant and Accountant 1 from 70% to 80%; and

All other reviewed percentages appear appropriate. (Note: The revised recommended percentages are based solely on our judgment based on the interviews conducted.)

72

54 The Board should develop contractual language for inclusion in each service provider’s agreement requiring extensive, prompt, written

74

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Number Recommendation(s) Page disclosure from the investment consultant (including filing of Form 700 if required) and each service provider regarding the amounts of all revenues the investment consultant receives from any incumbent or proposed service provider.

55 The Board should designate a specific individual (e.g., legal counsel), in addition to the City Clerk, to review and monitor conflicts of interest, actual and potential, including Form 700 reports as allowed by law.

74

56 A HIPAA compliance study should be performed, and steps should be taken to remedy any deficiencies in PFRS’ HIPAA compliance.

74

57 PFRS should continue the annual external audit of benefit calculations.

75

58 PFRS should hire an external actuarial firm to review the work of its current actuary.

75

59 PFRS should discuss a program of regular internal auditing of PFRS’ activities with the City Auditor. The internal auditing activity should be performed in accordance with generally accepted standards for the practice of internal auditing and should include compliance auditing. We suggest that PFRS’ external auditor be consulted on the design of such a program before it is implemented.

76

60 Observations and recommendations from this Operational Review should be tracked and monitored by staff and the Board should be updated regularly on the progress of recommendations that it chooses to implement.

76

61 The Board should undertake a periodic management audit such as the one performed to develop this report.

76

62 Staff’s performance measurement criteria should identify goals and objectives specifically related to the management and administration of PFRS. The criteria should be designed to align the interest of the board and staff and facilitate PFRS’ ability to accomplish its mission and strategic objectives.

77

63 Board members should provide input in the establishment of the performance measurement criteria for the staff assigned to carry out PFRS’ day to day administration, as well as the input in such staffs’ annual performance review.

77

G. Reporting 64 Should the current method of communicating governing body decisions

effecting retirees and beneficiaries, via the local union channels, remain in place, a formal process of communicating these decisions should be developed.

79

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Number Recommendation(s) Page 65 Establishment and maintenance of a PFRS webpage within the City’s

portal would allow another means of communicating Board decisions. 79

66 PFRS should resume the practice of publishing its own annual report on a timely basis. Reports for 2004 and 3005 should be prepared.

81

H. Disclosure 67 All actions taken by the governing body at the monthly meeting should

be recorded in detail in the meeting minutes. 82

68 Draft meeting minutes should be produced within five days of the meeting and circulated to the appropriate parties for review and action. The minutes should be reviewed prior to the next meeting to assure all actions requiring follow-up are complete.

82

69 Establishment and maintenance of a PFRS webpage within the City’s portal would allow another means of communicating Board decisions. (PFRS should bear the direct cost of creating and maintaining the web pages.)

82

70 Same recommendation as G. 64. 82 71 Same as H. 69 82

I. Investment Analysis 72 The Board should revise the performance objectives section of the IPS

to include additional investment objectives and benchmarks for the total Pension Fund (including a Total Fund Policy Index and Total Fund Asset Allocation Index) and each asset class or composite.

88

73 The IPS should include a distinct section on roles and responsibilities that covers all of the major investment related tasks.

90

74 The IPS should specify the frequency with which the asset allocation and/or asset liability studies should be conducted, e.g., at least every three to five years and by whom it should be done.

91

75 We recommend that the rebalancing ranges be tightened and modified. 93 76 We recommend that the IPS be expanded to include a more detailed

discussion on the manager selection process or, alternatively, reference a separate manager search policy document.

94

77 We recommend that the Board include only broad asset class level guidelines in the IPS.

96

78 The Board should consider revising and expanding the policy on securities lending as described in our report.

98

79 Add policy on brokerage practices to the total fund section of the IPS, which acknowledges that commissions are a plan asset and, as such, the Board will monitor commission and other trading expenses.

99

80 The Board should work with the Investment Consultant, custodian bank and investment managers to develop monthly reports that contain

104

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Number Recommendation(s) Page sufficient data to determine whether the individual portfolios and Total Fund are in compliance with the City Charter.

J. Performance Benchmarks 81 In order to evaluate the International Equity portion of the portfolio

more consistently, PFRS should consider measuring its international equity segment against the MSCI EAFE Index. If the Board concludes that the MSCI ACWI ex US Index is an appropriate benchmark, it should consider measuring its international equity managers against the MSCI ACWI ex US Index.

110

82 PFRS should consider measuring the fixed income portfolio against the Lehman Brothers Universal Index.

111

L. Investment Reporting and Monitoring 83 PFRS should measure the performance of the Total Fund against an

Asset Allocation index to allow the Board to determine how much of return was generated due to the investment managers’ skill, as opposed to tactical asset allocation decisions chosen by the Board.

125

84 The PFRS Board should request an exhibit that displays the performance for each asset class and investment manager, along with their respective benchmarks on a consecutive time period.

126

85 PFRS should request from their consultant universe comparisons for the Total Fund, each Asset Class Composite, and underlying investment managers on a cumulative and consecutive time period.

127

86 PFRS should request that its consultant provide holdings and/or returns based style analysis for its domestic equity portfolio.

127

87 PFRS should discuss with its consultant what equity characteristics it would like to see on a quarterly basis.

128

88 PFRS should discuss with its consultant what fixed income characteristics it would like to see on a quarterly basis.

128

89 PFRS should request that its consultant provide risk/return exhibits for the Total Fund and each Asset Class.

129

90 We recommend that the individual manager guidelines be expanded to include the specific guideline elements that are included in the other sections of the IPS (including those specific to the City Charter requirements), tailored to their strategy, as well as additional investment risk elements, as appropriate for the manager.

133

91 Staff should work with its investment consultant to develop a monthly manager report format, which includes all the necessary elements that would allow staff to monitor compliance more effectively.

136

92 The Board should either ask its investment consultant for assistance with monitoring its investment managers’ compliance with their

136

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Number Recommendation(s) Page investment guidelines or work with staff and the custodian to enroll in an automated guideline compliance system. In any case, monitoring procedures should be documented in writing.

ATTACHMENT B

Exhibit B. - Survey Results

The survey was sent to 7 funds deemed comparable based on characteristics of size, status as a closed fund, and location in California.

The following funds were selected to survey:

Survey Recipient Characteristic(s)Marin County ERA Calfornia closed fundCity of Fresno Retirement Systems Calfornia closed fundTulare County ERA Calfornia closed fundEast Bay Municipal Utility District Retirement System� California, Bay areaCity of Sacramento City ERS (Administered by CALPERS) Calfornia closed fundMinneapolis Police Relief Association Closed fund; sizeMinneapolis Firefighters Relief Association Closed fund; size

Only Marin, Fresno, and Tulare responded. IFS made several attempts to obtain information from the other recipients to no avail.

ATTACHMENT B

Exhibit B.1 - Survey Results - Asset Statistics

Asset Size (In Billions):

Fund/Plan

Marin County ERA

City of Fresno

Retirement Systems

Tulare County ERA

Minneapolis Firefighter’s Relief Association

Minneapolis Police Relief Association

Client: City of Oakland Police & Fire

DB Plan $1.250 $1.938 $0.864 $0.258 $0.352 $0.615

% of Assets Managed Internally:

Fund/Programs

Marin County ERA

City of Fresno

Retirement Systems

Tulare County ERA


DB Plan 0.00% 0.00% 0.00% 0.00%

% of Assets Managed Externally:

Fund/Programs

Marin County ERA

City of Fresno

Retirement Systems

Tulare County ERA


DB Plan 100% 100% 100% 100%

All information provided regarding Minneapolis Firefighter and Police Relief Association is based on research conducted. Source: http://www.auditor.state.mn.us/reports/pen/2004/investment/investment_04_report.pdf

ATTACHMENT B

Exhibit B.2 - Survey Results - Asset Allocation and StructurePercentage of Total Fund Actively Managed Assets (Publicly traded assets):

Asset Class

Marin County ERA

City of Fresno

Retirement Systems

Tulare County ERA


Domestic publicly traded equities 35.00% 33.80% 30.30% 36.22%

International publicly traded equities 23.00% 18.60% 21.20% 15.63%

Domestic publicly traded fixed income 21.99% 28.20% 24.70% 47.51%

International publicly traded fixed income 0.00% 0.00% 0.00% 0.00%

Percentage of Total Fund Passively Managed Assets (Publicly traded assets):

Asset Class

Marin County ERA

City of Fresno

Retirement Systems

Tulare County ERA






Publicly Traded Assets Managed Actively (Externally):

Asset Class

Marin County ERA

City of Fresno

Retirement Systems

Tulare County ERA






ATTACHMENT B

Public Traded Assets Managed Passively (Externally):

Asset Class

Marin County ERA

City of Fresno

Retirement Systems

Tulare County ERA



International publicly traded equities 0.00% 0.00% 0.00% 0.00%Domestic publicly traded fixed income 0.00% 0.00% 0.00% 0.00%


Total No. of External Managers for Publicly Traded Assets (i.e. actively and passively managed):

Asset Class

Marin County ERA

City of Fresno

Retirement Systems

Tulare County ERA


Domestic publicly traded equities 11 8 14 7

International publicly traded equities 2 3 2 3Domestic publicly traded fixed income 2 3 2 2

International publicly traded fixed income 0 0 0 0Cash & equivalents 0 1 0 0

Total Percentage of Fund Private Asset Class ( Externally & Internally Managed):

Private Asset Class

Marin County ERA

City of Fresno

Retirement Systems

Tulare County ERA



Alternatives 0.00% 3.50% 4.70% 0%

Private equity 0.00% 0.00% 0.35% 0%

Real estate equity 7.84% 0.00% 1.90% 2.70% 0%

REITs 0.00% 9.40% 7.10% 0.01%

Total asset allocation for publicly traded assets 7.84% 12.90% 14.05% 2.70% 0.01%

ATTACHMENT B

Total no. of External Managers (Private Assets):

Private Asset Class

Marin County ERA

City of Fresno

Retirement Systems

Tulare County ERA


Alternatives 0 0 2 0

Private equity 0 0 2 0

Real estate equity 1 0 1 0REITs 0 2 1 0

Percentage of Total Fund Asset Allocation (Actively and Passively managed Publicly Traded Assets):

Asset Class

Marin County ERA

City of Fresno

Retirement Systems

Tulare County ERA



Domestic publicly traded equities 47.20% 40.20% 40.00% 72.40% 36.22%

International publicly traded equities 23.00% 18.60% 21.20% 0.00% 15.63%

Domestic publicly traded fixed income 21.99% 28.20% 24.70% 24.90% 47.51%

International publicly traded fixed income 0.00% 0.00% 0.00% 0.00% 0.00%

Cash & equivalents 0.00% 0.10% 0.29% 0.00% 0.62%

Total asset allocation for publicly traded assets 92.19% 87.10% 86.19% 97.30% 99.98%


ATTACHMENT B

Exhibit B.3 - Survey Results - Return Data Annualized rate of return for domestic equity/benchmark (averages do not represent a true sample)

Name of Pension Fund 2005 2004 2003 2002 2001Oakland PFRS

Benchmark5.58% 6.13%

10.49%15.56%

29.36%31.41%

15.45 %(17.38%)

(9.70%) (7.48%)

Marin County ERA Benchmark

8.65% 4.86%

12.96%12.37%

35.96%32.3%

(19.65%)(21.73%)

(1.62%) (9.01%)

City of Fresno Retirement Systems (large cap) Benchmark

8.74% 6.32%

19.91%19.11%

(0.54%).26%

(19.7%)(18%)

(14.46%) (14.83%)

Tulare County ERA Benchmark

8% 6.1%

13.8%11.9%

34.1%31.1%

(22.3%)(21.6%)

(5.8%) (11.9%)

Annualized rate of return for international equity/benchmark

Name of Pension Fund 2005 2004 2003 2002 2001

Oakland PFRS Benchmark

13.74%17.11%

19.60%20.69%

36.11%39.17%

(12.13%)(15.66%)

(23.63%) (21.20%)


12.69%13.54%

19.17%20.25%

31.97%38.59%

(9.05%)(15.94%)

(22.22%) (21.44%)

City of Fresno Retirement Systems Benchmark

14.29%13.65%

30.46%32.37%

(7.86%)(6.46%)

(0.7%)(9.2%)

(14.57%) (23.61%)


17.3% 14%

25.1%20.7%

39.7%39.2%

(11.4%)(15.7%)

(24.3%) (21.2%)

Annualized rate of return for domestic fixed income/benchmark


Oakland PFRS Benchmark

3.53% 2.43%

4.96%4.34%

6.07%4.11%

7.87%10.25%

7.35% 8.43%%


2.41% 2.43%

5.31%4.34%

6.58%4.10%

10.01%10.26%

7.13% 8.43%


7.84% 6.80%

1.17%.32%

12.38%10.41%

8.5%8.6%

10.52% 11.23%


2.4% 2.4%

5.3%4.3%

6.6%4.1%

7.0%10.3%

7.9% 8.4%

Annualized rate of return for alternative investments/benchmark


Oakland PFRS Benchmark N/A N/A N/A N/A N/A

Marin County ERA Benchmark N/A N/A N/A N/A N/A


41.07%34.89%

39.53%33.51%

10.95%6.96%

2.5%1.3%

(13.36%) (25.83%)

Tulare County ERA Benchmark N/A N/A N/A N/A N/A


ATTACHMENT B

Exhibit B.4 - Survey Results - Return Data Total Fund Net Returns (%)

Name of Pension Fund 6_30_05 6_30_04 6_30_03 6_30_02 6_30_01

Oakland PFRS 5.80% 9.40% 18.30% -2.60% -3.60%

Marin County ERA Benchmark 8.74% 12.29% 22.08% -9.30% -2.25%

City of Fresno Retirement Systems Benchmark 10.94% 17.70% 4.31% -5.80% -4.10%

Tulare County ERA Benchmark 10.30% 13.50% 24.40% -9.00% 3.40%

Minneapolis Firefighter’s Relief Association 10.10% 20.00% -10.00% -3.30%

Minneapolis Police Relief Association Benchmark

10.10% 22.30% -10.10% -4.10%

Policy Benchmark Returns (%)

Name of Pension Fund 6_30_05 6_30_04 6_30_03 6_30_02 6_30_01

Oakland PFRS 6% 10.60% 18.30% -3.60% -1.80%

Marin County ERA Benchmark 7.43% 11.53% 21.14% -8.27% -3.97%

City of Fresno Retirement Systems Benchmark 10.40% 15.93% 4.80% -4.10% -5.80%

Tulare County ERA Benchmark 8.20% 12.20% 22.50% -8.20% -2.70%

Benchmark/Policy Index

Type of index/benchmark Marin County ERACity of Fresno

Retirement Systems Tulare County ERA

Minneapolis Firefighter’s Relief AssociationMinneapolis Police Relief Association

Oakland PFRS

Policy index/benchmark used Public fund median

S&P 500 Russell2000, MSCI EMF,

Lehman AggregateBond Index, NCREIF

Index weighted fortotal fund

25% S&P 500, 15%Russell 2500, 20%MSCI EAFE, 25%

Lehman Aggregate,10% NCREIF

Property Index, 5% T.Bill + 4%

For MFRA, S&P 5OOand Lehman Aggregate Bond are used. For MPRA, Wilshire 5000, Lehman Aggregrate and MSCI ACWI ex. US are used.

Russell 3000, MSCI ACWI ex US,

Lehman Aggregate


ATTACHMENT B

Exhibit B.5 - Survey Results - Cost DataBreakdown of Investment Cost (In Basis Points):


Marin County ERA

City of Fresno

Retirement Systems

Tulare County ERA


Minneapolis Police Relief Association Oakland PFRS

Total investment cost for the most recently completed fiscal year 47.6 bps 47 bps 64 bps 40.5 bps 26.24 bps 24.0

Investment Mgmt Fees 44.7 39.0 61.0 17.0

Custodial Transaction Fees 1.1 0.3 0.0 4.0

Investement Consultant Fee 1.2 1.0 0.0 3.0Investment Related Admin Costs 0.0 6.0 0.0 0.0

All information provided regarding Minneapolis Firefighter and Police Relief Associations is based on research conducted. Source: http://www.auditor.state.mn.us/reports/pen/2004/investment/investment_04_report.pdf


Marin County ERA

City of Fresno

Retirement Systems

Tulare County ERA



Total investment cost for the most recently completed fiscal year 47.6 bps 47 bps 64 bps 40.5 bps 26.24 bps 24.0

Investment Mgmt Fees 44.7 39 61 17.0

Custodial Transaction Fees 1.1 0.3 1 4.0

Investement Consultant Fee 1.8 1 2 3.0Investment Related Admin Costs 0.0 6 0.1 0.0

ATTACHMENT B

Exhibit B.6 - Survey Results - Staffing, Participants, and FundingStaffing:

Total Full-time employeesMarin County

ERA

City of Fresno

Retirement Systems

Tulare County ERA


Office of the Executive 3 2 2 2.3 0.68

Investment Staff 0 1 0 0.3 0

Accounting Staff 2 1 1 1.3 1.4

Systems and Office Services 1 0 1 0.7 0

Legal 0 0 0 0.0 0.6

Benefit Management Services 1 5 4 3.3 1.85

Internal Audit 0 0 0 0 0

Other

Total FTEs 7 9 8 8 4.53

Paticipants in fund and plan funded percentage:

No. of participants/funded %

Marin County ERA

City of Fresno

Retirement Systems

Tulare County ERA



Active members 3355 3,353 5119 3

Retired members & beneficiaries 2056 1,979 1808 1332

Total participants 5411 5,332 6927 1335

Funded % of plan 85.00% 123.00% 95.40% 90.20% 70.70% 69.60%


ATTACHMENT B

Exhibit B.7 - Survey Results - Hiring and Compensation AuthorityCompensation Authority questions:

Compensation Questions

Marin County ERA

City of Fresno

Retirement Systems

Tulare County ERA Oakland PFRS

Is compensation subject to the discretion of your governing body? no no no no

Is your org. subject to state civil service requirements regarding compensation? yes yes yes yes

Is compensation subject to legislative approval? yes yes yes yes

Personnel Authority Questions:

Personnel Questions

Marin County ERA

City of Fresno

Retirement Systems


Is the authorized number of staff positions subject to approval by the plan sponsor? no yes yes yes

Do they have independent personnel authority in hiring, promotion and termination? yes yes yes no

Is your staff employed by and made available to you from another agency? no no no no

Does your Board appoint the Plan's Executive? yes yes yes noHow many board members out of the total members does the head of the plan sponsor, select or appoint? 33% 40% 44% 57%

Procurement Authority Questions:

Does your organization have independent procurement authority to select and contract with:

Marin County ERA

City of Fresno

Retirement Systems


Invest. Management firms? yes yes yes yes

Investment Consultants? yes yes yes yes

Law Firms? yes yes yes yes

Auditors? yes yes yes yes

Actuary? yes yes yes yes General overhead (telephones, office space, and computers)? yes yes yes no


ATTACHMENT B

Exhibit B.8 - Survey Results - Fund GovernanceGovernance Questions:

Governance Questions

Marin County ERA

City of Fresno

Retirement Systems


What standing committees does your board maintain?

Have you adopted a governance policy? yes no yes yes

Do you have authority to establish your ownbudget?

yes yes yes yes

Do you have authority to spend the amount budgeted? yes yes yes yes

Does state or local law mandate that a State Attorney act as a leglal counsel or appoint a legal counsel to the fund and/or its board? yes no no yes

If yes, does the board have a written agreement with the attorney on identifying & dealing with conflict of interest issues that might require separate counsel for the board? no no

Does the board have authority to hire a staff attorney that serves at pleasure of board? yes no yes yes

If yes, has board hired such an attorney? no no no

Does the board have authority to retain outside law firm that contracts with the board? yes yes yes yes

If yes, do they have to receive consent from govt. attorney or another agency? no no no yesHas the board hired an outside law firm or firms? yes yes yes no

If yes, for what issues?

Does an indemnification arangement or insurance policy for board members require adherence to advice of counsel as a condition for coverage? unknown no no no


ATTACHMENT B

City of Oakland Management Audit Police and Fire Retirement System Originally Presented May 22, 2006

Page 1

The following table summarizes the recommendations by Independent Fiduciary Services, Inc (IFS) to Oakland PFRS originally presented May 22, 2006. The comments provided reflect the staff review of these recommendations as of May 26, 2010.


1 The Board should seek amendments to the Charter to delete the “legal list” restrictions on its authority to invest the System’s assets and to grant to PFRS authority to select the custodian of the System’s assets. Staff Comment: Implemented. In November 2006, City voters passed Measure M granting the Board significantly more flexibility when investing the System’s assets. Specifically, the Measure amended the City Charter to allow the System’s Board to invest in non-dividend paying stocks and to change the asset allocation structure from 50% equities and 50% fixed income to the Prudent Person Standard as defined by the California Constitution.

16

2 The Board should continue to consider and approve the System’s administrative budget, and staff should provide to the Board all the data necessary for the Board to make prudent budget decisions. Staff Comment: Implemented. Staff now provides monthly Administrative report. The report provides a monthly update on the System’s expenditures, Cash held in Treasury, Retiree census and Investment Fund Balances.

16

3 The Board should participate in the process by which the staff assigned to PFRS are selected, evaluated and compensated, and should obtain a commitment from OPRM and FMA that no staff assigned to PFRS shall be employed without input from the Board. Staff Comment: Partially Implemented. The PFRS Board currently participates in the interview process and selection of staff. The Board also approves a Budget that includes the allocation of staff and the appropriate salaries.

17

4 The Board should seek the assignment to PFRS of staff with investment expertise to assist the Board in setting investment policy and monitoring the performance of the System’s investment managers and consultant. Staff Comment: Not implemented. This recommendation has been raised with the Audit Committee for consideration. The Investment Consultant (PCA) monitors performance and recommends investment policy. In addition, the Retirement System Accountant works internally on investment related items.

17

(Weight = 9)

5 Pensioner records filing should be made a priority project. All pensioners’ filing information 19

ATTACHMENT C


Page 2

Number Recommendation(s) Page received in the future should be filed in a timely manner – i.e., within one week of receipt. Staff Comment: Implemented. All backlogged filing has been completed and a system established for ongoing filing to avoid future backlogs. Filing is done on a regular basis.

6 Pensioner record file drawers should be locked at all times when unattended by the Benefits Representative. Staff Comment: Partially Implemented. New file cabinets with locks have been ordered and files are in the process of being transferred.

19

7 Use of a scanner for document storage is also recommended. Certain paper documents could then be shredded for security purposes. Staff Comment: Partially Implemented. Steps have been taken to begin implementation of this recommendation. All of the money manager contracts have been scanned and are stored. No timeframe has been established at this point for scanning and storing other types of documents.

19

8 It should be required that all address changes are to be made in writing and signed by the pensioner only. Staff Comment: Implemented. All Address changes are now required to be made in writing and signed by the pensioner.

20

9 It should be required that a notary’s stamp and signature appear on all beneficiary forms verifying the signature is that of the pensioner. Staff Comment: Implemented. PFRS Retirees currently have beneficiary forms on file. The form was originally completed when the employee retired and were updated based on this recommendation. All significant changes requested by the Retiree require a notary when the Retiree is not able to come to the office. In August 2008, Staff sent out information to all Retirees to update their existing Beneficiary information. All changes to Beneficiary information require a notary.

20

10 OPRM should develop a written record retention policy that incorporates City requirements but addresses the special needs of a retirement system. While this will aid in preventing the untimely destruction of plan materials, with the limited availability of storage space, it may allow for the disposition of unnecessary materials.

23

(Weight = 1)

ATTACHMENT C


Page 3

Number Recommendation(s) Page Staff Comment: Not Implemented. The City of Oakland already has a record retention policy. It includes the requirement to retain active retirement payment records for seven years.

11 The Board meeting cassettes should be located for the past four years so that the System is in compliance with the Brown and Sunshine requirements to maintain meeting minutes for a minimum period of four years.1 Staff Comment: Implemented. The Board meeting cassettes are available for the past four years.

23

12 Should the practice of recording meetings be maintained, new technology, such as a CD recorder, should be utilized to avoid loss due to deterioration of cassettes over time. Staff Comment: Implemented. Board meetings are now recorded using a digital recorder.

23

13 Written minutes should provide more detail, especially in areas where the Board provides direction. For example, if the Board approves transfer of assets from one investment manager to another, or makes a policy decision, the minutes should reflect the effective date of the transfer or policy. It is also recommended that the meeting minutes reflect the signature of the President of the Board to attest to the approval of the minutes as drafted. Staff Comment: Implemented. Written minutes are now being prepared with more detail as recommended and the Board president and Committee Chairs are now required to sign them.

23

14 Use of a scanner for document storage is also recommended. Scanning of meeting materials would reduce the need for use of the limited storage space. It would also protect against the loss of older records due to natural disaster. Staff Comment: Partially implemented. All of the money manager contracts and additional historical information has been scanned and stored. No timeframe has been established at this point for scanning and storing Retiree files.

23

15 Establish a written procedure, for inclusion in the Standard Operations Manual (SOM), for expense payments. Staff Comment: Implemented. The expense payments process described in the Audit Report is now documented in a desk operations manual. Each staff person has a desk operations manual specific to the tasks performed. Manuals were completed in July 2006. Copies of the manuals

24


ATTACHMENT C


Page 4

Number Recommendation(s) Page are on the respective staff desk, on the shared drive accessible by appropriate staff and maintained on 3.5 floppy disks.

16 The Board seat of Insurance Representative should be filled as soon as possible. Staff Comment: Implemented. The Board seat of Insurance Representative was filled.

25

17 The pension payment spreadsheet should be password protected by Accountant 1. Any proposed changes to the file by the Benefits Representative should be provided to and entered by Accountant 1, prior to submission to the accounting department for final payment. Staff Comment: Implemented. Passwords have been assigned to pension payments files. It was recently discovered that all Pension Payments are considered public information and are not required to be password protected. SSN information is not included in the files. The process has been modified as recommended to require calculations to a member file be made by the Retirement Systems Accountant and verified by the Accountant.

26

18 All changes to the banking information for direct deposits should be verified and confirmed for accuracy. Changes to bank routing information should be approved by a second staff member. Staff Comment: Implemented. All Banking information is verified monthly by the City of Oakland. Bank and staff are notified when there is incorrect information. All members who make Bank changes are required to submit a voided check with the member’s name and banking information.

26

19 An administrative management report providing the following information should be provided to the Board on a monthly or quarterly basis: (1) the number of pensioners receiving benefits, (2) benefit payment totals, (3) the number of active participants and their contributions, (4) beginning and ending investment and cash balances, (5) death benefit payments and (6) operating expenses. Staff Comment: Implemented. Staff now presents a Monthly Administrative report that includes the information requested.

27

20 The administrative budget reports should continue to be shared with the Board. Staff Comment: Implemented. Administrative budget reports continue to be shared with the Board.

27

21 It is recommended that the completion of an Annual Report (AR) for the Plan Year 2005 be made a priority. The completed AR could be put online to reduce staff time and costs related to photocopying the report. An internet site could also be established for the PFRS and all pertinent information

27

ATTACHMENT C


Page 5

Number Recommendation(s) Page could be maintained there including the AR. Staff Comment: Implemented. An annual report was prepared and continues to be prepared annually.

B. Governing Body 22

The Board should retain independent fiduciary legal counsel. Staff Comment: Implemented. On April 28, 2010, the PFRS Board reached an agreement with the City Attorney’s office regarding Legal Council and approved a corresponding Resolution. The Board has interviewed and selected Legal Council. Completion of contract for Legal Council is in progress.

32

23 The Board should utilize independent fiduciary legal counsel to assist it in objectively harmonizing the provisions of Proposition 162 and the City Charter and then to update its rules and regulations to specifically delineate the extent of the Board’s authority and control regarding the administration of the pension fund, including PFRS’ authority to (a) establish its budget; (b) select outside counsel; (c) select and evaluate the PFRS Secretary and additional staff; (d) select and evaluate the actuary; and (e) select and evaluate the custodial bank. Staff Comment: Board input required

32

(Weight = ?)

24 The Board should develop a memorandum of understanding with the City which would facilitate the Board’s ability to exercise the authority granted to it by Proposition 162 and the City Charter by agreeing how the two documents will be harmonized and make plain the authority of the Board to set forth and establish, at a minimum, the authority of the Board to select and evaluate a Secretary to the board, additional staff (e.g., a staff member with investment experience), to retain outside legal counsel, to retain the actuary, and to establish its budget. Staff Comment: Board input required

32

(Weight = ?)

25 The Board should explore the cost/benefit of once again becoming a distinct entity within the Oakland City Government rather than being a part of the Office of Personnel. Staff Comment: Board input required

32

(Weight = ?)

26 The Board should become more cognizant of the full extent of its fiduciary responsibility, authority and control regarding the pension fund by periodically holding compulsory educational sessions (for current and new trustees) for the purpose of becoming more knowledgeable about the governing documents applicable to the administration of the pension fund and the investment of pension fund

32

(Weight = ?)

ATTACHMENT C


Page 6

Number Recommendation(s) Page assets, including but not limited to the provisions of Proposition 162, the City Charter, as amended, the Board’s Rules and Regulations, the Brown Act, the Board’s Investment Policy Statement, and any reporting and disclosure requirement applicable to the Board (e.g., Form 700). Staff Comment: Board input required

27 In consultation with the investment consultant and the equity investment managers, the Board should develop and implement a process for considering and acting upon proposed investments in equity securities which have not satisfied the five year dividend history set forth in the Charter. Staff Comment: Implemented. City voters passed Measure M which amended the City Charter to allow the System’s Board to invest in non-dividend paying stocks.

36

C. Accountability 28 We recommend that the Board seek a legal opinion regarding whether or not it has the legal

authority, through rulemaking, to remove a trustee. If it is determined that the Board has such authority, then we recommend that the Board amend its rules and regulations to require that a member who misses more than four meetings in a 12 month period must either resign from the Board or obtain the approval of the Board, evidenced by a majority vote, to continue on the Board. Staff Comment: Board input required

39

(Weight = ?)

29 We recommend that the Board’s Rules and Regulations be updated. Staff Comment: Not Implemented

40

(Weight = 7) 30 In addition to the meeting agenda, the Board should also publish the minutes of each meeting on its

website. Staff Comment: Implemented. Board meeting material is now available on the City of Oakland website.

42

31 The Board should issue a current annual report as soon as possible. Staff Comment: Implemented.

42

32 The Board should amend its Rules and Regulations to require that the notice of election, petition, election criteria, etc., be posted on the PFRS website. Staff Comment: Not Implemented Board input required.

44

(Weight = 7)

33 The Board should go on record and request the City Council to fill the current vacancy on the Board. 44

ATTACHMENT C


Page 7

Number Recommendation(s) Page If it is determined that the vacancy can not be filled then we recommend that the City Charter be amended to change the experience requirement from an individual with life insurance experience to one that has experience in benefits administration or investment management experience. Staff Comment: The vacancy has been filled.

34 The Board should develop a succession plan and implementation protocol. Staff Comment: Not Implemented

46

(Weight = 6) 35 The Board should develop a governance statement which sets forth the roles and responsibilities of

the key parties involved in the management of the PFRS. Staff Comment: Not Implemented

46

(Weight = 8)

36 The Board should instruct staff to develop a standard operating procedures manual made up of a compilation of existing policies, procedures, and operative practices of PFRS staff, including functional position descriptions for every PFRS position. Staff Comment: Partially Implemented. Each staff person has a desk operations manual specific to the tasks performed. Manuals were completed in July 2006. Copies of the manuals are on the respective staff desk, on the shared drive accessible by appropriate staff and maintained on 3.5 floppy disks.

46

D. Expert Advice 37 If the Audit Committee persists in the view that the attorney identified by the Board to serve as

outside legal counsel should serve as the Board’s outside counsel, the Audit Committee and the City Attorney should agree to submit the issue of eligibility to a mutually acceptable, qualified attorney to issue a definitive opinion on the point. If that attorney determines that the attorney identified by the Board to serve as outside legal counsel should not be selected, the Audit Committee should promptly select another candidate from the panel, and the City Attorney should not unreasonably withhold his consent to that selection. Staff Comment: Implemented. The PFRS Board has selected an Attorney.

49

38 The Board should continue to employ an investment consultant to provide a comprehensive range of consulting services. PCA Comment: PCA is willing to discuss adjusting our services where appropriate. IFS apparently did not have a complete record of services provided by PCA. For example, PCA

56

ATTACHMENT C


Page 8

Number Recommendation(s) Page (through its affiliate LDZ) calculates investment rates of return for the total fund and numerous composites, reconciles return calculations with external managers, and monitors organizational and business issues at PFRS’s external managers.

39 PFRS Board should consider expansion of PCA’s contract to include advice on other collateral and secondary services about which the current agreement is silent. (Refer to report Table D1.) PCA Comment: Specific areas qualifying for current consideration include securities lending and custody. PCA has provided PFRS a preliminary review of its securities lending program. PCA expects to work with Staff to review its custody relationship in the near future.

56

(Weight = ?)

40 Should PFRS elect to retain third party vendors to provide additional investment related services, PCA should provide PFRS with a periodic review of the work of these vendors. PCA Comment: Upon retention of third party vendors, PCA would work with Staff to provide PFRS with a periodic review of the work of these vendors.

56

41 While we have no reason to question the validity of the actuarial work performed currently, PFRS should consider obtaining a periodic ‘second opinion’ on the work of its actuary. Some funds do this every five years. Short of going to bid for the actuarial services, the Board’s monitoring process of its actuary could consist of hiring another reputable actuary to perform a one-time review. Staff Comment: The PFRS Board selected a new Actuary in 2007.

57

42 PFRS should seek competitive proposals for a new custody arrangement. The Board’s legal counsel should be closely involved in negotiating the custody agreement. PCA Comment: PCA expects to work with Staff to review its custody relationship in the near future.

60

43 Simultaneously, PFRS should seek competitive bids on its securities lending program. (See next section and recommendation.) PCA Comment: PCA has provided PFRS a preliminary review of its securities lending program. PCA expects to work with Staff to review its securities lending relationship in the near future.

60

44 The Board (and staff) should refrain from approval of borrowers. Staff or the investment consultant should periodically review the list of borrowers approved by MetWest and only bring to the Board’s attention any that may be questionable.

62

ATTACHMENT C


Page 9

Number Recommendation(s) Page Staff Comment: Not Implemented

45 PFRS should request and obtain contractual assurances from MetWest that its securities are loaned equitably. MetWest should also provide a description and explanation of the queuing mechanism that allocates loans among lenders.. Staff Comment: Not Implemented

62

46 Since the agreement for Securities Lending Services has been assigned at least three times, we suggest that it be renegotiated to incorporate certain key provisions of the Securities Lending Agreement such as requirement for maintenance of collateral, and to reflect the current agency and more favorable terms concerning, e.g.: • Indemnification against borrower default; • Liability on the part of agent for failing to act in accordance with PFRS instructions; and • Restrictions on borrowing activities of parent/affiliate of agent.

Staff Comment: The PFRS Board selected and signed a new SecLending contract in 2007.

62

47 PFRS should seek to restrict the terms and conditions under which MetWest can lend PFRS securities to its parent and affiliates, i.e., Wachovia. Staff Comment: No Longer Applicable

63

48 MetWest should provide explanations in their report when loan transactions fall outside general loan program guidelines. Staff Comment: Not Implemented

63

49 The footnote on securities lending should be corrected as appropriate. Staff Comment: No Longer Applicable

63

E. Suitability 50 We recommend that the Board amend its travel policy to (a) clarify that travel must be approved in

advance, (b) require that all international travel be approved by the full board in advance of such travel, (c) expand the policy to cover staff assigned to PFRS, (d) include a list of approved conferences, (e) limit the total number of trips that may be taken in any one year, and (f) require that members and staff that attend an educational conference provide a written overview of the conference to the board and make the conference materials available to others upon request. Staff Comment: The travel policy has been updated and adopted by the Board to include some,

66

ATTACHMENT C


Page 10

Number Recommendation(s) Page but not all, of the recommendations made by the auditing consultant.

F. Internal Controls 51 While it is only possible to revise the method of distribution for annual pay increases through the

collective bargaining process, providing clear, well-defined, and obtainable staff objectives for acceptable job performance and future career growth at each annual evaluation may increase employee performance and productivity. Staff Comment: Not Implemented

71

52 In addition to the SOM, an Administrative Manual should be completed that describes each position and the related job responsibilities. The Manual should also describe the primary and secondary responsibilities for each job title so that a clear back-up is designated in the absence of the primary personnel. Staff Comment: An administrative manual has not yet been developed, however, staff have been cross trained to fill in for colleagues in their absence to the extent possible. The operating procedures developed for each desk are on the shared drive and accessible by all members of the Retirement Section staff.

71

53 The percentages used for allocation purposes should be changed as follows: Reduce the percentage for the Executive Assistant to the Director of Personnel from 15% to

8%; Reduce the percentage for Human Resources Technician from 80 to 65%; Increase the percentage for Retirement Systems Accountant and Accountant 1 from 70% to

80%; and All other reviewed percentages appear appropriate.

(Note: The revised recommended percentages are based solely on our judgment based on the interviews conducted.) Staff Comment: The PFRS Retirement System no longer pays for the salaries of the Director of Human Resource Management or the Executive Assistant. Other allocations have not been changed.

72

54 The Board should develop contractual language for inclusion in each service provider’s agreement requiring extensive, prompt, written disclosure from the investment consultant (including filing of Form 700 if required) and each service provider regarding the amounts of all revenues the investment consultant receives from any incumbent or proposed service provider.

74

ATTACHMENT C


Page 11


55 The Board should designate a specific individual (e.g., legal counsel), in addition to the City Clerk, to review and monitor conflicts of interest, actual and potential, including Form 700 reports as allowed by law. Staff Comment: Not Implemented

74

56 A HIPAA compliance study should be performed, and steps should be taken to remedy any deficiencies in PFRS’ HIPAA compliance. Staff Comment: Not Implemented

74

57 PFRS should continue the annual external audit of benefit calculations. Staff Comment: Implemented. PFRS continues to go through annual external Audits

75

58 PFRS should hire an external actuarial firm to review the work of its current actuary. Staff Comment: Partially Imlemented: PFRS hired a new Actuary in 2007, who reviewed the work of the previous Actuary. If Bartel is retained for a long period of time then a third-party review may be appropiate.

75

59 PFRS should discuss a program of regular internal auditing of PFRS’ activities with the City Auditor. The internal auditing activity should be performed in accordance with generally accepted standards for the practice of internal auditing and should include compliance auditing. We suggest that PFRS’ external auditor be consulted on the design of such a program before it is implemented. Staff Comment: Not Implemented

76

60 Observations and recommendations from this Operational Review should be tracked and monitored by staff and the Board should be updated regularly on the progress of recommendations that it chooses to implement. Staff Comment: Implemented. Board members have been asked to identify their priorities relative to the recommendations made so that staff resources can be steered toward meeting their priorities.

76

61 The Board should undertake a periodic management audit such as the one performed to develop this report. Staff Comment: Under Consideration

76

ATTACHMENT C


Page 12

Number Recommendation(s) Page 62 Staff’s performance measurement criteria should identify goals and objectives specifically related to

the management and administration of PFRS. The criteria should be designed to align the interest of the board and staff and facilitate PFRS’ ability to accomplish its mission and strategic objectives. Staff Comment: Not Implemented

77

63 Board members should provide input in the establishment of the performance measurement criteria for the staff assigned to carry out PFRS’ day to day administration, as well as the input in such staffs’ annual performance review. Staff Comment: Not Implemented

77

G. Reporting 64 Should the current method of communicating governing body decisions effecting retirees and

beneficiaries, via the local union channels, remain in place, a formal process of communicating these decisions should be developed. Staff Comment: Not Implemented

79

65 Establishment and maintenance of a PFRS webpage within the City’s portal would allow another means of communicating Board decisions. Staff Comment: Not Implemented

79

66 PFRS should resume the practice of publishing its own annual report on a timely basis. Reports for 2004 and 2005 should be prepared. Staff Comment: This recommendation has been implemented.

81

H. Disclosure 67 All actions taken by the governing body at the monthly meeting should be recorded in detail in the

meeting minutes. Staff Comment: Currently being done.

82

68 Draft meeting minutes should be produced within five days of the meeting and circulated to the appropriate parties for review and action. The minutes should be reviewed prior to the next meeting to assure all actions requiring follow-up are complete. Staff Comment: Minutes are completed 10 business days following the Board meeting. The minutes are reviewed prior to the next meeting to assure all actions requiring follow-up are addressed.

82

69 Establishment and maintenance of a PFRS webpage within the City’s portal would allow another means of communicating Board decisions. (PFRS should bear the direct cost of creating and maintaining the web pages.)

82

ATTACHMENT C


Page 13


70 Same recommendation as G. 64. 82 71 Same as H. 69 82

I. Investment Analysis 72 The Board should revise the performance objectives section of the IPS to include additional

investment objectives and benchmarks for the total Pension Fund (including a Total Fund Policy Index and Total Fund Asset Allocation Index) and each asset class or composite. PCA Comment: PCA will modify the IPS over time to meet this recommendation. Currently, investment objectives and benchmarks for the total Pension Fund and each asset class (or composite) are included in the quarterly statement of performance.

88

73 The IPS should include a distinct section on roles and responsibilities that covers all of the major investment related tasks. PCA Comment: The current IPS includes a section on roles and responsibilities of the Board, Investment Consultant, Investment Manager, and Investment Counsel. If not already covered in this section, PCA will modify the IPS over time to meet this recommendation.

90

74 The IPS should specify the frequency with which the asset allocation and/or asset liability studies should be conducted, e.g., at least every three to five years and by whom it should be done. PCA Comment: PCA and EFI Actuaries conducted an asset-liability review for PFRS in 2005. PCA suggests that PFRS conduct a review every three to five years. PCA will work with Staff to document a schedule in the IPS.

91

75 We recommend that the rebalancing ranges be tightened and modified PCA Comment: In November 2006, revisions to current asset allocation restrictions are to be voted on as part of amendment to the City Charter. If the maximum of 50% equity (at cost) restriction is amended, the rebalancing ranges will be modified as appropriate.

93

76 We recommend that the IPS be expanded to include a more detailed discussion on the manager selection process or, alternatively, reference a separate manager search policy document. PCA Comment: The manager selection process is detailed in memorandums specific to each search. If further detail is required, PCA will work with Staff to include language in the IPS that provides an overview of the search process.

94

ATTACHMENT C


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Number Recommendation(s) Page 77 We recommend that the Board include only broad asset class level guidelines in the IPS.

PCA Comment: The current investment policy includes broad asset class level guidelines. PCA suggests that current PFRS asset class level guideline policies are appropriate and are within generally accepted standards.

96

78 The Board should consider revising and expanding the policy on securities lending as described in our report. PCA Comment: Policy on securities lending is included in the manager guidelines section of the IPS. If further detail is required, PCA will work with Staff to revise and expand the policy on security lending.

98

79 Add policy on brokerage practices to the total fund section of the IPS, which acknowledges that commissions are a plan asset and, as such, the Board will monitor commission and other trading expenses. PCA Comment: PCA will work with Staff to add policy on brokerage practices.

99

80 The Board should work with the Investment Consultant, custodian bank and investment managers to develop monthly reports that contain sufficient data to determine whether the individual portfolios and Total Fund are in compliance with the City Charter. PCA Comment: For an additional charge, PFRS could receive monthly information from its custodian.

104

J. Performance Benchmarks 81 In order to evaluate the International Equity portion of the portfolio more consistently, PFRS should

consider measuring its international equity segment against the MSCI EAFE Index. If the Board concludes that the MSCI ACWI ex US Index is an appropriate benchmark, it should consider measuring its international equity managers against the MSCI ACWI ex US Index. PCA Comment: Resolved. PCA has recommended and the Board adopted the MSCI ACWI ex US Index as its asset class benchmark. In addition, PCA recommended that two PFRS international equity managers be measured against the MSCI ACWI ex US index.

110

82 PFRS should consider measuring the fixed income portfolio against the Lehman Brothers Universal Index. PCA Comment: Resolved. PCA has recommended and the Board adopted the Lehman

111

ATTACHMENT C


Page 15

Number Recommendation(s) Page Universal Index as its asset class benchmark and its fixed income managers' benchmark.

L. Investment Reporting and Monitoring 83 PFRS should measure the performance of the Total Fund against an Asset Allocation index to allow

the Board to determine how much of return was generated due to the investment managers’ skill, as opposed to tactical asset allocation decisions chosen by the Board. PCA Comment: Resolved. The PFRS performance report does measure the Total Fund against an Asset Allocation (Policy) Index. In the Portfolio Performance Overview section, PCA discusses sources of return including investment managers’ skill (e.g., stock selection) and asset allocation decisions.

125

84 The PFRS Board should request an exhibit that displays the performance for each asset class and investment manager, along with their respective benchmarks on a consecutive time period. PCA Comment: Resolved. The PFRS performance report contains tables that provide asset class performance and those of each asset class’s investment manager performance, along with their respective benchmarks for the latest quarter, one year, three year, and five year periods.

126

85 PFRS should request from their consultant universe comparisons for the Total Fund, each Asset Class Composite, and underlying investment managers on a cumulative and consecutive time period. PCA Comment: The PFRS performance reports currently provide universe comparisons for the Total Fund. PCA will work with Staff to develop appropriate documentation for the PFRS performance reports.

127

86 PFRS should request that its consultant provide holdings and/or returns based style analysis for its domestic equity portfolio. PCA Comment: PCA will work with Staff to develop appropriate documentation for the PFRS performance reports.

127

87 PFRS should discuss with its consultant what equity characteristics it would like to see on a quarterly basis. PCA Comment: PCA will work with Staff to develop appropriate documentation for the PFRS performance reports. Equity characteristics could be provided by PFRS’ custodian at an extra cost.

128

88 PFRS should discuss with its consultant what fixed income characteristics it would like to see on a quarterly basis.

128

ATTACHMENT C


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Number Recommendation(s) Page PCA Comment: PCA will work with Staff to develop appropriate documentation for the PFRS performance reports. Fixed income characteristics could be provided by PFRS’ custodian at an extra cost.

89 PFRS should request that its consultant provide risk/return exhibits for the Total Fund and each Asset Class. PCA Comment: The PFRS performance report currently provides a risk/return exhibit for the Total Fund. PCA will work with Staff to develop appropriate documentation for each asset class.

129

90 We recommend that the individual manager guidelines be expanded to include the specific guideline elements that are included in the other sections of the IPS (including those specific to the City Charter requirements), tailored to their strategy, as well as additional investment risk elements, as appropriate for the manager. PCA Comment: PCA will work with Staff to modify individual manager guidelines.

133

91 Staff should work with its investment consultant to develop a monthly manager report format, which includes all the necessary elements that would allow staff to monitor compliance more effectively. PCA Comment: PCA currently provides PFRS with a quarterly statement of performance. Monthly performance could be obtained from PFRS’ custodian at an extra cost.

136

92 The Board should either ask its investment consultant for assistance with monitoring its investment managers’ compliance with their investment guidelines or work with staff and the custodian to enroll in an automated guideline compliance system. In any case, monitoring procedures should be documented in writing. PCA Comment: PCA will work with Staff to determine appropriate compliance monitoring procedures. Likely, an automated guideline compliance system could be obtained from PFRS custodian at an extra cost.

136

ATTACHMENT C


Page 1

The following table summarizes the recommendations by Independent Fiduciary Services, Inc (IFS) to Oakland PFRS originally presented May 22, 2006. The comments provided reflect the staff review of these recommendations as of May 26, 2010.

Investment Related Recommendations as of 05-18-2011


1 The Board should seek amendments to the Charter to delete the “legal list” restrictions on its authority to invest the System’s assets and to grant to PFRS authority to select the custodian of the System’s assets. Staff Comment: Implemented. In November 2006, City voters passed Measure M. Measure M amended the City Charter to allow the System’s Board to invest in non-dividend paying stocks and to change the asset allocation structure from 50% equities and 50% fixed income to the Prudent Person Standard as defined by the California Constitution.

16

4 The Board should seek the assignment to PFRS of staff with investment expertise to assist the Board in setting investment policy and monitoring the performance of the System’s investment managers and consultant. Staff Comment: The Investment Consultant (PCA) monitors performance and recommends investment policy. In addition, the Retirement System Accountant works internally on all investment related items. Given current funded status, the PFRS Board has elected not to hire additional full-time investment staff.

17

D. Expert Advice 38 The Board should continue to employ an investment consultant to provide a comprehensive range of

consulting services. Comment: Implemented. PFRS currently has and will continue to retain an external investment consultant.

56

ATTACHMENT D


Page 2

39 PFRS Board should consider expansion of PCA’s contract to include advice on other collateral and

secondary services about which the current agreement is silent. (Refer to report Table D1.) PCA Comment: PCA currently has a full retainer relationship with OPFRS. Part of this relationship is the review and advice on collateral and secondary services as they are needed. PCA provides reviews of both securities lending and OPFRS custody relationship every three to five years or as market conditions warrant.

56

40 Should PFRS elect to retain third party vendors to provide additional investment related services, PCA should provide PFRS with a periodic review of the work of these vendors. Implemented: PCA provides periodic review of Third Party Vendors when applicable. PCA provides reviews of both securities lending and OPFRS custody relationship every three to five years or as market conditions warrant.

56

42 PFRS should seek competitive proposals for a new custody arrangement. The Board’s legal counsel should be closely involved in negotiating the custody agreement. Implemented: PFRS Board seeks competitive bids at minimum upon contract renewal or as more frequently as needed to ensure best custody arrangements possible.

60

43 Simultaneously, PFRS should seek competitive bids on its securities lending program. (See next section and recommendation.) Implemented: PFRS SecLending program is currently managed by the Custodian. PFRS Board will review Security Lending program every three to five years or at the same time of the Custodial Review or as market conditions warrant.

60

44 The Board (and staff) should refrain from approval of borrowers. Staff or the investment consultant should periodically review the list of borrowers approved by MetWest and only bring to the Board’s attention any that may be questionable. Implemented: PCA will annually review list of Borrowers and inform Board as needed.

62

45 PFRS should request and obtain contractual assurances from MetWest that its securities are loaned equitably. MetWest should also provide a description and explanation of the queuing mechanism that allocates loans among lenders.. Implemented: Security Lending Loans are periodically reviewed by Staff and reported annually to the Board as part of the Annual Financial Audit.

62

ATTACHMENT D


Page 3

46 Since the agreement for Securities Lending Services has been assigned at least three times, we

suggest that it be renegotiated to incorporate certain key provisions of the Securities Lending Agreement such as requirement for maintenance of collateral, and to reflect the current agency and more favorable terms concerning, e.g.: • Indemnification against borrower default; • Liability on the part of agent for failing to act in accordance with PFRS instructions; and • Restrictions on borrowing activities of parent/affiliate of agent.

Implemented: The PFRS Board selected a new vendor and signed a new SecLending contract in 2007.

62

47 PFRS should seek to restrict the terms and conditions under which MetWest can lend PFRS securities to its parent and affiliates, i.e., Wachovia. Implemented: PCA and Staff review annually, however more frequent oversight is conducted on an ongoing basis .

63

48 MetWest should provide explanations in their report when loan transactions fall outside general loan program guidelines. Implemented: SecLending Loans are periodically reviewed by Staff and as part of the PFRS Annual Financial Audit.

63

49 The footnote on securities lending should be corrected as appropriate. Staff Comment: No Longer Applicable. The PFRS Board selected a new Security Lending Manager in 2007

63

I. Investment Analysis 72 The Board should revise the performance objectives section of the IPS to include additional

investment objectives and benchmarks for the total Pension Fund (including a Total Fund Policy Index and Total Fund Asset Allocation Index) and each asset class or composite. Implemented: Currently, investment objectives and benchmarks for the total Pension Fund and each asset class (or composite) are included in the quarterly statement of performance. These items are reviewed continually and or at a minimum during annual IPS reviews.

88

ATTACHMENT D


Page 4

73 The IPS should include a distinct section on roles and responsibilities that covers all of the major

investment related tasks. Comment: The current IPS includes a section on roles and responsibilities of the Board, Investment Consultant, Investment Manager, and Investment Counsel. Language regarding the role of PFRS staff will be added and updated to the IPS as warranted

90

74 The IPS should specify the frequency with which the asset allocation and/or asset liability studies should be conducted, e.g., at least every three to five years and by whom it should be done. Implemented: The Investment Policy currently states the targeted dates of the asset/ liability study. These dates and reviewed and updated as needed.

91

75 We recommend that the rebalancing ranges be tightened and modified Implemented: The Investment Policy currently specifies a smaller range for asset rebalancing. However, these ranges are reviewed at minimum monthly through the use of the cash flow report. or as needed

93

76 We recommend that the IPS be expanded to include a more detailed discussion on the manager selection process or, alternatively, reference a separate manager search policy document. Comment: The manager selection process is detailed in Board memorandums specific to each search are presented to the PFRS Board. The IPS is reviewed on a continual basis but at a minimum annual review are conducted by staff and consultant to help ensure best practices

94

77 We recommend that the Board include only broad asset class level guidelines in the IPS. Implemented: The PFRS Investment Policy has been updated accordingly.

96

78 The Board should consider revising and expanding the policy on securities lending as described in our report. Implemented: The PFRS Investment Policy has been updated to expand on the security lending program.

98

79 Add policy on brokerage practices to the total fund section of the IPS, which acknowledges that commissions are a plan asset and, as such, the Board will monitor commission and other trading expenses. Implemented and currently in the PFRS Investment Policy

99

ATTACHMENT D


Page 5

80 The Board should work with the Investment Consultant, custodian bank and investment managers to

develop monthly reports that contain sufficient data to determine whether the individual portfolios and Total Fund are in compliance with the City Charter. Implemented: Staff and PCA currently receive a monthly report that details Managers compliance with the Investment Policy.

104

J. Performance Benchmarks 81 In order to evaluate the International Equity portion of the portfolio more consistently, PFRS should

consider measuring its international equity segment against the MSCI EAFE Index. If the Board concludes that the MSCI ACWI ex US Index is an appropriate benchmark, it should consider measuring its international equity managers against the MSCI ACWI ex US Index. Implemented: The PFRS International Equity Benchmark was changed to the MSCI ACWI ex US Index.

110

82 PFRS should consider measuring the fixed income portfolio against the Lehman Brothers Universal Index. Implemented: The PFRS Fixed Income Benchmark was changed to the Lehman Brothers Universal Index.

111

L. Investment Reporting and Monitoring 83 PFRS should measure the performance of the Total Fund against an Asset Allocation index to allow

the Board to determine how much of return was generated due to the investment managers’ skill, as opposed to tactical asset allocation decisions chosen by the Board. Implemented PCA provides this information quarterly or as project specific requests warrant

125

84 The PFRS Board should request an exhibit that displays the performance for each asset class and investment manager, along with their respective benchmarks on a consecutive time period. Implemented PCA provides this information quarterly or as project specific requests warrant

126

85 PFRS should request from their consultant universe comparisons for the Total Fund, each Asset Class Composite, and underlying investment managers on a cumulative and consecutive time period. Implemented PCA provides this information quarterly or as project specific requests warrant

127

ATTACHMENT D

low9d

Highlight


Page 6

86 PFRS should request that its consultant provide holdings and/or returns based style analysis for its

domestic equity portfolio. Implemented PCA provides this information quarterly or as market conditions warrant

127

87 PFRS should discuss with its consultant what equity characteristics it would like to see on a quarterly basis. Comment: Ongoing. PCA and Staff are continually reviewing this asset class to better meetthe boards needs PCA and Staff will discuss with PFRS Board and seek Board direction. Staff hopes to have this issue resolved by 3rd Quarter 2011.

128

88 PFRS should discuss with its consultant what fixed income characteristics it would like to see on a quarterly basis. Comment: Ongoing. PCA and Staff are continually reviewing this asset class to better meetthe boards needs PCA and Staff will discuss with PFRS Board and seek Board direction. Staff hopes to have this issue resolved by 3rd Quarter 2011.

128

89 PFRS should request that its consultant provide risk/return exhibits for the Total Fund and each Asset Class. Implemented PCA provides risk/return exhibits quarterly and during each asset class structure review on an ongoing basis

129

90 We recommend that the individual manager guidelines be expanded to include the specific guideline elements that are included in the other sections of the IPS (including those specific to the City Charter requirements), tailored to their strategy, as well as additional investment risk elements, as appropriate for the manager. No Longer Applicable: PFRS no longer utilizes Individual Manager Guidelines. All Investment Managers receive a copy of the overall Investment Policy to ensure consistency and accuracy.

133

91 Staff should work with its investment consultant to develop a monthly manager report format, which includes all the necessary elements that would allow staff to monitor compliance more effectively. Implemented: Custodian currently provides a monthly compliance report.

136

92 The Board should either ask its investment consultant for assistance with monitoring its investment 136

ATTACHMENT D


Page 7

managers’ compliance with their investment guidelines or work with staff and the custodian to enroll in an automated guideline compliance system. In any case, monitoring procedures should be documented in writing. Implemented: PCA and Staff currently works together to monitor the investment managers’ compliance with the investment guidelines based on a monthly report provided by the Custodian.

ATTACHMENT D

Page 1 of 1


1. Subject: March 29, 2017 PFRS Investment Committee Meeting Minutes From: Staff of the PFRS Board

Recommendation: APPROVE March 29, 2017 Investment Committee meeting minutes.

2. Subject: Investment Market Overview From: Pension Consulting Alliance (PCA)

Recommendation: ACCEPT an Informational Report regarding overview of the global investment market through April 2017.

3. Subject: Investment Fund Performance Report for the Quarter Ending March 31, 2017

From: Pension Consulting Alliance

Recommendation: APPROVE the Investment Fund Performance Report for the Quarter Ending March 31, 2017.

4. Subject: Discussion and adoption the revised asset allocation policy implementation schedule


Recommendation: RECOMMEND BOARD APPROVAL of PCA recommendation regarding discussion and adoption the revised asset allocation policy implementation schedule.

5. Subject: Watch Status Update – Reams Asset Management From: Pension Consulting Alliance

Recommendation: RECOMMEND BOARD APPROVAL of PCA recommendation regarding watch status for Reams Asset Management.

6. Open Forum

7. Future Scheduling



INVESTMENT COMMITTEE MEMBERS

Jaime T. Godfrey Chairman

R. Steve Wilkinson Member

Steven J. Bernard Member

*In the event a quorum of the Board participates in the Committee meeting, the meeting is noticed as a Special Meeting of the Board; however, no final Board action can be taken. In the event that the Investment Committee does not reach quorum, this meeting is noticed as an informational meeting between staff and the Chair of the Investment Committee.



SPECIAL MEETING of the INVESTMENT AND FINANCIAL MATTERS COMMITTEE of the OAKLAND POLICE AND FIRE RETIREMENT SYSTEM (“PFRS”)

AGENDA

PFRS Investment & Financial Matters Committee Minutes March 29, 2017

Page 1 of 2

D R A F T

D R A F T

A SPECIAL INVESTMENT AND FINANCIAL MATTERS COMMITTEE MEETING of the Oakland Police and Fire Retirement System (“PFRS”) was held March 29, 2017 in Hearing Room 3, One Frank Ogawa Plaza, Oakland, California.

Committee Members Present: • Steven Wilkinson, Member • Steven J. Bernard, Member

Committee Members Absent: • Jaime T. Godfrey, Chairman

Additional Attendees: • Pelayo Llamas, Deputy City Attorney / PFRS Legal Counsel • David Low & Teir Jenkins, Staff Member • David Sancewich and Sean Copus, Pension Consulting Alliance (PCA)

• Jack O’Connor and John Sherman, DDJ Capital Management, LLC

Chairman Godfrey was absent from the Committee Meeting. Member Wilkinson acted as Chairman Pro Tem in Chairman Godfrey’s absence.

The meeting was called to order at 10:24 AM.

1. Approval of Investment Committee meeting minutes – Member Bernard made a motion to approve the February 22, 2017 investment committee meeting minutes, second by Chairman Pro Tem Wilkinson. Motion passed.

[ GODFREY – ABSENT / WILKINSON – Y / BERNARD – Y ] ( AYES: 2 / NOES: 0 / ABSTAIN: 0 )

2. Investment Manager Performance Report–DDJ Capital Management, LLC – Jack O’Connor and John Sherman from DDJ Capital Management, LLC, a domestic fixed income asset manager, presented a review of the PFRS investment portfolio managed by their firm. PFRS investment Officer Teir Jenkins reported that the PFRS Investment Assets with this firm are in high yield, commingled investment funds and, therefore, are not subject to PFRS Local Broker restrictions for fund trading. Following the presentation and some discussion between the Committee and the investment manager, Member Bernard made a motion to accept the informational report from DDJ Capital Management, LLC, second by Chairman Pro Tem Wilkinson. Motion passed.


3. Investment Manager Overview – DDJ Capital Management – Sean Copus from Pension Consulting Alliance, presented an overview of DDJ investment performance and management notes of their firm. Mr. Copus reported that DDJ had been on Watch Status due to management changes since May 2016 and would be presenting a report at the April 2017 meeting to follow-up on this matter. After some board discussion, member Bernard made a motion to accept the informational report from PCA, second by Chairman Pro Tem Wilkinson. Motion passed.


4. $15.0 million 2nd Quarter 2017 Member Benefits Drawdown – Mr. Copus presented the details of the $15.0 million 2nd Quarter 2017 Member Benefits Drawdown. Member Bernard made motion to recommend Board approval of the $15.0 million 2nd Quarter 2017 Member Benefits Drawdown, second by Chairman Pro Tem Wilkinson. Motion passed.


5. Investment Market Overview – David Sancewich reported on the global economic factors affecting the PFRS Fund. Member Bernard made a motion accept the Informational Report from PCA, second by Chairman Pro Tem Wilkinson. Motion passed.

[ GODFREY – ABSENT / WILKINSON – Y / BERNARD – Y ]

PFRS Investment & Financial Matters Committee Minutes March 29, 2017

Page 2 of 2

D R A F T

D R A F T

( AYES: 2 / NOES: 0 / ABSTAIN: 0 )

6. PFRS Fund Asset-Liability Study – Mr. Sancewich reported that he was instructed by the PFRS Board at its February 22, 2017 meeting to present his asset-liability report and three (3) recommendations for a new asset allocation strategy at this meeting. Mr. Sancewich presented the details of his individual Asset Allocation recommendations for the Investment Committee. Following committee discussion, Member Bernard made a motion to recommend board approval of the recommendation by PCA for an new asset allocation plan for the PFRS fund, second by Chairman Pro Tem Wilkinson. Motion passed.


7. Resolution No. 6957 - Resolution modifying the Agreement with EARNEST Partners, LLC – The committee and staff discussed the expiration of the second of three approved one-year service agreement extensions between EARNEST Partners and PFRS. Teir Jenkins, PFRS Investment Officer, and Pelayo Llamas, PFRS Legal Counsel, explained the planned action revise the Service Agreements with PFRS investment managers to amend the TERMINATION section of the service agreements to create unlimited one-year extension options in the City’s favor. Mr. Jenkins said this revision would still permit the PFRS board full power to terminate the service agreement with cause while causing an annual service review to be initiated as the extension expires every year. Mr. Sancewich added that the Board requested PCA to review the investment manager fees prior to the approval of the service contract renewals and report any concerns, which he had none. Following Committee discussion regarding exercising a one-year extension to this service agreement, Member Bernard made a motion to recommend board approval of Resolution No. 6957, second by Chairman Pro Tem Wilkinson. Motion passed.


8. Resolution No. 6958 - Resolution exercising a one-year option to extend the Agreement with Fisher Investment – Member Bernard made a motion to recommend board approval of Resolution No. 6958, exercising a one-year extension to this service agreement, second by Chairman Pro Tem Wilkinson. Motion passed.


9. Resolution No. 6959 - Resolution modifying the Agreement with Northern Trust Investments, N.A. – Member Bernard made a motion to recommend board approval of Resolution No. 6959, exercising a one-year extension to this service agreement, second by Chairman Pro Tem Wilkinson. Motion passed.


10. Open Forum – No Report

11. Future Scheduling – The next investment committee meeting was scheduled for April 26, 2017.

The meeting adjourned at 11:13 AM

JAIME T. GODFREY, COMMITTEE CHAIRMAN DATE

May 2017

PCA INVESTMENT MARKET RISK METRICS

Monthly Report

PENSION CONSULTING ALLIANCE, LLC.• Investment Market Risk Metrics 2

• Equity volatility measure (VIX) is at its lowest levels since the global financial crisis

indicating complacency.

• U.S. public equity valuations (based on normalized price/earnings ratios, page 5)

remain at levels only surpassed in the late 1990’s tech bubble and 1929.

• Non-U.S. developed and emerging market equity valuations remain historically

cheap relative to their own histories, and relative to U.S. levels, even after recent

rallies.

• Credit spreads remain tight (risk seeking) in both investment grade and high yield

markets, and are tightening further.

• With the 10-year Treasury interest rate recently moving up, spreads between the cap

rate on core real estate and the 10-year Treasury rate (a measure of valuation),

tightened to levels not seen since before the global financial crisis (expensive).

• The yield curve flattened (short term rates increased and long term rates stayed the

same or fell, page 9) in anticipation of further rate increases by the Federal Reserve.

• Inflation indicators remain well behaved, as U.S. dollar strength has kept commodity

prices at decade lows. (page 10) Breakeven inflation levels remain stable, recently

moving down below 2% again.

• PCA’s sentiment indicator (page 4) remains positive. The sentiment indicator remains

solidly green.

Takeaways

1See Appendix for the rationale for selection and calculation methodology used for the risk metrics.

Monthly Report - May 2017

Risk Overview

US Equity(page 5)

Dev ex‐USEquity(page 5)

EM EquityRelative toDM Equity(page 6)

PrivateEquity(page 6)

PrivateRealEstate

Cap Rate(page 7)

PrivateRealEstateSpread(page 7)

US IG CorpDebtSpread(page 8)

US HighYield DebtSpread(page 8)

Valuation Metrics versus Historical Range A Measure of Risk

Top Decile

Bottom Decile

Average

UnfavorablePricing

Favorable Pricing

Neutral

Equity Volatility(page 9)

Yield Curve Slope(page 9)

Breakeven Inflation(page 10)

Interest Rate Risk(page 11)

Other Important Metrics within their Historical RangesPay Attention to Extreme Readings

Top Decile

Bottom Decile

Average

Attention!

Attention!

Neutral

PENSION CONSULTING ALLIANCE, LLC. • Investment Market Risk Metrics 3


Market Sentiment

Information Behind Current Sentiment Reading

Bond Spread Momentum Trailing‐Twelve Months Positive

Equity Return Momentum Trailing‐Twelve Months Positive

Agreement Between Bond Spread and Equity Spread Momentum Measures? Agree

Growth Risk Visibility (Current Overall Sentiment) Positive

PCA Market Sentiment Indicator (1995‐Present)

Avoid Growth Risk Growth Risk Neutral Embrace Growth Risk PCA Sentiment Indicator

Positive

Negative

Neutral

Positive

Neutral

Negative

PCA Market Sentiment Indicator ‐ Most Recent 3‐Year Period


Positive

Negative

Neutral

Positive

Neutral

Negative



Developed Public Equity Markets

(Please note the difference in time scales)

(Please note the different time scales)

0

5

10

15

20

25

30

35

40

45

P/E Ratio

Developed ex‐US Equity Market P/E Ratio1

versus Long‐Term Historical Average2

Long‐Term Average

Historical 2

P/E = 16.9x

Intl Developed Markets Current P/E as of 4/2017

= 15.5x

1 P/E ratio is a Shiller P/E‐10 based on 10 year real MSCI EAFE earnings over EAFE index level.

2 To calculate the LT historical average, from 1881 to 1982 U.S. data is used as developed market proxy. From 1982 to present, actual developed ex‐US market data (MSCI EAFE) is used.

Average 1982‐4/2017 EAFE

Only P/E = 23.4x

0

5

10

15

20

25

30

35

40

45

50

P/E Ratio

U.S. Equity Market P/E Ratio1

versus Long‐Term Historical Average

1966

2000

19811921

1929

US MarketsLong‐term Average

(since 1880) P/E = 16.7x

US Markets Current P/E

as of 4/2017= 29.4x

1 P/E ratio is a Shiller P/E‐10 based on 10 year real S&P 500 earnings over S&P 500 index level.

2009

1901

PENSION CONSULTING ALLIANCE, LLC. • Investment Market Risk Metrics5


Emerging Market Public Equity Markets

US Private Equity Quarterly Data, Updated to Mar. 31st.

0%

25%

50%

75%

100%

125%

150%

175%

200%

225%

250%

275%

Emerging Markets PE / Developed Markets PE(100% = Parity between PE Ratios)

EM/DM PE Average EM/DM PE ParitySource: Bloomberg, MSCI World, MSCI EMF

Asian Crisis

Technology and Telecom Crash

Commodityprice runup

WorldFinancial Crisis

EM/DM relative PEratio is slightly below thehistorical average

Russian Crisis, LTCM implosion, currency devaluations

5.00

6.00

7.00

8.00

9.00

10.00

11.00

Price to EBITDA Multiples Paid in LBOs

(Updated to Mar. 31st)

Source: S&P LCD study

0

50

100

150

200

250

Billions ($)

Disclosed U.S. Quarterly Deal Volume*

Source: Thomson Reuters Buyouts* quarterly total deal size (both equity and debt)

Deal volumefell over the first quarter.

Multiples have risen above pre‐crisis highs.

Mexican Peso Crisis

Average since 1997.

PENSION CONSULTING ALLIANCE, LLC. • Investment Market Risk Metrics

6


Private Real Estate Markets Quarterly Data, Updated to Mar. 31st.

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%

10.0%

Cap

Rat

e

Core Real Estate Current Value Cap Rates1

Core Cap RateLT Average Cap Rate10 Year Treasury Rate

Sources: NCRIEF, www.ustreas.gov 1A cap rate is the current annual income of the property divided by an estimate of the current value of the property . It is the current yield of the property. Low cap rates indicate high valuations.

Core real estate cap rates remain low by historical standards (expensive).

0.00%

5.00%

10.00%

15.00%

20.00%

Transactions as a % of Market Value Trailing‐Four Quarters (a measure of property turnover activity)

Source: NCREIF, PCA calculation

Activity has slowly been increasing since Q4 2014.

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

Cap

Rat

e S

pre

ad

Core Cap Rate Spread over 10‐Year Treasury Interest Rate

Core Cap Rate Spread to Treasuries

LT Average Spread

Spread to the 10‐year Treasury was unchanged during the first quarter.

PENSION CONSULTING ALLIANCE, LLC. • Investment Market Risk Metrics

7


Credit Markets US Fixed Income

0

100

200

300

400

500

600

700

Spread

Over Treasuries (basis points)

Investment Grade Corporate Bond Spreads

InvestmentGradeSpreadBonds

AverageSpreadsince 1994(IG Bonds)

Source: LehmanLive: Barclays Capital US Corporate Investment Grade Index Intermediate Component.

Investment grade spreads narrowed during April, ending the month below the long‐term average level.

0

200

400

600

800

1000

1200

1400

1600

1800

2000

Spread

Over Treasuries (basis points)

High Yield Corporate Bond Spreads

High YieldBondSpreads

Averagespreadsince 1994(HY Bonds)

Source: LehmanLive: Barclays Capital U.S. Corporate High Yield Index.

Likewise, high yield spreads ticked down in April and still remain well below the long‐term average level.



Other Market Metrics

0

10

20

30

40

50

60

70

80

VIX ‐ a measure of equity market fear / uncertainty

Source: http://www.cboe.com/micro/vix/historical.aspx

Equity market volatility (VIX) slightly decreased inApril and ended the month meaningfully below the long‐term average level (≈ 20) at 10.8.

‐3.0

‐2.0

‐1.0

0.0

1.0

2.0

3.0

4.0

5.0

Yield Curve Slope

Source: www.ustreas.gov (10 yr treasury yield minus 1 year treasury yield)

Yield curve slopes that are negative (inverted)

The average 10‐year Treasury interest rate decreased in April. The average one‐year Treasury interest rate increased during the month. The slope decreased for the month, and the yield curve remains upward sloping.



Measures of Inflation Expectations

(Please note the different time scales)

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

10‐Year Breakeven Inflation(10‐year nominal Treasury yield minus 10‐year TIPS yield)

Source: www.ustreas.gov

Breakeven inflation ended April at 1.92%, staying approximately the same from the end of March. The 10‐year TIPS real‐yield decreased to 0.37%, and the nominal 10‐year Treasury yield ticked down to 2.29%.

0

20

40

60

80

100

120

140

160

Inflation Adjusted Dow Jones UBS Commodity Price Index (1991 = 100)

Broad commodity prices ticked down in April but continue to remain above the historical lows set in early 2016.

Source: Bloomberg Commodity Index, St. Louis Fed for US CPI all urban consumers.



Measures of U.S. Treasury Interest Rate Risk

‐2.0

0.0

2.0

4.0

6.0

8.0

10.0

Expected Real Yield of 10‐Year Treasury

Estimate of 10‐Year Treasury Forward‐Looking Real Yield

Sources: www.ustreas.gov for 10‐year constant maturity rates*Federal Reserve Bank of Philadelphia survey of professional forecasts for inflation estimates

The forward‐looking annual real yield on 10‐year Treasuries is estimated at approximately 0.00% real, assuming 10‐yearannualized inflation of 2.30%* per year.

4.00

4.50

5.00

5.50

6.00

6.50

7.00

7.50

8.00

8.50

9.00

9.50

10‐Year Treasury Bond Duration

10‐Year Treasury Duration (Change in Treasury price with a change in interest rates)

Source: www.ustreas.gov for 10‐year constant maturity rates, calculation of duration

Lower Risk

Higher RiskInterest rate risk is slightly off all‐time highs.

If the 10‐year Treasury yield rises by 100 basis points from today's levels, the capital loss from the change in price is expected to be ‐8.8%.


PENSION CONSULTING ALLIANCE, LLC • Investment Market Risk Metrics

Appendix


Appendix

METRIC DESCRIPTION, RATIONALE FOR SELECTION AND CALCULATION METHODOLOGY

US Equity Markets:

Metric: P/E ratio = Price / “Normalized” earnings for the S&P 500 Index

To represent the price of US equity markets, we have chosen the S&P 500 index. This index has thelongest published history of price, is well known, and also has reliable, long-term, published quarterlyearnings. The price=P of the P/E ratio is the current price of the market index (the average daily price ofthe most recent full month for the S&P 500 index). Equity markets are very volatile. Prices fluctuatesignificantly during normal times and extremely during periods of market stress or euphoria. Therefore,developing a measure of earnings power (E) which is stable is vitally important, if the measure is toprovide insight. While equity prices can and do double, or get cut in half, real earnings power does notchange nearly as much. Therefore, we have selected a well known measure of real, stable earningspower developed by Yale Professor Robert Shiller known as the Shiller E-10. The calculation of E-10 issimply the average real annual earnings over the past 10 years. Over 10 years, the earnings shenanigansand boom and bust levels of earnings tend to even out (and often times get restated). Therefore, thisearnings statistic gives a reasonably stable, slow-to-change estimate of average real earnings power forthe index. Professor Shiller’s data and calculation of the E-10 are available on his website athttp://www.econ.yale.edu/~shiller/data.htm. We have used his data as the base for our calculations.Details of the theoretical justification behind the measure can be found in his book Irrational Exuberance[Princeton University Press 2000, Broadway Books 2001, 2nd ed., 2005].

Developed Equity Markets Excluding the US:

Metric: P/E ratio = Price / “Normalized” earnings for the MSCI EAFE Index

To represent the price of non-US developed equity markets, we have chosen the MSCI EAFE index. Thisindex has the longest published history of price for non-US developed equities. The price=P of the P/Eratio is the current price of the market index (the average daily price of the most recent full month for theMSCI EAFE index). The price level of this index is available starting in December 1969. Again, for thereasons described above, we elected to use the Shiller E-10 as our measure of earnings (E). Since12/1972, a monthly price earnings ratio is available from MSCI. Using this quoted ratio, we have backedout the implied trailing-twelve month earnings of the EAFE index for each month from 12/1972 to thepresent. These annualized earnings are then inflation adjusted using CPI-U to represent real earnings inUS dollar terms for each time period. The Shiller E-10 for the EAFE index (10 year average real earnings) iscalculated in the same manner as detailed above.

However, we do not believe that the pricing and earnings history of the EAFE markets are long enough tobe a reliable representation of pricing history for developed market equities outside of the US. Therefore,in constructing the Long-Term Average Historical P/E for developed ex-US equities for comparisonpurposes, we have elected to use the US equity market as a developed market proxy, from 1881 to 1982.This lowers the Long-Term Average Historical P/E considerably. We believe this methodology provides amore realistic historical comparison for a market with a relatively short history.

http://www.econ.yale.edu/~shiller/data.htm


Appendix


Emerging Market Equity Markets:

Metric: Ratio of Emerging Market P/E Ratio to Developed Market P/E Ratio

To represent the Emerging Markets P/E Ratio, we have chosen the MSCI Emerging Market Free Index, whichhas P/E data back to January 1995 on Bloomberg. To represent the Developed Markets PE Ratio, we havechosen the MSCI World Index, which also has data back to January 1995 on Bloomberg. Although thereare issues with published, single time period P/E ratios, in which the denominator effect can cause largemovements, we feel that the information contained in such movements will alert investors to market activitythat they will want to interpret.

US Private Equity Markets:

Metrics: S&P LCD Average EBITDA Multiples Paid in LBOs and US Quarterly Deal Volume

The Average Purchase Price to EBITDA multiples paid in LBOs is published quarterly by S&P in their LCD study.This is the total price paid (both equity and debt) over the trailing-twelve month EBITDA (earnings beforeinterest, taxes, depreciation and amortization) as calculated by S&P LCD. This is the relevant, high-levelpricing metric that private equity managers use in assessing deals. Data is published monthly.

US quarterly deal volume for private equity is the total deal volume in $ billions (both equity and debt)reported in the quarter by Thomson Reuters Buyouts. This metric gives a measure of the level of activity inthe market. Data is published quarterly.

U.S Private Real Estate Markets:

Metrics: US Cap Rates, Cap Rate Spreads, and Transactions as a % of Market Value

Real estate cap rates are a measure of the price paid in the market to acquire properties versus theirannualized income generation before financing costs (NOI=net operating income). The data, published byNCREIF, describes completed and leased properties (core) on an unleveraged basis. We chose to usecurrent value cap rates. These are capitalization rates from properties that were revalued during thequarter. This data relies on estimates of value and therefore tends to be lagging (estimated prices areslower to rise and slower to fall than transaction prices). The data is published quarterly.

Spreads between the cap rate (described above) and the 10-year nominal Treasury yield, indicate ameasure of the cost of properties versus a current measure of the cost of financing.

Transactions as a % of Market Value Trailing-Four Quarters is a measure of property turnover activity in theNCREIF Universe. This quarterly metric is a measure of activity in the market.

Credit Markets US Fixed Income:

Metric: Spreads

The absolute level of spreads over treasuries and spread trends (widening / narrowing) are good indicatorsof credit risk in the fixed income markets. Spreads incorporate estimates of future default, but can also bedriven by technical dislocations in the fixed income markets. Abnormally narrow spreads (relative tohistorical levels) indicate higher levels of valuation risk, wide spreads indicate lower levels of valuation riskand / or elevated default fears. Investment grade bond spreads are represented by the Barclays CapitalUS Corporate Investment Grade Index Intermediate Component. The high yield corporate bond spreadsare represented by the Barclays Capital US Corporate High Yield Index.


Appendix


Measure of Equity Market Fear / Uncertainty

Metric: VIX – Measure of implied option volatility for U.S. equity markets

The VIX is a key measure of near-term volatility conveyed by implied volatility of S&P 500 index optionprices. VIX increases with uncertainty and fear. Stocks and the VIX are negatively correlated. Volatilitytends to spike when equity markets fall.

Measure of Monetary Policy

Metric: Yield Curve Slope

We calculate the yield curve slope as the 10 year treasury yield minus the 1 year treasury yield. When theyield curve slope is zero or negative, this is a signal to pay attention. A negative yield curve slope signalslower rates in the future, caused by a contraction in economic activity. Recessions are typicallypreceded by an inverted (negatively sloped) yield curve. A very steep yield curve (2 or greater)indicates a large difference between shorter-term interest rates (the 1 year rate) and longer-term rates(the 10 year rate). This can signal expansion in economic activity in the future, or merely higher futureinterest rates.

Measures of US Inflation Expectations

Metrics: Breakeven Inflation and Inflation Adjusted Commodity Prices

Inflation is a very important indicator impacting all assets and financial instruments. Breakeven inflation iscalculated as the 10 year nominal treasury yield minus the 10 year real yield on US TIPS (treasury inflationprotected securities). Abnormally low long-term inflation expectations are indicative of deflationary fears.A rapid rise in breakeven inflation indicates an acceleration in inflationary expectations as marketparticipants sell nominal treasuries and buy TIPs. If breakeven inflation continues to rise quarter overquarter, this is a signal of inflationary worries rising, which may cause Fed action and / or dollar decline.

Commodity price movement (above the rate of inflation) is an indication of anticipated inflation causedby real global economic activity putting pressure on resource prices. We calculate this metric byadjusted in the Dow Jones UBS Commodity Index (formerly Dow Jones AIG Commodity Index) by US CPI-U.While rising commodity prices will not necessarily translate to higher US inflation, higher US inflation will likelyshow up in higher commodity prices, particularly if world economic activity is robust.

These two measures of anticipated inflation can, and often are, conflicting.

Measures of US Treasury Bond Interest Rate Risk

Metrics: 10-Year Treasury Forward-Looking Real Yield and 10-Year Treasury Duration

The expected annualized real yield of the 10 year U.S. Treasury Bond is a measure of valuation risk for U.S.Treasuries. A low real yield means investors will accept a low rate of expected return for the certainly ofreceiving their nominal cash flows. PCA estimates the expected annualized real yield by subtracting anestimate of expected 10 year inflation (produced by the Survey of Professional Forecasters as collectedby the Federal Reserve Bank of Philadelphia), from the 10 year Treasury constant maturity interest rate.

Duration for the 10-Year Treasury Bond is calculated based on the current yield and a price of 100. This is ameasure of expected percentage movements in the price of the bond based on small movements inpercentage yield. We make no attempt to account for convexity.

Definition of “extreme” metric readings

A metric reading is defined as “extreme” if the metric reading is in the top or bottom decile of its historicalreadings. These “extreme” reading should cause the reader to pay attention. These metrics havereverted toward their mean values in the past.

PCA Market Sentiment Indicator

Explanation, Construction and Q&A

© 2012 Pension Consulting Alliance, LLC. Reproduction of all or any part of this report is permissible ifreproduction contains notice of Pension Consulting Alliance’s copyright as follows: “Copyright © 2012by Pension Consulting Alliance, LLC.” Information is considered to be reliable but not guaranteed.This report is not intended to be an offer, solicitation, or recommendation to purchase any security ora recommendation of the services supplied by any money management organization unlessotherwise noted.

By:

Pension Consulting Alliance, LLC.

John Linder, CFA, CPA

Neil Rue, CFA

PCA has created the PCA Market Sentiment Indicator (PMSI) tocomplement our valuation-focused PCA Investment Market RiskMetrics. This measure of sentiment is meant to capture significantand persistent shifts in long-lived market trends of economic growthrisk, either towards a risk-seeking trend or a risk-aversion trend.

This paper explores:

What is the PCA Market Sentiment Indicator (PMSI)? How do I read the indicator graph? How is the PCA Market Sentiment Indicator (PMSI) constructed? What do changes in the indicator mean?


PCA has created a market sentiment indicator for monthly publication (the PMSI – see below) tocomplement PCA’s Investment Market Risk Metrics.

PCA’s Investment Market Risk Metrics, which rely significantly on standard market measures ofrelative valuation, often provide valid early signals of increasing long-term risk levels in the globalinvestment markets. However, as is the case with numerous valuation measures, the Risk Metricsmay convey such risk concerns long before a market corrections take place. The PMSI helps toaddress this early-warning bias by measuring whether the markets are beginning to acknowledgekey Risk Metrics trends, and / or indicating non-valuation based concerns. Once the PMSIindicates that the market sentiment has shifted, it is our belief that investors should considersignificant action, particularly if confirmed by the Risk Metrics. Importantly, PCA believes the RiskMetrics and PMSI should always be used in conjunction with one another and never in isolation.The questions and answers below highlight and discuss the basic underpinnings of the PCA PMSI:

What is the PCA Market Sentiment Indicator (PMSI)?The PMSI is a measure meant to gauge the market’s sentiment regarding economic growth risk.Growth risk cuts across most financial assets, and is the largest risk exposure that most portfoliosbear. The PMSI takes into account the momentum (trend over time, positive or negative) of theeconomic growth risk exposure of publicly traded stocks and bonds, as a signal of the futuredirection of growth risk returns; either positive (risk seeking market sentiment), or negative (riskaverse market sentiment).

How do I read the PCA Market Sentiment Indicator (PMSI) graph?Simply put, the PMSI is a color coded indicator that signals the market’s sentiment regardingeconomic growth risk. It is read left to right chronologically. A green indicator on the PMSIindicates that the market’s sentiment towards growth risk is positive. A gray indicator indicates thatthe market’s sentiment towards growth risk is neutral or inconclusive. A red indicator indicates thatthe market’s sentiment towards growth risk is negative. The black line on the graph is the level ofthe PMSI. The degree of the signal above or below the neutral reading is an indication the signal’scurrent strength.

Momentum as we are defining it is the use of the past behavior of a series as a predictor of itsfuture behavior.

PCA Market Sentiment Indicator (1995 - Present)


Positive

Negative

Neutral

Positive

Neutral

Negative



How is the PCA Market Sentiment Indicator (PMSI) Constructed?

The PMSI is constructed from two sub-elements representing investor sentiment in stocks andbonds:

1. Stock return momentum: Return momentum for the S&P 500 Equity Index (trailing 12-months)2. Bond yield spread momentum: Momentum of bond yield spreads (excess of the measured

bond yield over the identical duration U.S. Treasury bond yield) for corporate bonds (trailing12-months) for both investment grade bonds (75% weight) and high yield bonds (25% weight).The scale of this measure is adjusted to match that of the stock return momentum measure.

The black line reading on the graph is calculated as the average of the stock return momentummeasure and the bonds spread momentum measure. The color reading on the graph isdetermined as follows:

1. If both stock return momentum and bond spread momentum are positive = GREEN (positive)2. If one of the momentum indicators is positive, and the other negative = GRAY (inconclusive)3. If both stock return momentum and bond spread momentum are negative = RED (negative)

What does the PCA Market Sentiment Indicator (PMSI) mean? Why might it be useful?

There is strong evidence that time series momentum is significant and persistent. In particular,across an extensive array of asset classes, the sign of the trailing 12-month return (positive ornegative) is indicative of future returns (positive or negative) over the next 12 month period. ThePMSI is constructed to measure this momentum in stocks and corporate bond spreads. A readingof green or red is agreement of both the equity and bond measures, indicating that it is likely thatthis trend (positive or negative) will continue over the next 12 months. When the measuresdisagree, the indicator turns gray. A gray reading does not necessarily mean a new trend isoccurring, as the indicator may move back to green, or into the red from there. The level of thereading (black line) and the number of months at the red or green reading, gives the useradditional information on which to form an opinion, and potentially take action.

I Momentum as we are defining it is the use of the past behavior of a series as a predictor of its future behavior.

ii “Time Series Momentum” Moskowitz, Ooi, Pedersen, August 2010

http://pages.stern.nyu.edu/~lpederse/papers/TimeSeriesMomentum.pdf


Oakland Police and Fire Retirement

System

Quarterly Report

This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from

Pension Consulting Alliance, LLC.

Nothing herein is intended to serve as investment advice, a recommendation of any particular investment or type of investment, a suggestion of purchasing or selling securities, or an invi-

tation or inducement to engage in investment activity.

Q1 2017

TABLE OF CONTENTS

Tab

A

Section

TOTAL PORTFOLIO SUMMARY

B INVESTMENT MARKET RISK METRICS

C ECONOMIC OVERVIEW

D TOTAL PORTFOLIO REVIEW

E MANAGER MONITORING / PROBATION LIST

F INDIVIDUAL MANAGER PERFORMANCE

Appendix

1

TOTAL PORTFOLIO SUMMARY

As of March 31, 2017, the City of Oakland Police and Fire Retirement System (OPFRS) portfolio had an aggregate value of $357.7 million.

This represents a $2.1 million increase in value, which includes ($15) million in benefit payments, over the quarter. During the previous

one-year period, the OPFRS Total Portfolio decreased by ($9.9) million, including ($60) million in withdrawals during the period.

Asset Allocation Trends

The asset allocation targets (see table on page 20) reflect those as of March 31, 2017. Target weightings reflect the Plan’s evolving

asset allocation (effective 3/31/2014).

With respect to policy targets, the portfolio ended the latest quarter overweight International Equity, Covered Calls, and Cash, while

underweight Fixed Income. Domestic Equity allocation currently matches its target allocation.

Recent Investment Performance

During the most recent quarter, the OPFRS Total Portfolio generated an absolute return of 5.0%, gross of fees, outperforming its policy

benchmark. The portfolio outperformed its benchmark by 1.2% over the 1-year period, underperformed by (0.5%) over the 3-year

period, and outperformed by 0.4% over the 5-year period.

The Total Portfolio outperformed the Median fund’s return over the most recent quarter, Fiscal YTD, 1-, and 3-year periods while trailing

the Median fund over the 5-year period. Performance differences with respect to the Median Fund continue to be attributed largely to

differences in asset allocation.

Quarter Fiscal YTD 1 Year 3 Year 5 Year

Total Portfolio1 5.0 11.7 14.3 6.2 7.4

Policy Benchmark2 4.7 10.5 13.1 6.7 7.0

Excess Return 0.3 1.2 1.2 (0.5) 0.4

Reference: Median Fund3 4.4 8.8 11.0 5.6 7.8

Reference: Total Net of Fees4 4.9 11.3 13.9 5.8 7.0

1 Gross of Fees. Performance since 2005 includes securities lending. 2 Evolving Policy Benchmark consists of 48% Russell 3000, 12% MSCI ACWI ex U.S., 20% Bbg BC Universal, and 20% CBOE BXM 3 Investment Metrics < $1 Billion Public Plan Universe. 4 Net of fee returns are estimated based on OPFRS manager fee schedule (approximately 42 bps).

2

Investment Market Risk Metrics

Takeaways

• U.S. public equity valuations (based on normalized price/earnings ratios) remain at levels only surpassed in the

late 1990’s tech bubble.

• Non-U.S. developed and emerging market equity valuations remain historically cheap relative to their own

histories and relative to U.S. levels.

• Credit spreads remain tight (risk seeking) in both investment grade and high yield markets.

• With the 10-year Treasury interest rate moving up to 2.4%, spreads between the cap rate on core real estate

and the 10-year Treasury rate (a measure of valuation) tightened to levels not seen since before the global

financial crisis (expensive).

• The yield curve flattened (short term rates increased and long term rates stayed the same or fell) in

anticipation of further rate increases by the Federal Reserve.

• Inflation indicators remain well behaved, as U.S. dollar strength has kept commodity prices at decade lows.

Breakeven inflation levels remain stable.

• Equity volatility levels remain near bottom decile levels.

• PCA’s sentiment indicator remains positive. The sentiment indicator remains solidly green.

* See Appendix for the rationale for selection and calculation methodology used for the risk metrics.

3

US Equity(Ex. 1)

Dev ex‐USEquity

(Ex. 2)

EM EquityRelative to

DM Equity(Ex. 3)

Private Equity(Ex. 4, 5)

PrivateReal Estate

Cap Rate(Ex. 6)

PrivateReal Estate

Spread(Ex. 7)

US IG CorpDebt Spread

(Ex. 9)

US High YieldDebt Spread

(Ex. 10)

Valuation Metrics versus Historical Range A Measure of Risk

Top Decile

Bottom Decile

Average

UnfavorablePricing

Favorable Pricing

Neutral

Equity Volatility

(Ex. 11)

Yield Curve Slope

(Ex. 12)

Breakeven Inflation

(Ex. 13, 14)

Interest Rate Risk

(Ex. 15, 16)

Other Important Metrics within their Historical RangesPay Attention to Extreme Readings

Top Decile

Bottom Decile

Average

Attention!

Attention!

Neutral

4

Information Behind Current Sentiment Reading

Bond Spread Momentum Trail ing‐Twelve Months Positive

Equity Return Momentum Trail ing‐Twelve Months Positive Positive

Agreement Between Bond and Equity Momentum Measures? Agree

Growth Risk Visibility

(Current Overall Sentiment)

5

(Please note different time scales)

05

101520253035404550

P/E Ratio

U.S. Equity Market P/E Ratio1

versus Long‐Term Historical Average

1966

2000

1981

1929

US Markets

Long‐term Average (since 1880)

P/E = 16.7x

US Markets Current P/E as of

3/2017 =29.1x

1 P/E ratio is a Shiller P/E‐10 based on 10 year real S&P 500 earnings over S&P 500 index level.

2009

1901

1921

Exhibit 1

05

1015202530354045

P/E Ratio

Developed ex‐U.S. Equity Market P/E Ratio1

versus Long‐Term Historical Average2

Long‐term Average Historical 2

P/E = 16.9x

Intl Developed Markets Current P/E

as of 3/2017 = 15.0x

1 P/E ratio is a Shiller P/E‐10 based on 10 year real MSCI EAFE earnings over EAFE index level.

2 To calculate the LT historical average, from 1881 to 1982 U.S. data is used as developed market proxy. From 1982 to present, actual developed ex‐US market data (MSCI EAFE) is used.

Average 1982‐

3/2017 EAFE Only P/E = 23.4x

Exhibit 2

Developed Public Equity Markets

6

0%

25%

50%

75%

100%

125%

150%

175%

200%

225%

250%

275%

Emerging Markets PE / Developed Markets PE(100% = Parity between PE Ratios)

EM/DM PE Average EM/DM PE Parity

Exhibit 3

Source: Bloomberg, MSCIWorld, MSCI EMF

Asian crisis

Russian crisis , LTCM implosion, currency devaluations

Technology and telecom crash

Commodityprice run‐up

World financial crisis

Mexican Peso crisis

EM/DM relative PE ratio is slightly below the historical average

Emerging Markets Public Equity Markets

7

U.S. Private Equity Markets

8

0.0%

5.0%

10.0%

15.0%

20.0%

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Transactions as a % of Market Value Trailing‐Four Quarters

Source: NCREIF, PCA calculation

Exhibit 8

Activity has been slowly increasing since Q4 2014.

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Cap

Rat

e S

prea

d

Core Cap Rate Spread over 10‐Year Treasury Interest Rate

Core Cap Rate Spread to Treasuries

LT Average Spread

Spread to the 10‐year Treasury was unchanged during the first quarter.

Exhibit 7

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Cap

Rat

es

Current Value Cap Rates1Core Cap Rate

LT Average Cap Rate

10 Year Treasury Rate

1A cap rate is the current annual income of the property divided by an estimate of the current value of the property. It is the current yield of the property. dLow cap rates indicate high valuations.

Exhibit 6

Source: NCRIEF

Core real estate cap rates remain low by historical standards (expensive).

Exhibit 6

Quarterly Data, Updated to Mar. 31st

Private Real Estate Markets

9

0

100

200

300

400

500

600

700

Spread

Ove

r Treasuries (basis points)

Investment Grade Corporate Bond Spreads

Investment GradeBond Spreads

Average spread since1994 (IG Bonds)

Source: LehmanLive: Barclays Capital US Corporate Investment Grade Index IntermediateComponent.

Investment grade spreads narrowed during the quarter and remain marginally below the long‐term average level.

Exhibit 9

0

200

400

600

800

1000

1200

1400

1600

1800

Spread

Ove

r Treasuries (basis points)

High Yield Corporate Bond Spreads

High Yield BondSpreads

Average spread since1994 (HY Bonds)

Source: LehmanLive: Barclays Capital U.S. Corporate High Yield Index.

Likewise, high yield spreads decreased in the first quarter and remain below the long‐term average level.

Exhibit 10

Credit Markets U.S. Fixed Income

10

‐3.0

‐2.0

‐1.0

0.0

1.0

2.0

3.0

4.0

5.0Yield Curve Slope

Source: www.ustreas.gov (10‐yeartreasury yield minus 1‐year treasury yield)Recession Dating: NBER http://www.nber.org/cycles.html

Yield curve slopes that are negative(inverted) portend a recession.

The average 10‐year Treasury interest rate saw little change during the quarter. The average one y ear Treasury interest rate increased over the quarter. The slope decreased for the quarter, and the yield curve remains upward sloping.

Exhibit 12

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

VIX ‐ a measure of equity market fear / uncertainty

Source: http://www.cboe.com/micro/vix/historical.aspx

Exhibit 11

Equity market volatil ity (VIX) ticked down in March and remained meaningfully below the long‐term average level (≈ 20) at 12.4.

Other Market Metrics

11

(Please note different time scales)

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

10‐Year Breakeven Inflation(10‐year nominal Treasury yield minus 10‐year TIPS yield)

Source: www.ustreas.gov

Breakeven inflation ended March at 1.97%, di rectly in‐line with

the end of December. The 10‐year TIPS real‐yield ticked down to

0.43%, and the nominal 10‐year Treasury yield decreased to 2.40%.

Exhibit 13

0

20

40

60

80

100

120

140

160

Inflation Adjusted BloombergCommodity Price Index (1991 = 100)

Broad commodity prices ticked down in the first quarter but continue to

remain above the historical lows set in early 2016.

Source: Bloomberg Commodity Index, St. Louis Fed for US CPI a ll urban consumers.

Exhibit 14

Measures of Inflation Expectations

12

‐2.0

0.0

2.0

4.0

6.0

8.0

10.0

Expected Real Yield of 10‐Year Treasury

Estimate of 10‐Year Treasury Forward‐Looking Real Yield

Sources: www.ustreas.gov for 10‐year constant maturity rates*Federal Reserve Bank of Philadelphia survey of professional forecasts for inflation estimates

Exhibit 15

The forward‐looking annual real yield on 10‐year Treasuries is es timated at approximately 0.18% rea l, assuming 10‐year annualized inflation of 2.30%* per year.

Average since 1981.

4.004.505.005.506.006.507.007.508.008.509.009.50

10‐Year Treasury Bond Duration

10‐Year Treasury Duration (Change in Treasury price with a change in interest rates)

Source: www.ustreas.gov for 10‐year constant maturity rates, calculation of duration

Lower Risk

Higher RiskInterest rate risk is sti ll near all‐time highs.

Exhibit 16

If the 10‐year Treasury yield rises by 100 basispoints from today's levels, the capital loss fromthe change in price is expected to be ‐8.8%.

Measures of U.S. Treasury Interest Rate Risk

13

ECONOMIC & MARKET OVERVIEW – 1Q 2017

Overview: US GDP growth increased by 0.7% in the first quarter of 2017. GDP growth during the quarter was driven mostly by increases in business investment,

exports, housing investment, and consumer spending. The unemployment rate remained at 4.7% in the first quarter. The seasonally adjusted Consumer Price

Index for All Urban Consumers increased by 1.2% on an annualized basis during the quarter. Commodities decreased during the first quarter, but are still

positive over the trailing 1-year period at 11.7%. Global equity returns were positive for the quarter at 7.0% (MSCI ACWI). The US dollar depreciated against

the Euro, Pound, and Yen. Bond markets produced positive returns over the quarter as the BC Universal increased by 1.1%.

Economic Growth

Real GDP increased at an annualized rate of 0.7 percent in the first quarter of

2017.

Real GDP growth was driven by increases in business investment, exports, housing

investment, and consumer spending.

GDP growth gains were partially offset during the quarter by declines in private

inventory investment, state and local government spending, and federal

government spending. Also, imports, which detract from GDP, increased over the

quarter.

Inflation

The Consumer Price Index for All Urban Consumers (CPI-U) increased 1.2 percent

in the quarter on an annualized basis after seasonal adjustment.

Quarterly percentage changes may be adjusted between data publications due

to periodic updates in seasonal factors.

Core CPI-U increased by 1.2 percent for the quarter on an annualized basis after

seasonal adjustment.

Over the last 12 months, core CPI-U increased 1.9 percent after seasonal

adjustment.

Unemployment

The US economy gained approximately 533,000 jobs in the quarter.

The unemployment rate remained at 4.7% at quarter end.

The majority of jobs gained occurred in private service providing, goods

producing, and professional and business services. The primary contributors to

jobs lost were in utilities, information, and retail trade.

0.7%

2.1%

3.5%

1.4%0.8%0.9%

-2.0%

0.0%

2.0%

4.0%

2017 Q12016 Q42016 Q32016 Q22016 Q12015 Q4

Annualized Quarterly GDP Growth

1.2%

3.4%

1.8%

3.4%

-0.2%

0.9%

-2.0%

0.0%

2.0%

4.0%

2017 Q12016 Q42016 Q32016 Q22016 Q12015 Q4

CPI-U After Seasonal Adjustment

4.7%4.7%4.9%4.9%4.9%5.0%

4.0%

5.0%

6.0%

2017 Q12016 Q42016 Q32016 Q22016 Q12015 Q4

Unemployment Rate

14


Interest Rates & US Dollar

Treasury Yield Curve Changes

US Treasury yields were generally flat over the quarter.

The Federal Reserve has increased the federal funds rate to between 0.75

percent and 1.00 percent.

The US dollar depreciated against the Euro, Pound, and Yen by 1.3%, 1.7%, and

4.8%, respectively.

Source: US Treasury Department

Fixed Income US bonds were essentially flat over the quarter except for Credit and High Yield, returning 1.3% and 2.7%, respectively. Mortgages performed the worst at 0.5%.

Over the trailing 1-year period, High Yield materially outperformed all other sectors, producing a 16.4% return. Government trailed all other bond sectors with a return of

minus (1.3%) as rates generally rose over the period.

US Fixed Income Sector Performance

(BC Aggregate Index)

Sector Weight QTR 1 Year

Governments* 40.4% 0.8% -1.0%

Agencies 3.6% 1.1% 1.0%

Inv. Grade Credit 25.1% 1.3% 3.3%

MBS 28.5% 0.5% 0.2%

ABS 0.5% 0.5% 1.2%

CMBS 1.8% 0.9% 0.6%

0.0%

2.0%

4.0%

6.0%

3 m

o6 m

o1 yr

2 yr

3 yr

5 yr

7 yr

10 yr

20 yr

30 yr

12/30/2016 3/31/2017

0.8

%

0.4

%

0.7

%

-1.3

%

1.3

%

3.0

%

0.5

%

0.2

%2.7

%

16

.4%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

QTR 1-Year

Fixed Income Returns

BC Agg BC Govt* BC Credit BC Mortgage BC High Yield

*US Treasuries and Government Related *US Treasuries and Agencies

15


US Equities

During the quarter, growth stocks dominated value stocks across the market cap spectrum. In terms of market capitalization, large cap stocks provided the strongest

returns across styles. Large cap growth stocks returned this quarter’s strongest return at 8.9%, and small cap value provided the weakest result at minus (0.1%).

During the trailing 1-year period, US equities provided positive double-digit returns, with the top performer, small cap value, returning 29.4%. Conversely, large cap growth

trailed all other market caps and styles with a return of 15.8%.

0.4%

US Equity Sector Performance

(Russell 3000 Index)


Financial Services 21.1% 12.7% 14.8%

Technology 18.0% 8.9% -3.3%

Consumer Disc. 14.0% 7.6% 6.8%

Health Care 13.3% 5.9% 5.8%

Producer Durables 11.0% -6.8% 26.3%

Consumer Staples 7.5% 6.0% 23.1%

Energy 6.1% 4.0% 20.1%

Utilities 5.3% 3.0% 18.0%

Materials & Proc. 3.9% 2.0% 20.5%

International Equities International equities performed well over the quarter as each region provided positive returns. The best performer was Emerging Markets, with a return of 11.5%. The

Pacific narrowly trailed all other regions with a return of 7.0%.

Over the trailing 1-year period, international equities provided double digit returns across the board. Emerging Markets led all other regions with a return of 17.7%, while

Europe underperformed all other regions with a 10.5% return.

International Equity Region Performance (in USD)

(MSCI ACW Index ex US)


Europe Ex. UK 31.8% 8.6% 11.7%

Emerging Markets 23.5% 11.5% 17.7%

Japan 16.4% 4.6% 14.8%

United Kingdom 12.5% 5.1% 7.5%

Pacific Ex. Japan 8.9% 11.8% 18.5%

Canada 6.9% 2.7% 15.6%

8.0

% 13

.7%

7.4

% 12

.2%

7.6

% 10

.5%

7.0

%

16

.1%

11

.5% 1

7.7

%

-10%

-5%

0%

5%

10%

15%

20%

QTR 1‐Year

International Equity Returns (in USD)

MSCI ACW Ex U.S. MSCI EAFE MSCI Europe MSCI Pacific MSCI EM

5.7

%

18

.1%

8.6

% 16

.3%

3.0

%

20

.0%

6.0

%

17

.4%

8.9

% 15

.8%

3.3

%

19

.2%

2.5

%

26

.2%

5.3

%

23

.0%

-0.1

%

29

.4%

-10%-5%0%5%

10%15%20%25%30%35%

QTR 1‐Year

U.S. Equity Returns

R3000 (Broad Core) R3000G (Broad Gr) R3000V (Broad Val)R1000 (Lg Core) R1000G (Lg Gr) R1000V (Lg Val)R2000 (Sm Core) R2000G (Sm Gr) R2000V (Sm Val)

16


* Performance is annualized for periods greater than one year.

Market Summary – Long-term Performance*

Indexes Month Quarter 1 Year 3 Years 5 Years 10 Years 20 Years

Global Equity

MSCI AC World Index 1.3% 7.0% 15.7% 5.7% 9.0% 4.6% 6.4%

Domestic Equity

S&P 500 0.1% 6.1% 17.2% 10.4% 13.3% 7.5% 7.9%

Russell 3000 0.1% 5.7% 18.1% 9.8% 13.2% 7.5% 8.1%

Russell 3000 Growth 1.2% 8.6% 16.3% 10.9% 13.2% 9.0% 7.3%

Russell 3000 Value -1.0% 3.0% 20.0% 8.6% 13.1% 5.9% 8.4%

Russell 1000 0.1% 6.0% 17.4% 10.0% 13.3% 7.6% 8.1%

Russell 1000 Growth 1.2% 8.9% 15.8% 11.3% 13.3% 9.1% 7.3%

Russell 1000 Value -1.0% 3.3% 19.2% 8.7% 13.1% 5.9% 8.4%

Russell 2000 0.1% 2.5% 26.2% 7.2% 12.4% 7.1% 8.7%

Russell 2000 Growth 1.2% 5.3% 23.0% 6.7% 12.1% 8.1% 7.2%

Russell 2000 Value -0.8% -0.1% 29.4% 7.6% 12.5% 6.1% 9.7%

Russell Microcap 0.9% 0.4% 27.8% 4.9% 12.4% 5.4% ---

CBOE BXM Index 0.4% 4.0% 12.2% 6.5% 7.0% 4.6% 6.8%

International Equity

MSCI AC World Index ex USA 2.6% 8.0% 13.7% 1.0% 4.8% 1.8% 5.4%

MSCI EAFE 2.9% 7.4% 12.2% 1.0% 6.3% 1.5% 5.0%

MSCI Pacific 4.1% 7.6% 10.5% -0.9% 6.3% 1.3% 5.9%

MSCI Europe 0.7% 7.0% 16.1% 4.9% 6.5% 2.1% 3.5%

MSCI EM (Emerging Markets) 2.5% 11.5% 17.7% 1.5% 1.2% 3.1% 5.9%

Fixed Income

BC Universal 0.0% 1.1% 1.9% 3.0% 2.8% 4.5% 5.6%

Global Agg. - Hedged 0.0% 0.4% 1.1% 3.6% 3.4% 4.3% 5.3%

BC Aggregate Bond -0.1% 0.8% 0.4% 2.7% 2.3% 4.3% 5.4%

BC Government 0.0% 0.7% -1.3% 2.0% 1.6% 3.8% 5.0%

BC Credit Bond -0.2% 1.3% 3.0% 3.5% 3.7% 5.3% 6.1%

BC Mortgage Backed Securities 0.0% 0.5% 0.2% 2.7% 2.0% 4.2% 5.2%

BC High Yield -0.2% 2.7% 16.4% 4.6% 6.8% 7.5% 7.1%

BC WGIL All Maturities - Hedged -0.1% 0.7% 6.6% 5.3% 3.4% 5.0% ---

Emerging Markets Debt 0.3% 3.3% 8.6% 5.4% 5.2% 6.8% 8.8%

Real Estate

NCREIF 0.6% 1.8% 8.3% 11.8% 12.0% 5.6% 9.3%

FTSE NAREIT All Equity Index -1.4% 3.0% 6.3% 10.5% 10.4% 4.8% 9.3%

Commodity Index

Bloomberg Commodity Index -2.7% -2.3% 8.7% -13.9% -9.5% -6.2% 0.2%

17

Asset Class Performance (gross of fees)

* Starting on 5/1/2016, Policy Benchmark consists of 48% Russell 3000, 12% MSCI ACWI ex U.S., 20% BC Universal, 20% CBOE BXM

** Domestic Equity Benchmark consists of S&P 500 thru 3/31/98, 10% R1000, 20% R1000V, 5% RMC from 4/1/98 - 12/31/04, and Russell 3000 from 1/1/05 to present

^ International Equity Benchmark consists of MSCI EAFE thru 12/31/04, and MSCI ACWI x US thereafter.

^^ Fixed Income Benchmark consists of Bbg BC Aggregate prior to 4/1/06, and Bbg BC Universal thereafter.

Total Plan (Gross) OPFRS Policy Benchmark

All Public Plans < $1B-Total Fund

0.0

5.0

10.0

15.0

20.0

Re

turn

1

Quarter

1

Year

3

Years

5

Years

7

Years

10

Years

4.4

11.0

5.67.8 8.1

5.74.7

13.1

6.7 7.0 7.75.05.0

14.3

6.2 7.4 8.25.4

1

Quarter

1

Year

OPFRS Total Plan

Beginning Market Value 355,573 367,540

Net Contributions -15,293 -57,608

Gain/Loss 17,404 47,753

Ending Market Value 357,684 357,684

1

Quarter

1

Year

3

Years

5

Years

7

Years

10

Years

OPFRS Total Plan 5.0 14.3 6.2 7.4 8.2 5.4

OPFRS Policy Benchmark* 4.7 13.1 6.7 7.0 7.7 5.0

Domestic Equity 6.0 18.9 9.4 13.1 13.2 7.7

Russell 3000 (Blend)** 5.7 18.1 9.8 13.2 12.9 7.5

International Equity 8.7 13.9 2.0 5.5 4.7 1.8

MSCI ACWI Ex US (Blend)^ 8.0 13.7 1.0 4.8 4.3 1.8

Fixed Income 0.9 2.9 3.2 2.8 4.1 4.8

Bloomberg Barclays Universal (Blend)^^ 1.1 1.9 3.0 2.8 3.9 4.5

Covered Calls 4.4 14.7 8.1 - - -

CBOE BXM 4.0 12.2 6.5 - - -

Cash 0.2 0.6 0.3 0.1 - -

Citigroup 3 Month T-Bill Index 0.1 0.3 0.1 0.1 - -

Performance and Market Values As of March 31, 2017

Investment Performance Portfolio Valuation (000's)Investment Performance

Oakland Police and Fire Retirement System 18

Trailing Period Perfomance (annualized)

12-month Performance- As of March 31, 2017

Total Plan (Gross of Fees) OPFRS Policy Benchmark All Public Plans < $1B-Total Fund

0.0

5.0

10.0

15.0

20.0

Re

turn

1

Quarter

1

Year

3

Years

5

Years

4.4

11.0

5.6

7.8

4.7

13.1

6.7 7.0

5.0

14.3

6.27.4

OPFRS Total Plan OPFRS Policy Benchmark All Public Plans < $1B-Total Fund

0.0

8.0

16.0

24.0

-8.0

Re

turn

2012 2013 2014 2015 2017

12.5

17.1

6.8

0.0

11.010.1

12.3

7.6

0.6

13.111.0

15.7

6.5

0.3

14.3

OPFRS Portfolio Relative Performance Results



Actual Asset Allocation Comparison

*Target weightings reflect the Plan’s evolving asset allocation (effective 3/31/2014).

Asset

Allocation

($000)

Asset

Allocation

(%)

Target

Allocation*

(%)

Variance

(%)

OPFRS Total Plan 357,684 100.0 100.0 0.0

Domestic Equity 171,826 48.0 48.0 0.0

International Equity 43,743 12.2 12.0 0.2

Total Fixed Income 63,776 17.8 20.0 -2.2

Covered Calls 74,660 20.9 20.0 0.9

Cash 3,678 1.0 0.0 1.0

March 31, 2017 : $357,634,701

Domestic Equity

48.0

Cash

1.0

Fixed Income

17.8

Covered Calls

20.9


12.2

December 31, 2016 : $355,525,830

Domestic Equity

48.8

Cash

0.9

Fixed Income

18.1

Covered Calls

20.1


12.1

Actual vs. Target Allocation



During the latest three-month period ending March 31, 2017, both of OPFRS's two active Domestic Equity managers outperformed their respective benchmarks.

All of OPFRS"s passive Domestic Equity mandates performed in-line with their respective benchmarks.

Northern Trust, the Plan’s passive large cap core transition account, continues to perform in-line with its benchmark over all time periods measured.

This performance is within expectations for a passive mandate.

SSgA Russell 1000 Value, the Plan’s passive large cap value account, has continued to perform within expectations for a passive mandate.

Manager - Style Mkt

Value

($000)

1

Quarter

1

Year

3

Years

5

Years

Since

Inception*

Inception

Date

Large Cap Core

Northern Trust Russell 1000 Index 69,221 6.0 17.2 10.0 13.2 14.4 06/2010

Russell 1000 Index 6.0 17.4 10.0 13.3 14.4

Excess Return 0.0 -0.2 0.0 -0.1 0.0

Large Cap Value

SSgA Russell 1000 Value Index 26,945 3.3 19.2 --- --- 7.8 11/2014

Russell 1000 Value Index 3.3 19.2 --- --- 7.7

Excess Return 0.0 0.0 --- --- 0.1

Large Cap Growth

SSgA Russell 1000 Growth Index 26,762 8.9 15.8 --- --- 10.0 11/2014

Russell 1000 Growth Index 8.9 15.8 --- --- 10.0

Excess Return 0.0 0.0 --- --- 0.0

Mid Cap Core

EARNEST Partners - Active 26,991 7.5 23.9 10.5 13.6 9.0 04/2006

Russell Midcap Index 5.1 17.0 8.5 13.1 8.3

Excess Return 2.4 6.9 2.0 0.5 0.7

Small Cap Value

NWQ - Active 11,947 2.0 22.1 8.7 15.4 7.9 02/2006

Russell 2000 Value Index -0.1 29.4 7.6 12.5 6.8

Excess Return 2.1 -7.3 1.1 2.9 1.1

Small Cap Growth

Russell 2000 Growth ETF 9,959 5.2 --- --- --- 11.9 08/2016

Russell 2000 Growth Index 5.3 --- --- --- 11.9

Excess Return -0.1 --- --- --- 0.0

Manager Performance - Gross of Fees


Domestic Equity




Domestic Equity

SSgA Russell 1000 Growth, the Plan’s passive large cap growth account, has continued to perform within expectations for a passive mandate.

EARNEST Partners, the Plan’s mid cap core manager, completed the quarter with an 7.5% return, outperforming the Russell Midcap Index by 2.4%.

Over the latest 1- and 3-year periods, Earnest outperformed its benchmark by 6.9% and 2.0%, respectively. Over the 5-year period, EARNEST

outperformed its benchmark by 50 basis points on an annualized basis.

NWQ, the Plan’s small cap value manager, outperformed the Russell 2000 Value Index by 2.1% over the latest quarter. Over the 1-year period,

NWQ underperformed its benchmark by (7.3%), but has outperformed over the 3- and 5-year periods by 1.1% and 2.9%, respectively.

Russell 2000 Growth ETF, the Russell 2000 Growth ETF continues to be used as a stand-in until OPFRS's new small cap growth manager, Rice Hall

James, is funded sometime during the upcoming quarter.


During the latest three-month period ending March 31, 2017, both of OPFRS's active International Equity managers outperformed their respective

benchmarks.

The SSgA account has performed roughly in-line with its benchmark over all time periods measured. This performance is within expectations for a

passive mandate.

Hansberger, one of OPFRS’ active international equity managers, outperformed the MSCI ACWI x US Index during the quarter by 2.2%. The portfolio

also outperformed the benchmark over the 1-, 3-, and 5-year periods by 2.6%, 1.9%, and 0.9%, respectively.

Fisher, one of OPFRS’ active international equity managers, outperformed the MSCI ACWI x US Index by 40 basis points during the quarter. Over the

latest 1-year period, Fisher trailed its benchmark target by (50) basis points, but outperformed over the 3- and 5-year periods by 1.2% and 0.3%,

respectively.

Manager - StyleMkt

Value

($000)

1

Quarter

1

Year

3

Years

5

Years

Since

Inception

Inception

Date

Active International

Fisher Investments 14,858 8.4 13.2 2.2 5.1 3.6 04/2011

MSCI AC World ex USA 8.0 13.7 1.0 4.8 2.8

Excess Return 0.4 -0.5 1.2 0.3 0.8

Hansberger 16,070 10.2 16.3 2.9 5.7 3.7 02/2006

MSCI AC World ex USA 8.0 13.7 1.0 4.8 3.6

Excess Return 2.2 2.6 1.9 0.9 0.1

Passive International

SSgA 12,815 7.4 12.1 0.8 6.2 7.2 08/2002

MSCI EAFE Index 7.4 12.2 1.0 6.3 7.3

Excess Return 0.0 -0.1 -0.2 -0.1 -0.1





During the latest three-month period, ending March 31, 2017, two of OPFRS’ three active Fixed Income managers outperformed their respective benchmarks.

Ramirez, the Plan’s new core fixed income manager, produced a quarterly gain of 20 basis points by returning 1.0% compared to the benchmark return of 0.8%.

Reams, the Plan’s core plus fixed income manager, trailed its benchmark, the Bbg BC Universal, by (30) basis points over the quarter. During the latest 1-year period, the portfolio underperformed its benchmark by (60) basis points and also underperformed over the 3-year period by (20) basis points. Reams outperformed its benchmark over the 5-year period by 20 basis points.

DDJ, the Plan’s High Yield & Bank Loan manager, outperformed its benchmark, the BofAML US High Yield Master II index, by 0.8% over the most

recent quarter, and returned 18.2% over the most recent 1-year period, outperforming its benchmark by 1.3%.

Manager - StyleMkt

Value

($000)

1

Quarter

1

Year

3

Years

5

Years

Since

Inception

Inception

Date

Core Fixed Income

Ramirez 32,632 1.0 --- --- --- 1.0 01/2017

Bloomberg Barclays U.S. Aggregate Index 0.8 --- --- --- 0.8

Excess Return 0.2 --- --- --- 0.2

Core-Plus Fixed Income

Reams 22,090 0.8 1.3 2.8 3.0 5.8 02/1998

Bbg Barclays Universal (Blend) 1.1 1.9 3.0 2.8 5.1

Excess Return -0.3 -0.6 -0.2 0.2 0.7

High Yield / Bank Loans

DDJ Capital 9,006 3.5 18.2 --- --- 6.5 02/2015

BofA Merrill Lynch High Yield Master II 2.7 16.9 --- --- 6.4

Excess Return 0.8 1.3 --- --- 0.1



Fixed Income


During the latest three-month period ending March 31, 2017, OPFRS’ aggregate Covered Calls portfolio has outperformed its benchmark over all time periods measured.

Parametric BXM Portfolio, the Plan’s passive covered calls allocation slightly underperformed its CBOE BXM index by (10) basis points over the most recent quarter. Over the most recent 1- and 3-year periods, the passive strategy has outperformed its benchmark by 90 and 70 basis points, respectively.

Parametric Delta Shift Portfolio, the Plan's active covered calls allocation has outperformed the CBOE BXM benchmark by 90 basis points over the most recent quarter, and has outperformed the benchmark by 4.0% and 3.5% over the most recent 1- and 3-year periods.

Manager - StyleMkt

Value

($000)

1

Quarter

1

Year

3

Years

5

Years

Since

Inception

Inception

Date

Covered Calls Composite

Covered Calls 74,660 4.4 14.7 8.1 --- 8.1 04/2014

CBOE BXM 4.0 12.2 6.5 --- 6.5

Excess Return 0.4 2.5 1.6 --- 1.6

CC - Passive Allocation

Parametric BXM 36,709 3.9 13.1 7.2 --- 7.2 04/2014

CBOE BXM 4.0 12.2 6.5 --- 6.5

Excess Return -0.1 0.9 0.7 --- 0.7

CC - Active Allocation

Parametric DeltaShift 37,951 4.9 16.2 10.0 --- 10.0 04/2014

CBOE BXM 4.0 12.2 6.5 --- 6.5

Excess Return 0.9 4.0 3.5 --- 3.5



Covered Calls


Growth of $1 (5-year)

Risk/Return Performance (5-year)

* The actuarial expected rate of return was 8% through 6/30/2009, 7.5% through 6/30/2010, 7% through 6/30/2011, 6.75% through 6/30/2014, and 6.5% currently

OPFRS Total Plan OPFRS Policy Benchmark OPFRS Actuarial Rate*

$0.80

$1.00

$1.20

$1.40

$1.60

3/12 9/12 3/13 9/13 3/14 9/14 3/15 9/15 3/16 9/16 3/17

$1.38$1.41

$1.43

0.0

4.0

8.0

12.0

16.0

An

nu

ali

ze

d R

etu

rn (%

)

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0

Risk (Standard Deviation %)

OPFRS Policy Benchmark

Median Portfolio

Fixed Income Bench.

Fixed IncomeIntl. Equity Bench.


Dom. Equity Bench.

Domestic Equity

Risk Free Rate

OPFRS Total Portfolio

OPFRS Total Portfolio 5-Year Performance



-1.0

2.0

5.0

8.0

11.0

14.0

17.0

20.0

An

nu

ali

ze

d R

etu

rn

1

Quarter

Fiscal

YTD

1

Year

3

Years

5

Years

7

Years

OPFRS Total Plan 5.0 (19) 11.7 (4) 14.3 (3) 6.2 (20) 7.4 (67) 8.2 (45)¢

OPFRS Policy Benchmark 4.7 (32) 10.5 (16) 13.1 (8) 6.7 (7) 7.0 (78) 7.7 (66)�

5th Percentile 5.5 11.4 13.5 6.9 9.3 9.3

1st Quartile 4.8 9.8 11.9 6.1 8.4 8.6

Median 4.4 8.8 11.0 5.6 7.8 8.1

3rd Quartile 4.0 7.8 9.9 5.0 7.2 7.5

95th Percentile 3.2 5.7 8.7 3.9 6.2 6.6

Population 406 402 399 389 380 366

Plan Sponsor Peer Group Analysis


Parentheses contain percentile rankings.

Calculation based on monthly periodicity. 27

-25.0

-10.0

5.0

20.0

35.0

50.0

65.0

80.0

95.0A

llo

ca

tio

n (%

)

US Equity Intl. Equity US Fixed IncomeIntl. Fixed

IncomeAlternative Inv. Real Estate Cash

OPFRS Total Plan 68.9 (2) 12.2 (72) 17.8 (88) 0.0 0.0 (100) 0.0 1.0 (58)¢

5th Percentile 58.3 25.0 44.0 9.5 24.9 13.0 7.4

1st Quartile 50.9 17.7 34.5 5.3 14.9 9.9 2.4

Median 45.2 14.5 28.8 4.9 7.9 7.6 1.2

3rd Quartile 39.5 11.7 21.3 4.0 4.5 5.1 0.6

95th Percentile 26.4 7.5 13.2 2.3 1.7 3.3 0.1

Population 385 364 386 129 91 261 347

Plan Sponsor TF Asset AllocationAs of March 31, 2017

Parentheses contain percentile rankings.

Calculation based on <Periodicity> periodicity. 28

MANAGER MONITORING / PROBATION LIST

Monitoring/Probation Status


Return vs. Benchmark since Corrective Action

^ Annualized performance if over one year.

* Approximate date based on when Board voted to either monitor a manager at a heightened level or place it on probation.

Investment Performance Criteria

For Manager Monitoring/Probation Status

Asset Class Short-term

(rolling 12 mth periods)

Medium-term

(rolling 36 mth periods)

Long-term

(60 + months)

Active Domestic Equity Fd return < bench return –

3.5%

Fd annlzd return < bench

annlzd return – 1.75% for 6

consecutive months

VRR < 0.97 for 6 consecutive

months

Active International

Equity

Fd return < bench return –

4.5%



consecutive months


months

Passive International

Equity Tracking Error > 0.50%

Tracking Error > 0.45% for 6

consecutive months



consecutive months

Fixed Income Fd return < bench return –

1.5%



consecutive months


months

Portfolio Status Concern

Months Since

Corrective

Action

Performance^

Since

Corrective

Action

Date of

Corrective

Action*

DDJ Capital On Watch Organizational 10 14.2% 5/25/2016

BofAML US High Yield M2 --- --- 10 11.6% ---

All critelized basis.

VRR – Value Relative Ratio – is calculated as: manager cumulative return / benchmark cumulative return.

29

Trailing Period Performance Growth of $1 - Since Inception

Calendar Year Performance Risk/Return - Since Inception

Alpha BetaInformation

Ratio

Sharpe

Ratio

Tracking

ErrorR-Squared

Up

Market

Capture

Down

Market

Capture

Inception

Date

Northern Trust Russell 1000 1.08 0.96 0.37 1.09 1.51 0.99 99.48 93.97 05/01/2010

Russell 1000 Index 0.00 1.00 - 1.01 0.00 1.00 100.00 100.00 05/01/2010

Citigroup 3 Month T-Bill Index 0.10 0.00 -1.01 - 12.64 0.00 0.33 -0.21 05/01/2010

Northern Trust Russell 1000 Russell 1000 Index

$0.0

$0.6

$1.2

$1.8

$2.4

$3.0

4/10 4/11 4/12 4/13 4/14 4/15 4/16 3/17

$2.3

$2.4

Northern Trust Russell 1000 Russell 1000 Index

0.0

6.0

12.0

18.0

24.0

Re

turn

1Quarter

1Year

3Years

5Years

6.0

17.4

10.0

13.3

6.0

17.2

10.0

13.2

6.0

9.0

12.0

15.0

18.0

Re

turn

(%)

8.0 10.0 12.0 14.0 16.0 18.0


ReturnStandard

Deviation

Northern Trust Russell 1000 13.5 12.2¢£

Russell 1000 Index 12.8 12.6pr

Median 12.8 12.8¾Northern Trust Russell 1000 Russell 1000 Index

0.0

15.0

30.0

45.0

Re

turn

2012 2013 2014 2015 2016

16.4

33.1

13.2

0.9

12.1

16.4

32.9

13.2

1.2

11.8

Northern Trust Russell 1000 - gross of fees






Ratio

Sharpe

Ratio

Tracking

ErrorR-Squared

Up

Market

Capture

Down

Market

Capture

Inception

Date

SSgA Russell 1000 Growth 0.02 1.00 0.52 0.87 0.04 1.00 100.08 99.96 11/01/2014

Russell 1000 Growth Index 0.00 1.00 - 0.87 0.00 1.00 100.00 100.00 11/01/2014


SSgA Russell 1000 Growth Russell 1000 Growth Index

$0.8

$1.0

$1.2

$1.4

$1.6

10/14 4/15 10/15 4/16 10/16 3/17

$1.3

$1.3

SSgA Russell 1000 Growth Russell 1000 Growth Index

0.0

5.0

10.0

15.0

20.0

Re

turn

1Quarter

1Year

3Years

5Years

8.9

15.8

11.3

13.3

8.9

15.8

0.0

4.0

8.0

12.0

16.0

Re

turn

(%)

8.0 10.0 12.0 14.0 16.0


ReturnStandard

Deviation

SSgA Russell 1000 Growth 10.0 11.5¢£

Russell 1000 Growth Index 10.0 11.5pr

Median 8.8 11.8¾SSgA Russell 1000 Growth Russell 1000 Growth Index

0.0

15.0

30.0

45.0

Re

turn

2012 2013 2014 2015 2016

15.3

33.5

13.1

5.77.1

5.67.2

SSgA Russell 1000 Growth - gross of fees






Ratio

Sharpe

Ratio

Tracking

ErrorR-Squared

Up

Market

Capture

Down

Market

Capture

Inception

Date

SSgA Russell 1000 Value 0.11 1.00 1.33 0.72 0.07 1.00 100.27 99.57 11/01/2014

Russell 1000 Value Index 0.00 1.00 - 0.71 0.00 1.00 100.00 100.00 11/01/2014


SSgA Russell 1000 Value Russell 1000 Value Index

$0.8

$1.0

$1.2

$1.4

10/14 4/15 10/15 4/16 10/16 3/17

$1.2

$1.2

SSgA Russell 1000 Value Russell 1000 Value Index

0.0

8.0

16.0

24.0

32.0

Re

turn

1Quarter

1Year

3Years

5Years

3.3

19.2

8.7

13.1

3.3

19.2

0.0

3.0

6.0

9.0

12.0

15.0

Re

turn

(%)

6.0 8.0 10.0 12.0 14.0 16.0 18.0


ReturnStandard

Deviation

SSgA Russell 1000 Value 7.8 11.1¢£

Russell 1000 Value Index 7.7 11.1pr

Median 7.8 11.7¾SSgA Russell 1000 Value Russell 1000 Value Index

0.0

15.0

30.0

45.0

-15.0

Re

turn

2012 2013 2014 2015 2016

17.5

32.5

13.5

-3.8

17.3

-3.6

17.3

SSgA Russell 1000 Value - gross of fees






Ratio

Sharpe

Ratio

Tracking

ErrorR-Squared

Up

Market

Capture

Down

Market

Capture

Inception

Date

EARNEST Partners 0.58 0.99 0.14 0.52 3.52 0.96 98.95 95.50 03/01/2006

Russell Midcap Index 0.00 1.00 - 0.57 0.00 1.00 100.00 100.00 01/01/1979

U.S. Mid Cap Core Equity Median - - - - - - - -


EARNEST Partners Russell Midcap Index

($1.0)

$0.0

$1.0

$2.0

$3.0

$4.0

2/06 5/07 8/08 11/09 2/11 5/12 8/13 11/14 3/17

$2.5

$2.6


U.S. Mid Cap Core Equity

0.0

8.0

16.0

24.0

32.0

Re

turn

1Quarter

1Year

3Years

5Years

4.8

18.9

9.4

13.4

5.1

17.0

8.5

13.1

7.5

23.9

10.5

13.6

6.0

8.0

10.0

12.0

14.0

Re

turn

(%)

12.0 15.0 18.0 21.0 24.0


ReturnStandard

Deviation

EARNEST Partners 9.0 17.4¢£

Russell Midcap Index 8.5 17.2pr

Median 9.2 17.2¾


U.S. Mid Cap Core Equity

0.0

20.0

40.0

60.0

-20.0

Re

turn

2013 2014 2015 2016

37.1

10.2

-1.0

16.6

34.8

13.2

-2.4

13.8

31.3

10.4

1.3

16.4

EARNEST Partners - gross of fees






Ratio

Sharpe

Ratio

Tracking

ErrorR-Squared

Up

Market

Capture

Down

Market

Capture

Inception

Date

NWQ 0.53 1.01 0.09 0.42 7.07 0.88 101.33 99.07 01/01/2006

Russell 2000 Value Index 0.00 1.00 - 0.54 0.00 1.00 100.00 100.00 01/01/1979

U.S. Small Cap Value Equity Median - - - - - - - -


NWQ Russell 2000 Value Index

($0.8)

$0.0

$0.8

$1.6

$2.4

$3.2

12/05 6/07 12/08 6/10 12/11 6/13 12/14 3/17

$2.3

$2.3

NWQ

Russell 2000 Value Index

U.S. Small Cap Value Equity

0.0

15.0

30.0

45.0

-15.0

Re

turn

1Quarter

1Year

3Years

5Years

0.8

24.6

8.713.7

-0.1

29.4

7.612.5

2.0

22.1

8.7

15.4

4.0

6.0

8.0

10.0

12.0

14.0

Re

turn

(%)

12.0 15.0 18.0 21.0 24.0 27.0


ReturnStandard

Deviation

NWQ 7.8 20.8¢£

Russell 2000 Value Index 7.5 19.4pr

Median 9.3 18.9¾

NWQ

Russell 2000 Value Index

U.S. Small Cap Value Equity

0.0

20.0

40.0

60.0

-20.0

-40.0

Re

turn

2013 2014 2015 2016

38.1

5.7

-4.3

26.134.5

4.2

-7.5

31.7

42.3

8.6

-2.3

21.7

NWQ - gross of fees






Ratio

Sharpe

Ratio

Tracking

ErrorR-Squared

Up

Market

Capture

Down

Market

Capture

Inception

Date

Russell 2000 Growth ETF 0.02 0.99 0.01 0.39 0.10 1.00 99.16 97.41 08/01/2016

Russell 2000 Growth Index 0.00 1.00 - 0.38 0.00 1.00 100.00 100.00 08/01/2016


Russell 2000 Growth ETF Russell 2000 Growth Index

$0.9

$1.0

$1.1

$1.2

7/16 8/16 9/16 10/16 11/16 12/16 1/17 2/17 3/17

$1.1

$1.1

Russell 2000 Growth ETF Russell 2000 Growth Index

0.0

8.0

16.0

24.0

32.0

Re

turn

1Quarter

1Year

3Years

5Years

5.3

23.0

6.7

12.1

5.2

0.0

5.0

10.0

15.0

20.0

25.0

Re

turn

(%)

1.8 2.4 3.0 3.6 4.2 4.8 5.4


ReturnStandard

Deviation

Russell 2000 Growth ETF 11.9 3.8¢£

Russell 2000 Growth Index 11.9 3.8pr

Median 12.2 3.7¾Russell 2000 Growth ETF Russell 2000 Growth Index

0.0

20.0

40.0

60.0

-20.0

Re

turn

2012 2013 2014 2015 2016

14.6

43.3

5.6

-1.4

11.3

Russell 2000 Growth ETF - gross of fees






Ratio

Sharpe

Ratio

Tracking

ErrorR-Squared

Up

Market

Capture

Down

Market

Capture

Inception

Date

Fisher Investments 0.67 1.09 0.27 0.29 3.66 0.96 106.56 102.24 03/01/2011

MSCI AC World ex USA 0.00 1.00 - 0.24 0.00 1.00 100.00 100.00 01/01/1988

Intl. Large Cap Core Equity Median - - - - - - - -


Fisher Investments MSCI AC World ex USA

$0.6

$0.8

$1.0

$1.2

$1.4

2/11 11/11 8/12 5/13 2/14 11/14 8/15 5/16 3/17

$1.2

$1.2


Intl. Large Cap Core Equity

0.0

5.0

10.0

15.0

20.0

Re

turn

1Quarter

1Year

3Years

5Years

7.7

11.5

1.6

6.88.0

13.7

1.0

4.8

8.4

13.2

2.2

5.1

0.0

2.0

4.0

6.0

8.0

10.0

Re

turn

(%)

10.0 12.0 14.0 16.0 18.0


ReturnStandard

Deviation

Fisher Investments 3.5 16.1¢£

MSCI AC World ex USA 2.7 14.5pr

Median 4.4 14.4¾



0.0

15.0

30.0

45.0

-15.0

Re

turn

2013 2014 2015 2016

23.2

-3.8

0.3 1.2

15.8

-3.4 -5.3

5.0

17.0

-2.3 -1.3

2.3

Fisher Investments - gross of fees






Ratio

Sharpe

Ratio

Tracking

ErrorR-Squared

Up

Market

Capture

Down

Market

Capture

Inception

Date

Hansberger -0.51 1.07 -0.02 0.23 4.55 0.95 103.50 104.83 01/01/2006

MSCI AC World ex USA 0.00 1.00 - 0.24 0.00 1.00 100.00 100.00 01/01/1988

Intl. Large Cap Core Equity Median - - - - - - - -


Hansberger MSCI AC World ex USA

$0.0

$0.4

$0.8

$1.2

$1.6

$2.0

12/05 6/07 12/08 6/10 12/11 6/13 12/14 3/17

$1.6$1.5



0.0

6.0

12.0

18.0

24.0

Re

turn

1Quarter

1Year

3Years

5Years

7.7

11.5

1.6

6.88.0

13.7

1.0

4.8

10.2

16.3

2.9

5.7

2.0

4.0

6.0

8.0

Re

turn

(%)

12.0 14.0 16.0 18.0 20.0 22.0


ReturnStandard

Deviation

Hansberger 3.7 20.2¢£

MSCI AC World ex USA 4.2 18.4pr

Median 4.6 18.0¾



0.0

15.0

30.0

45.0

-15.0

Re

turn

2013 2014 2015 2016

23.2

-3.8

0.3 1.2

15.8

-3.4 -5.3

5.0

19.7

-7.1

1.6 2.5

Hansberger - gross of fees






Ratio

Sharpe

Ratio

Tracking

ErrorR-Squared

Up

Market

Capture

Down

Market

Capture

Inception

Date

SSgA Passive EAFE 0.01 0.99 -0.13 0.43 0.46 1.00 99.26 99.23 08/01/2002

MSCI EAFE Index 0.00 1.00 - 0.43 0.00 1.00 100.00 100.00 08/01/2002


SSgA Passive EAFE MSCI EAFE Index

$0.0

$1.0

$2.0

$3.0

$4.0

7/02 4/04 1/06 10/07 7/09 4/11 1/13 10/14 3/17

$2.8

$2.8

SSgA Passive EAFE MSCI EAFE Index

0.0

5.0

10.0

15.0

20.0

Re

turn

1Quarter

1Year

3Years

5Years

7.4

12.2

1.0

6.37.4

12.1

0.8

6.2

6.0

7.0

8.0

9.0

10.0

Re

turn

(%)

12.0 14.0 16.0 18.0 20.0 22.0


ReturnStandard

Deviation

SSgA Passive EAFE 7.2 16.8¢£

MSCI EAFE Index 7.3 16.9pr

Median 8.1 17.2¾SSgA Passive EAFE MSCI EAFE Index

0.0

15.0

30.0

45.0

-15.0

Re

turn

2012 2013 2014 2015 2016

17.9

23.3

-4.5-0.4

1.5

17.7

23.1

-4.6-0.5

1.4

SSgA Passive EAFE - gross of fees






Ratio

Sharpe

Ratio

Tracking

ErrorR-Squared

Up

Market

Capture

Down

Market

Capture

Inception

Date

Ramirez 0.09 0.84 0.19 0.79 0.25 0.52 130.13 333.97 01/01/2017

Bbg Barclays U.S. Aggregate Index 0.00 1.00 - - 0.00 1.00 100.00 100.00 01/01/1976

U.S. Broad Market Core F.I. Median - - - - - - - -

Citigroup 3 Month T-Bill Index 0.04 -0.01 -0.77 - 0.30 0.34 8.79 -85.50 01/01/2017

Ramirez Bbg Barclays U.S. Aggregate Index

$0.9

$1.0

$1.1

12/16 1/17 2/17 3/17

$1.0

$1.0

Ramirez

Bbg Barclays U.S. Aggregate Index

U.S. Broad Market Core F.I.

0.0

1.0

2.0

3.0

4.0

Re

turn

1Quarter

1Year

3Years

5Years

0.9 1.0

3.0 2.8

0.80.4

2.72.3

1.0

0.4

0.8

1.2

1.6

2.0

Re

turn

(%)

0.1 0.2 0.3 0.4 0.5


ReturnStandard

Deviation

Ramirez 1.0 0.3¢£

Bbg Barclays U.S. Aggregate Index 0.8 0.3pr

Median 0.9 0.3¾

Ramirez

Bbg Barclays U.S. Aggregate Index

U.S. Broad Market Core F.I.

0.0

4.0

8.0

12.0

-4.0

-8.0

Re

turn

2013 2014 2015 2016

-1.6

6.1

0.8

3.1

-2.0

6.0

0.5

2.6

Ramirez - gross of fees






Ratio

Sharpe

Ratio

Tracking

ErrorR-Squared

Up

Market

Capture

Down

Market

Capture

Inception

Date

Reams 0.31 1.06 0.15 0.68 4.17 0.43 109.23 103.90 01/01/1998

Bbg Barclays Universal (Blend) 0.00 1.00 - - 0.00 1.00 100.00 100.00 01/01/1976

U.S. Broad Market Core+ F.I. Median - - - - - - - -


Reams Bbg Barclays Universal (Blend)

$0.0

$1.0

$2.0

$3.0

$4.0

12/97 3/00 6/02 9/04 12/06 3/09 6/11 9/13 3/17

$2.6

$2.9

Reams

Bbg Barclays Universal (Blend)

U.S. Broad Market Core+ F.I.

0.0

2.0

4.0

6.0

Re

turn

1Quarter

1Year

3Years

5Years

1.3

3.2 3.3 3.5

1.1

1.9

3.0 2.8

0.81.3

2.8 3.0

4.0

4.8

5.6

6.4

7.2

8.0

Re

turn

(%)

1.6 2.4 3.2 4.0 4.8 5.6 6.4 7.2


ReturnStandard

Deviation

Reams 5.7 5.5¢£

Bbg Barclays Universal (Blend) 5.2 3.4pr

Median 5.8 3.7¾

Reams

Bbg Barclays Universal (Blend)

U.S. Broad Market Core+ F.I.

0.0

3.0

6.0

9.0

-3.0

-6.0

Re

turn

2013 2014 2015 2016

-0.5

6.2

0.2

4.7

-1.3

5.6

0.4

3.9

-0.9

4.8

0.5

4.0

Reams - gross of fees






Ratio

Sharpe

Ratio

Tracking

ErrorR-Squared

Up

Market

Capture

Down

Market

Capture

Inception

Date

DDJ Capital 1.65 0.71 -0.07 1.16 3.15 0.76 85.05 73.33 01/01/2015

BofA Merrill Lynch High Yield M2 0.00 1.00 - 0.64 0.00 1.00 100.00 100.00 09/01/1986

U.S. High Yield Bonds Median - - - - - - - -


DDJ Capital BofA Merrill Lynch High Yield M2

$0.8

$1.0

$1.2

$1.4

12/14 6/15 12/15 6/16 12/16 3/17

$1.2

$1.1

DDJ Capital

BofA Merrill Lynch High Yield M2

U.S. High Yield Bonds

0.0

6.0

12.0

18.0

24.0

Re

turn

1Quarter

1Year

3Years

5Years

2.4

14.2

4.36.6

2.7

16.9

4.66.8

3.5

18.2

2.0

4.0

6.0

8.0

10.0

Re

turn

(%)

0.0 1.5 3.0 4.5 6.0 7.5 9.0 10.5


ReturnStandard

Deviation

DDJ Capital 6.3 5.2¢£

BofA Merrill Lynch High Yield M2 6.4 6.4pr

Median 5.8 5.5¾

DDJ Capital

BofA Merrill Lynch High Yield M2

U.S. High Yield Bonds

0.0

10.0

20.0

30.0

-10.0

-20.0

Re

turn

2013 2014 2015 2016

7.52.5

-2.2

14.0

7.42.5

-4.6

17.5

-4.5

16.0

DDJ Capital - gross of fees






Ratio

Sharpe

Ratio

Tracking

ErrorR-Squared

Up

Market

Capture

Down

Market

Capture

Inception

Date

CC - Parametric 0.84 1.06 0.51 1.10 2.36 0.88 111.37 101.90 03/01/2014

CBOE BXM 0.00 1.00 - 0.55 0.00 1.00 100.00 100.00 07/01/1986

U.S. Large Cap Core Equity Median - - - - - - - -


CC - Parametric CBOE BXM

$0.8

$1.0

$1.2

$1.4

$1.6

2/14 8/14 2/15 8/15 2/16 8/16 3/17

$1.2

$1.3


U.S. Large Cap Core Equity

0.0

6.0

12.0

18.0

24.0

Re

turn

1Quarter

1Year

3Years

5Years

6.0

16.3

9.8

13.2

4.0

12.2

6.5 7.0

4.4

14.7

8.1

3.0

6.0

9.0

12.0

15.0

18.0

Re

turn

(%)

3.0 6.0 9.0 12.0 15.0


ReturnStandard

Deviation

CC - Parametric 7.7 6.8¢£

CBOE BXM 6.4 6.1pr

Median 9.8 10.4¾


U.S. Large Cap Core Equity

0.0

15.0

30.0

45.0

Re

turn

2013 2014 2015 2016

33.0

13.4

1.3

10.513.3

5.6 5.27.1

4.8

10.1

CC - Parametric - gross of fees



Style Map (5-Year) Growth of $1 (5-Year)

Style Exposure Style History (5-Year)

Style History Most Recent Average Style Exposure

Ca

pit

ali

za

tio

n

Manager Style

Russell 1000 Growth

Russell 2000 GrowthRussell 2000 Value

Russell 1000 Value

Domestic Equity Russell 3000 (Blend)

$1.0

$1.4

$1.8

$2.2

3/12 12/12 9/13 6/14 3/15 12/15 9/16 3/17

$1.8

0.0% 15.0% 30.0% 45.0% 60.0%

Russell 1000 Value

Russell 1000 Growth

Russell Midcap Value

Russell Mid Cap Growth

Russell 2000 Value

Russell 2000 Growth

Russell 1000 Value Russell 1000 Growth

Russell Midcap Value Russell Mid Cap Growth

Russell 2000 Value Russell 2000 Growth

0

25

50

75

100

5/13 11/13 5/14 11/14 5/15 11/15 5/16 11/16 3/17

Domestic Equity Analysis





Style History Mar-2017 Average Style Exposure

De

ve

lop

ed

/Em

erg

ing

Manager Style

MSCI EAFE Growth

MSCI EM GrowthMSCI EM Value

MSCI EAFE Value

International Equity MSCI ACWI Ex US (Blend)

$0.6

$0.8

$1.0

$1.2

$1.4

$1.6

3/12 12/12 9/13 6/14 3/15 12/15 3/17

$1.3

0.0% 20.0% 40.0% 60.0% 80.0%

MSCI EAFE Growth

MSCI EAFE Value

MSCI EM Growth

MSCI EM Value

MSCI Japan MSCI Canada MSCI U.K.

MSCI Australia MSCI Europe MSCI Pacific ex Japan

MSCI EM

0

25

50

75

100

5/13 11/13 5/14 11/14 5/15 11/15 5/16 11/16 3/17

International Equity Analysis





Style History Mar-2017 Average Style Exposure

Qu

ali

ty

Maturity

Long Treasuries

Long CreditShort Credit

Short Treasuries

Fixed Income Bbg Barclays Universal (Blend)

$0.9

$1.0

$1.1

$1.2

$1.3

3/12 12/12 9/13 6/14 3/15 12/15 9/16 3/17

$1.2

0.0% 20.0% 40.0% 60.0% 80.0%

Bbg BC U.S. Treasury Long

Bbg BC U.S. Treasury Short

Bbg BC U.S. Credit Short

Bbg BC U.S. Credit 5-10y

Bbg BC U.S. Govt. Long Bbg BC U.S. Govt. Interm.

Bbg BC U.S. Govt. Short Bbg BC U.S. Securitized

Bbg BC U.S. Corp. IG BofAML US High Yield

0

25

50

75

100

5/13 11/13 5/14 11/14 5/15 11/15 5/16 11/16 3/17

Fixed Income Analysis



Glossary

Alpha

Annualized Performance

Batting Average

Dividend Discount Model

The premium an investment earns above a set

standard. This is usually measured in terms of a

common index (i.e., how the stock performs

independent of the market). An Alpha is usually

generated by regressing excess return on the S&P

500 excess return.

The annual rate of return that when compounded

(t) times generates the same (t) period holding

return as actually occurred from periods (1) to

period (t).

Percentage of periods a portfolio outperforms a

given index.

The measure of an asset’s risk in relation to the

Market (for example, the S&P 500) or to an

alternative benchmark or factors. Roughly

speaking, a security with a Beta of 1.5 will have

moved, on average, 1.5 times the market return.

Beta

Bottom-up

A management style that de-emphasizes the

significance of economic and market cycles,

focusing instead on the analysis of individual

stocks.

A method to value the common stock of a

company that is based on the present value of the

expected future dividends.

Growth Stock

Common stock of a company that has an

opportunity to invest money and earn more than its

opportunity cost of capital.

Information Ratio

The ratio of annualized expected residual return to

residual risk. A central measurement for active

management, value added is proportional to the

square of the information ratio.

R - Squared

Square of the correlation coefficient. The

proportion of the variability in one series that can

be explained by the variability of one or more

other series in a regression model. A measure of

the quality of fit. 100% R-square means a perfect

predictability.

Standard Deviation

The square root of the variance. A measure of

dispersion of a set of data from its mean

Sharpe Ratio

A measure of a portfolio’s excess return relative to

the total variability of the portfolio.

Style Analysis

A returns-based analysis using a multi-factor

attribution model. The model calculates a

product’s average exposure to particular

investment styles over time (i.e., the products

normal style benchmark).

Top-Down

Investment style that begins with an assessment of

the overall economic environment and makes a

general asset allocation decision regarding various

sectors of the financial markets and various

industries.

Tracking Error

The standard deviation of the difference between

the returns of a portfolio and an appropriate

benchmark.

Turnover

For mutual funds, a measure of trading activity

during the previous year, expressed as a

percentage of the average total assets of the

fund. A turnover rate of 25% means that the value

of trades represented (1/4) of the assets of the

fund.

Value Stock

Stocks with low price/book ratios or price/earnings

ratios. Historically, value stocks have enjoyed

higher average returns than growth stocks (stocks

with high price/book or price/earnings ratios) in a

variety of countries.

46

Benchmark Definitions

Bloomberg Barclays Capital Universal: includes market coverage by the Aggregate Bond Index fixed rate debt issues, which are rated investment

grade or higher by Moody’s Investor Services, Standard and Poor’s Corporation, or Fitch Investor’s Service, in that order with all issues having at least

one year to maturity and an outstanding par value of at least $100 million) and includes exposures to high yield CMBS securities. All returns are

market value weighted inclusive of accrued interest.

MSCI ACWI x US: MSCI ACWI (All Country World Index) Free excluding US (gross dividends): is a free-floating adjusted market capitalization index

designed to measure equity performance in the global developed and emerging markets. As of April 2002, the index consisted of 49 developed

and emerging market country indices.

MSCI EAFE (Europe, Australasia, Far East): is a free float-adjusted market capitalization index that is designed to measure developed market equity

performance, excluding the US & Canada.

Russell 1000: measures the performance of the 1,000 largest securities in the Russell 3000 Index. Russell 1000 is highly correlated with the S&P 500

Index and capitalization-weighted.

Russell 1000 Growth: measures the performance of those Russell 1000 securities with a greater-than-average growth orientation. Securities in this

index tend to exhibit higher price-to-book and price-earnings ratios, lower dividend yields and higher forecasted growth values than the Value

universe.

Russell 1000 Value: measures the performance of those Russell 1000 securities with a less-than-average growth orientation. Securities in this index

tend to exhibit lower price-to-book and price-earnings ratios, higher dividend yields and lower forecasted growth values than the Growth universe.

Russell Mid-Cap: measures the performance of the smallest 800 companies in the Russell 1000 Index, as ranked by total market capitalization.

Russell 2000: measures the performance of the 2,000 smallest securities in the Russell 3000 Index. Russell 2000 is market capitalization-weighted.

Russell 2000 Growth: measures the performance of those Russell 2000 securities with a greater-than-average growth orientation. Securities in this

index tend to exhibit higher price-to-book and price-to-earnings ratios.

Russell 2000 Value: measures the performance of those Russell 2000 securities with a less-than-average growth orientation. Securities in this index

tend to exhibit lower price-to-book and price-to-earnings ratios.

CBOE BXM: measures the performance of a hypothetical buy-write strategy on the S&P 500 Index.

BofA ML U.S. High Yield Master II: Tracks the performance of US dollar denominated below investment grade rated corporate debt publically issued

in the US domestic market. To qualify for inclusion in the index, securities must have a below investment grade rating (based on an average of

Moody's, S&P, and Fitch) and an investment grade rated country of risk (based on an average of Moody's, S&P, and Fitch foreign currency long

term sovereign debt ratings). Each security must have greater than 1 year of remaining maturity, a fixed coupon schedule, and a minimum amount

outstanding of $100 million.

47

RISK METRIC DESCRIPTION – Rationale for selection and calculation methodology

US Equity Markets:

Metric: P/E ratio = Price / “Normalized” earnings for the S&P 500 Index

To represent the price of US equity markets, we have chosen the S&P 500 index. This index has the longest published history of price, is well known, and also has reliable, long-

term, published quarterly earnings. The price=P of the P/E ratio is the current price of the market index (the average daily price of the most recent full month for the S&P 500

index). Equity markets are very volatile. Prices fluctuate significantly during normal times and extremely during periods of market stress or euphoria. Therefore, developing a

measure of earnings power (E) which is stable is vitally important, if the measure is to provide insight. While equity prices can and do double, or get cut in half, real earnings

power does not change nearly as much. Therefore, we have selected a well known measure of real, stable earnings power developed by Yale Professor Robert Shiller known as

the Shiller E-10. The calculation of E-10 is simply the average real annual earnings over the past 10 years. Over 10 years, the earnings shenanigans and boom and bust levels of

earnings tend to even out (and often times get restated). Therefore, this earnings statistic gives a reasonably stable, slow-to-change estimate of average real earnings power

for the index. Professor Shiller’s data and calculation of the E-10 are available on his website at http://www.econ.yale.edu/~shiller/data.htm. We have used his data as the

base for our calculations. Details of the theoretical justification behind the measure can be found in his book Irrational Exuberance [Princeton University Press 2000, Broadway

Books 2001, 2nd ed., 2005].

Developed Equity Markets Excluding the US:

Metric: P/E ratio = Price / “Normalized” earnings for the MSCI EAFE Index

To represent the price of non-US developed equity markets, we have chosen the MSCI EAFE index. This index has the longest published history of price for non-US developed

equities. The price=P of the P/E ratio is the current price of the market index (the average daily price of the most recent full month for the MSCI EAFE index). The price level of

this index is available starting in December 1969. Again, for the reasons described above, we elected to use the Shiller E-10 as our measure of earnings (E). Since 12/1972, a

monthly price earnings ratio is available from MSCI. Using this quoted ratio, we have backed out the implied trailing-twelve month earnings of the EAFE index for each month

from 12/1972 to the present. These annualized earnings are then inflation adjusted using CPI-U to represent real earnings in US dollar terms for each time period. The Shiller E-10

for the EAFE index (10 year average real earnings) is calculated in the same manner as detailed above.

However, we do not believe that the pricing and earnings history of the EAFE markets are long enough to be a reliable representation of pricing history for developed market

equities outside of the US. Therefore, in constructing the Long-Term Average Historical P/E for developed ex-US equities for comparison purposes, we have elected to use the US

equity market as a developed market proxy, from 1881 to 1982. This lowers the Long-Term Average Historical P/E considerably. We believe this methodology provides a more

realistic historical comparison for a market with a relatively short history.

Emerging Market Equity Markets

Metric: Ratio of Emerging Market P/E Ratio to Developed Market P/E Ratio

To represent the Emerging Markets P/E Ratio, we have chosen the MSCI Emerging Market Free Index, which has P/E data back to January 1995 on Bloomberg. To represent theDeveloped Markets PE Ratio, we have chosen the MSCI World Index, which also has data back to January 1995 on Bloomberg. Although there are issues with published, singletime period P/E ratios, in which the denominator effect can cause large movements, we feel that the information contained in such movements will alert investors to marketactivity that they will want to interpret.

48

http://www.econ.yale.edu/~shiller/data.htm

US Private Equity Markets:

Metrics: S&P LCD Average EBITDA Multiples Paid in LBOs and US Quarterly Deal Volume

The Average Purchase Price to EBITDA multiples paid in LBOs is published quarterly by S&P in their LCD study. This is the total price paid (both equity and debt) over the trailing-twelve month EBITDA (earnings before interest, taxes, depreciation and amortization) as calculated by S&P LCD. This is the relevant, high-level pricing metric that private equitymanagers use in assessing deals. Data is published monthly.

US quarterly deal volume for private equity is the total deal volume in $ billions (both equity and debt) reported in the quarter by Thomson Reuters Buyouts. This metric gives ameasure of the level of activity in the market. Data is published quarterly.

U.S Private Real Estate Markets:

Metrics: US Cap rates and Annual US Real Estate Deal Volume

Real estate cap rates are a measure of the price paid in the market to acquire properties versus their annualized income generation before financing costs (NOI=net operatingincome). The date is published by NCREIF. We chose to use current value cap rate. These are capitalization rates from properties that were revalued during the quarter. Whilethis data does rely on estimates of value and therefore tends to be lagging, (estimated prices are slower to rise and slow to fall than transaction prices), the data series goesback to1979, providing a long data series for valuation comparison. Data is published quarterly.

Annual US real estate deal volume is the total deal transaction volume in $ billions (both equity and debt) reported by Real Capital Analytics during the trailing-twelve months.This metric gives the level of activity in the market. Data is published monthly.

Measure of Equity Market Fear / Uncertainty

Metric: VIX – Measure of implied option volatility for U.S. equity markets

The VIX is a key measure of near-term volatility conveyed by implied volatility of S&P 500 index option prices. VIX increases with uncertainty and fear. Stocks and the VIX arenegatively correlated. Volatility tends to spike when equity markets fall.

Measure of Monetary Policy

Metric: Yield Curve Slope

We calculate the yield curve slope as the 10 year treasury yield minus the 1 year treasury yield. When the yield curve slope is zero or negative, this is a signal to pay attention. Anegative yield curve slope signals lower rates in the future, caused by a contraction in economic activity. Recessions are typically preceded by an inverted (negatively sloped)yield curve. A very steep yield curve (2 or greater) indicates a large difference between shorter-term interest rates (the 1 year rate) and longer-term rates (the 10 year rate). Thiscan signal expansion in economic activity in the future, or merely higher future interest rates.


49

Definition of “extreme” metric readings

A metric reading is defined as “extreme” if the metric reading is in the top or bottom decile of its historical readings. These “extreme” reading should cause the reader to pay

attention. These metrics have reverted toward their mean values in the past.

Credit Markets US Fixed Income:

Metric: Spreads

The absolute level of spreads over treasuries and spread trends (widening / narrowing) are good indicators of credit risk in the fixed income markets. Spreads incorporate

estimates of future default, but can also be driven by technical dislocations in the fixed income markets. Abnormally narrow spreads (relative to historical levels) indicate higher

levels of valuation risk, wide spreads indicate lower levels of valuation risk and / or elevated default fears. Investment grade bond spreads are represented by the Barclays

Capital US Corporate Investment Grade Index Intermediate Component. The high yield corporate bond spreads are represented by the Barclays Capital US Corporate High

Yield Index.

Measures of US Inflation Expectations

Metrics: Breakeven Inflation and Inflation Adjusted Commodity Prices

Inflation is a very important indicator impacting all assets and financial instruments. Breakeven inflation is calculated as the 10 year nominal treasury yield minus the 10 year real

yield on US TIPS (treasury inflation protected securities). Abnormally low long-term inflation expectations are indicative of deflationary fears. A rapid rise in breakeven inflation

indicates acceleration in inflationary expectations as market participants sell nominal treasuries and buy TIPs. If breakeven inflation continues to rise quarter over quarter, this is a

signal of inflationary worries rising, which may cause Fed action and / or dollar decline.

Commodity price movement (above the rate of inflation) is an indication of anticipated inflation caused by real global economic activity putting pressure on resource prices.

We calculate this metric by adjusted in the Dow Jones UBS Commodity Index (formerly Dow Jones AIG Commodity Index) by US CPI-U. While rising commodity prices will not

necessarily translate to higher US inflation, higher US inflation will likely show up in higher commodity prices, particularly if world economic activity is robust.

These two measures of anticipated inflation can, and often are, conflicting.

Measures of US Treasury Bond Interest Rate Risk

Metrics: 10-Year Treasury Forward-Looking Real Yield and 10-Year Treasury Duration

The expected annualized real yield of the 10 year US Treasury Bond is a measure of valuation risk for US Treasuries. A low real yield means investors will accept a low rate of

expected return for the certainly of receiving their nominal cash flows. PCA estimates the expected annualized real yield by subtracting an estimate of expected 10 year

inflation (produced by the Survey of Professional Forecasters as collected by the Federal Reserve Bank of Philadelphia), from the 10 year Treasury constant maturity interest rate.

Duration for the 10-Year Treasury Bond is calculated based on the current yield and a price of 100. This is a measure of expected percentage movements in the price of the

bond based on small movements in percentage yield. We make no attempt to account for convexity.


50

What is the PCA Market Sentiment Indicator (PMSI)?

The PMSI is a measure meant to gauge the market’s sentiment regarding economic growth risk. Growth risk cuts across most financial assets, and is the largest risk exposure that

most portfolios bear. The PMSI takes into account the momentum (trend over time, positive or negative) of the economic growth risk exposure of publicly traded stocks and

bonds, as a signal of the future direction of growth risk returns; either positive (risk seeking market sentiment), or negative (risk averse market sentiment).

How do I read the PCA Market Sentiment Indicator (PMSI) graph?

Simply put, the PMSI is a color coded indicator that signals the market’s sentiment regarding economic growth risk. It is read left to right chronologically. A green indicator on

the PMSI indicates that the market’s sentiment towards growth risk is positive. A gray indicator indicates that the market’s sentiment towards growth risk is neutral or inconclusive.

A red indicator indicates that the market’s sentiment towards growth risk is negative. The black line on the graph is the level of the PMSI. The degree of the signal above or

below the neutral reading is an indication the signal’s current strength.

How is the PCA Market Sentiment Indicator (PMSI) Constructed?

The PMSI is constructed from two sub-elements representing investor sentiment in stocks and bonds:

1.Stock return momentum: Return momentum for the S&P 500 Equity Index (trailing 12-months)

2.Bond yield spread momentum: Momentum of bond yield spreads (excess of the measured bond yield over the identical duration U.S. Treasury bond yield) for corporate bonds

(trailing 12-months) for both investment grade bonds (75% weight) and high yield bonds (25% weight). The scale of this measure is adjusted to match that of the stock return

momentum measure.

The black line reading on the graph is calculated as the average of the stock return momentum measure and the bonds spread momentum measure. The color reading on the

graph is determined as follows:

1.If both stock return momentum and bond spread momentum are positive = GREEN (positive)

2.If one of the momentum indicators is positive, and the other negative = GRAY (inconclusive)

3.If both stock return momentum and bond spread momentum are negative = RED (negative)

What does the PCA Market Sentiment Indicator (PMSI) mean? Why might it be useful?

There is strong evidence that time series momentum is significant and persistent. In particular, across an extensive array of asset classes, the sign of the trailing 12-month return

(positive or negative) is indicative of future returns (positive or negative) over the next 12 month period. The PMSI is constructed to measure this momentum in stocks and

corporate bond spreads. A reading of green or red is agreement of both the equity and bond measures, indicating that it is likely that this trend (positive or negative) will

continue over the next 12 months. When the measures disagree, the indicator turns gray. A gray reading does not necessarily mean a new trend is occurring, as the indicator

may move back to green, or into the red from there. The level of the reading (black line) and the number of months at the red or green reading, gives the user additional

information on which to form an opinion, and potentially take action.

Momentum is defined as the persistence of relative performance. There is a significant amount of academic evidence indicating that positive momentum (e.g., strong performing stocks over the recent past continue to post strongperformance into the near future) exists over near-to-intermediate holding periods. See, for example, “Understanding Momentum,” Financial Analysts Journal, Scowcroft, Sefton, March, 2005.


51

DISCLOSURES: This document is provided for informational purposes only. It does not constitute an offer of securities of any of the issuers that may be described herein. Information containedherein may have been provided by third parties, including investment firms providing information on returns and assets under management, and may not have been independently verified. Thepast performance information contained in this report is not necessarily indicative of future results and there is no assurance that the investment in question will achieve comparable results or thatthe Firm will be able to implement its investment strategy or achieve its investment objectives. The actual realized value of currently unrealized investments (if any) will depend on a variety offactors, including future operating results, the value of the assets and market conditions at the time of disposition, any related transaction costs and the timing and manner of sale, all of whichmay differ from the assumptions and circumstances on which any current unrealized valuations are based.

Neither PCA nor PCA’s officers, employees or agents, make any representation or warranty, express or implied, in relation to the accuracy or completeness of the information contained in thisdocument or any oral information provided in connection herewith, or any data subsequently generated herefrom, and accept no responsibility, obligation or liability (whether direct or indirect, incontract, tort or otherwise) in relation to any of such information. PCA and PCA’s officers, employees and agents expressly disclaim any and all liability that may be based on this document andany errors therein or omissions therefrom. Neither PCA nor any of PCA’s officers, employees or agents, make any representation of warranty, express or implied, that any transaction has been ormay be effected on the terms or in the manner stated in this document, or as to the achievement or reasonableness of future projections, management targets, estimates, prospects or returns, ifany. Any views or terms contained herein are preliminary only, and are based on financial, economic, market and other conditions prevailing as of the date of this document and are thereforesubject to change.

The information contained in this report may include forward-looking statements. Forward-looking statements include a number of risks, uncertainties and other factors beyond the control of theFirm, which may result in material differences in actual results, performance or other expectations. The opinions, estimates and analyses reflect PCA’s current judgment, which may change in thefuture.

Any tables, graphs or charts relating to past performance included in this report are intended only to illustrate investment performance for the historical periods shown. Such tables, graphs andcharts are not intended to predict future performance and should not be used as the basis for an investment decision.

All trademarks or product names mentioned herein are the property of their respective owners. Indices are unmanaged and one cannot invest directly in an index. The index data provided is on an“as is” basis. In no event shall the index providers or its affiliates have any liability of any kind in connection with the index data or the portfolio described herein. Copying or redistributing theindex data is strictly prohibited.

The Russell indices are either registered trademarks or tradenames of Frank Russell Company in the U.S. and/or other countries.

The MSCI indices are trademarks and service marks of MSCI or its subsidiaries.

Standard and Poor’s (S&P) is a division of The McGraw-Hill Companies, Inc. S&P indices, including the S&P 500, are a registered trademark of The McGraw-Hill Companies, Inc.

CBOE, not S&P, calculates and disseminates the BXM Index. The CBOE has a business relationship with Standard & Poor's on the BXM. CBOE and Chicago Board Options Exchange are registeredtrademarks of the CBOE, and SPX, and CBOE S&P 500 BuyWrite Index BXM are servicemarks of the CBOE. The methodology of the CBOE S&P 500 BuyWrite Index is owned by CBOE and may becovered by one or more patents or pending patent applications.

The Bloomberg Barclays Capital indices (formerly known as the Barclays indices) are trademarks of Bloomberg Finance L.P..

The Citigroup indices are trademarks of Citicorp or its affiliates.

The Merrill Lynch indices are trademarks of Merrill Lynch & Co. or its affiliates.

52

M E M O R A N D U M

Date: May 31, 2017

To: Oakland Police and Fire Retirement System (OPFRS)

From: Pension Consulting Alliance, LLC (PCA)

CC: David Sancewich - PCA

Sean Copus – PCA

Teir Jenkins – OPFRS

Katano Kasaine - OPFRS

RE: New Evolving Policy memo under new Asset Allocation

Summary

At the April 2017 meeting, the OPFRS Board approved a new long-term investment policy

for the Retirement portfolio. The table below suggests a schedule for implementing the

new policy, moving from the actual portfolio’s current allocations to the interim/long-

term policy over the next 12-18 months. The new policy will take time to fully implement

as a result of the educational and search process of the CRO class. Accounting for these

funding and pacing issues, implementation of the new policy should be completed

within the next twelve months. PCA recommends the Board adopt these revised evolving

policy implementation schedules.

PCA recommends the Board adopt the funding plan of the new asset allocation policies

and the revised evolving policy implementation schedule.

Discussion

The tables that follows presents a revised evolving policy implementation schedule,

following the Board’s decision to adopt a new investment policy at its April 2017 meeting.

Asset Class 3/31/2017

Actual

5/1/2017 -

12/31/2017

1/1/2018 -

6/30/2018

Cash 1 0 0

Fixed Income 18 31 21

Credit 0 2 2

Covered Calls 20 5 5

Domestic Equity 48 40 40

International Equity 12 12 12

CRO 0 10 20

2

As seen above, both portfolios reduce the overall exposure to public equities and move

the retirement system towards a less risky allocation as assets move closer to 2026.

Interim Portfolio allocation

US

Equity

Covered

Calls

Non-

US

Equity

Fixed

Income REITs Credit CRO Cash Total Return StDev Sharpe

Portfolio #2 40% 5% 12% 31% 0% 2% 10% 0% 100% 6.4% 10.5% 0.37

Long-Term Portfolio allocation

US

Equity

Covered

Calls

Non-

US

Equity

Fixed

Income REITs Credit CRO Cash Total Return StDev Sharpe

Portfolio #1 40% 5% 12% 21% 0% 2% 20% 0% 100% 6.7% 10.3% 0.40

Implications of New Strategic Investment Policy

The new allocation raises several issues, all of which can be addressed over the course

of the implementation process:

1. Introduction of CROSM. The Crisis Risk OffsetSM or CROSM is a strategic class whose

return pattern varies from public equity during market extremes and is designed

to be relatively uncorrelated. This class involves three separate components: long

duration treasuries, trend following, and alternative risk premia. These

components are going to require additional education and discussion with the

OPFRS Board as well as manager searches. It is reasonable that these components

can be implemented before the end of 2017.

2. Reduction of the public equity exposure. As presented during the study’s

presentations, the OPFRS portfolio is currently on a path to be fully funded by 2026.

This means that as the Plan further matures, the heavy reliance on equities, which

has benefited the portfolio in the past, is no longer a prudent option. Thus, both

portfolio allocations involve a significant reduction to equities, through the U.S.

and covered call allocations.

An Evolving Strategic Policy

As highlighted above, one feature of adopting the new strategic policy is that it will

require a significant amount of change, both from an asset adjustment standpoint and

from the perspective of introducing new areas into the portfolio. When working with

3

other clients in similar positions, PCA has found that it can be challenging to keep the

actual portfolio aligned with the intended long-term policy portfolio. Specifically, some

moves/adjustments toward policy allocations take significant time, resulting in an actual

portfolio that may deviate significantly from its policy benchmark, from both investment

performance and asset allocation perspectives.

To help resolve and/or manage this issue, PCA is recommending an “evolving policy”

(see table above). Under an evolving policy framework, the policy portfolio is allowed

to adjust over time, reflecting the incremental funding nature that many of the minor

classes require to achieve their policy targets. Typically, the plan sponsor selects a 3-to-

5-year window over which it believes it can attain the adopted policy targets. For OPFRS,

we will try to move faster depending upon market conditions.

This evolving policy can, of course, be modified at any time during the next several years.

Scenarios leading to modification might include significant appreciation (or, possibly,

depreciation) within the Fixed Income or Public Equity classes. The Board might also

desire to lengthen/shorten the window of time required to achieve the long-term policy

depending on the progress of overall implementation.

The primary reason for the evolving policies is to account for the necessity to prudently

invest in the capital markets over time. Considering this funding process, all the other

classes will effectively be at their appropriate policy levels within approximately 18-24

months.

4

DISCLOSURES: This document is provided for informational purposes only. It does not constitute an offer of securities of any of the issuers that may be described herein. Information contained herein may have been provided by third parties, including investment firms providing information on returns and assets under management, and may not have been independently verified. The past performance information contained in this report is not necessarily indicative of future results and there is no assurance that the investment in question will achieve comparable results or that the Firm will be able to implement its investment strategy or achieve its investment objectives. The actual realized value of currently unrealized investments (if any) will depend on a variety of factors, including future operating results, the value of the assets and market conditions at the time of disposition, any related transaction costs and the timing and manner of sale, all of which may differ from the assumptions and circumstances on which any current unrealized valuations are based. Neither PCA nor PCA’s officers, employees or agents, make any representation or warranty, express or implied, in relation to the accuracy or completeness of the information contained in this document or any oral information provided in connection herewith, or any data subsequently generated herefrom, and accept no responsibility, obligation or liability (whether direct or indirect, in contract, tort or otherwise) in relation to any of such information. PCA and PCA’s officers, employees and agents expressly disclaim any and all liability that may be based on this document and any errors therein or omissions therefrom. Neither PCA nor any of PCA’s officers, employees or agents, make any representation of warranty, express or implied, that any transaction has been or may be effected on the terms or in the manner stated in this document, or as to the achievement or reasonableness of future projections, management targets, estimates, prospects or returns, if any. Any views or terms contained herein are preliminary only, and are based on financial, economic, market and other conditions prevailing as of the date of this document and are therefore subject to change. The information contained in this report may include forward-looking statements. Forward-looking statements include a number of risks, uncertainties and other factors beyond the control of the Firm, which may result in material differences in actual results, performance or other expectations. The opinions, estimates and analyses reflect PCA’s current judgment, which may change in the future. Any tables, graphs or charts relating to past performance included in this report are intended only to illustrate investment performance for the historical periods shown. Such tables, graphs and charts are not intended to predict future performance and should not be used as the basis for an investment decision. All trademarks or product names mentioned herein are the property of their respective owners. Indices are unmanaged and one cannot invest directly in an index. The index data provided is on an “as is” basis. In no event shall the index providers or its affiliates have any liability of any kind in connection with the index data or the portfolio described herein. Copying or redistributing the index data is strictly prohibited. The Russell indices are either registered trademarks or tradenames of Frank Russell Company in the U.S. and/or other countries. The MSCI indices are trademarks and service marks of MSCI or its subsidiaries. Standard and Poor’s (S&P) is a division of The McGraw-Hill Companies, Inc. S&P indices, including the S&P 500, are a registered trademark of The McGraw-Hill Companies, Inc. CBOE, not S&P, calculates and disseminates the BXM Index. The CBOE has a business relationship with Standard & Poor's on the BXM. CBOE and Chicago Board Options Exchange are registered trademarks of the CBOE, and SPX, and CBOE S&P 500 BuyWrite Index BXM are servicemarks of the CBOE. The methodology of the CBOE S&P 500 BuyWrite Index is owned by CBOE and may be covered by one or more patents or pending patent applications. The Barclays Capital indices (formerly known as the Lehman indices) are trademarks of Barclays Capital, Inc. The Citigroup indices are trademarks of Citicorp or its affiliates. The Merrill Lynch indices are trademarks of Merrill Lynch & Co. or its affiliates. FTSE is a trademark of the London Stock Exchange Group companies and is used by FTSE under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. No further distribution of FTSE data is permitted with FTSE’s express written consent.

M E M O R A N D U M Date: May 31, 2017

To: Oakland Police and Fire Retirement System (OPFRS)

From: Pension Consulting Alliance, LLC (PCA)

CC: Katano Kasaine - OPFRS

Teir Jenkins - OPFRS

David Sancewich – PCA

Sean Copus - PCA

RE: Reams Asset Management – Watch Recommendation

Manager: Reams Asset Management (“Reams”)

Inception Date: 2/28/1998 OPFRS AUM (3/31/17): $22.1 million (6.2%)

Management Fee: 20 bps ($44,180)*

Investment Strategy: Core Plus Fixed Income Firm-wide AUM (3/31/17): $27.7 billion Benchmark: Bbg. BC Universal Strategy AUM (3/31/17): $6.9 billion

* Management fee $ amount estimated based on current portfolio value

Recommendation:

Due to the recent organizational changes at Reams Asset Management, specifically, the

announced acquisition of Reams by Carillion Tower Advisors (a subsidiary of Raymond James

Financial), PCA recommends that Reams be placed on Watch status.

Summary:

In April 2017, Carillion Tower Advisors, a subsidiary of Raymond James Financial, announced that

it had reached an agreement with UMB Financial Corp. to purchase its subsidiary, Scout

Investments, and its Reams Asset Management Division. As a result of the acquisition, Reams

Asset Management will become a wholly-owned subsidiary of Carillion Tower Advisors and all

Reams and Scout investment products will be distributed through Carillon Tower Advisors.

Carillion Tower Advisors currently owns several independent, affiliate portfolio management

teams for which Carillion provides distribution and operational support capabilities. Reams is

expected to remain independent and be autonomously run with no changes to its current

investment philosophy, process, and team. In addition, all of Reams’ multi-year employment

contracts will remain in place, and the firm will continue to be headquartered in Columbus, IN.

However, PCA believes the acquisition of Reams, and the organization changes it entails,

present a material distraction for Reams and warrants the firm being placed on Watch status.

OPFRS retained Reams Asset Management to manage OPFRS’ Core Plus Fixed Income portfolio

in February 1998. As of the end of March 2017, OPFRS has $22.1 million invested with Reams.

2

Reams Asset Management

Core Plus Fixed Income

Watch Status Recommendation

Product and Organization Review Summary

Reason for Update

Areas of Potential Impact

Failed Performance Criteria

Organizational Changes

Scheduled Watch Update Level of

Concern^

Investment

process

(client

portfolio)

Investment

Team

Performance

Track Record

Team/

Firm

Culture

Product

Key people changes None

Changes to team structure/individuals roles None

Product client gain/losses None

Changes to the investment process None

Personnel turnover None

Organization

Ownership changes Medium

Key people changes None

Firm wide client gain/losses None

^None, low or high

Review and Recommendation History

Date PCA Findings and Recommendation Board of Retirement

5/2017 PCA recommends Watch status due to organization issues Pending

8/2011 PCA recommended removal for Watch status Approved

9/2010 PCA recommended Watch status due to organization issues Approved

3/2010 PCA recommended removal for Watch status Approved

6/2009 PCA recommended Watch status due to performance Approved

Annualized Performance Results

As of 3/31/2017

Performance 3 Month 1 Year 3 Years 5 Years Inception

(2/1998)

Reams – Gross of Fees 0.8 1.3 2.8 3.0 5.8

Reams – Net of Fees* 0.6 1.1 2.6 2.8 5.6 Bloomberg Barclays Universal 1.1 1.9 3.0 2.8 5.1 Difference (Net of Fees) (0.5) (0.8) (0.4) 0.0 0.5

IM Core Plus Peer Percentile Rank 94 90 85 88 53

Source: Investment Metrics * Net of Fees performance estimated from current fee schedule

Performance:

As OPFRS’s Core Plus Fixed Income manager, Reams has underperformed its Bloomberg Barclays

Universal benchmark by (30) basis points, gross of fees, over the first quarter of 2017. The portfolio

3

underperformed its benchmark by (60) and (20) basis points over the most recent 1- and 3-year

periods, respectively, while outperforming its benchmark over the 5-year period by 20 basis

points. Since the initial funding of Reams in early 1998, the portfolio has outperformed the

Bloomberg Barclays Universal index by 70 basis points. When compared to its Core Plus Fixed

Income peers, the fund has not performed particularly well, ranking in the bottom quartile of the

Broad Market Core+ Fixed Income peer group over the quarter, 1-, 3-, and 5-year periods. Since

inception, the fund has ranked slightly below the peer group median.

Personnel Changes:

As of the end 1Q2017, there has been minimal turnover within Reams’ investment management

team over the last several years. In 2015, two analysts left the team, while one new analyst was

added, but there has been no portfolio manager turnover over the last several years. All

members of the firm work as a team on all products offered by Reams.

Investment Philosophy and Process:

Reams’ investment philosophy is based on the premise that volatility is a key driver of

performance in the fixed income market. Volatility is usually higher than commonly perceived

and is often mispriced in the marketplace. This core belief leads the firm to: focus on long-term

value and “total return,” employ macro and bottom-up strategies to uncover unique

opportunities, and react opportunistically to valuation discrepancies and volatility in the bond

market.

Reams manages portfolios using three basis steps, which are best described as a combination of

top-down and bottom-up. The first step is to establish the portfolio's overall duration and yield

curve characteristics, often referred to as the top-down or macro portfolio characteristics.

Reams approaches the duration decision as a valuation problem, utilizing below-benchmark or

short-duration portfolios when the market is unattractive or overvalued and above-benchmark

or long-duration portfolios when the market is attractive or undervalued. The main tool used to

establish value is the real or inflation-adjusted Treasury bond rate. Depending on Reams’

assessment of relative values along the yield curve, portfolios may be barbelled, bulleted, or

laddered.

The second step of the investment process is to consider sector exposures. Sector exposure

decisions are made on both a top-down and bottom-up basis. For most sectors, the bottom-up

issue selection process is the major determinant of sector exposure. As securities are analyzed on

a risk/return or upside/downside basis, attention is paid to which sectors are producing the most

attractive securities. When a number of the most attractive securities are coming from a certain

sector, this area will be researched further to determine whether the sector should be

consciously overweighted. Conversely, underweighting might result from a predominance of

relatively unattractive issues within a sector. In this manner, security selection will tend to

determine sector selection, with top-down objectives used mostly for risk control to avoid over-

concentration. However, for some more generic parts of the portfolio, such as mortgage pass-

4

throughs or agencies, top-down considerations will drive the sector allocation process as overall

sector measures of value, such as spreads or price levels, will be used to make sector decisions.

This is more generally the case when credit quality is not an issue.

The third step of the investment process is individual security selection. Reams approaches

security selection on a total return basis assuming that the market will exhibit a considerable

degree of both interest rate and credit volatility. Therefore, the firm’s focus is generally on

securities that will benefit from dynamic interest rate and credit environments. Pockets of the

market that exhibit good dynamic and structural characteristics may be used intensively,

allowing Reams to take advantage of its relatively moderate size.

Reams relies primarily on internal research in the bond selection process. A great deal of

emphasis is placed on using scenario analysis as an analytical tool, allowing Reams to determine

how each security will perform in a variety of potential interest rate and credit environments.

Value is determined based on the distribution of potential returns. The firm’s outlook for interest

rates, fundamental credit analysis, and option-adjusted spread analysis are the primary tools

used when constructing these scenarios. This process identifies which bonds should perform the

best under the most likely scenarios. Importantly, this process will also point out those bonds that,

while attractive on the surface, are most vulnerable to risks in the bond market and

inappropriate for the portfolio. Ultimately, investment opportunities are compared, and the

bonds with the highest risk-adjusted return are selected.

5

DISCLOSURES: This document is provided for informational purposes only. It does not constitute an offer of securities of any of the issuers that may be described herein. Information contained herein may have been provided by third parties, including investment firms providing information on returns and assets under management, and may not have been independently verified. The past performance information contained in this report is not necessarily indicative of future results and there is no assurance that the investment in question will achieve comparable results or that the Firm will be able to implement its investment strategy or achieve its investment objectives. The actual realized value of currently unrealized investments (if any) will depend on a variety of factors, including future operating results, the value of the assets and market conditions at the time of disposition, any related transaction costs and the timing and manner of sale, all of which may differ from the assumptions and circumstances on which any current unrealized valuations are based. Neither PCA nor PCA’s officers, employees or agents, make any representation or warranty, express or implied, in relation to the accuracy or completeness of the information contained in this document or any oral information provided in connection herewith, or any data subsequently generated herefrom, and accept no responsibility, obligation or liability (whether direct or indirect, in contract, tort or otherwise) in relation to any of such information. PCA and PCA’s officers, employees and agents expressly disclaim any and all liability that may be based on this document and any errors therein or omissions therefrom. Neither PCA nor any of PCA’s officers, employees or agents, make any representation of warranty, express or implied, that any transaction has been or may be effected on the terms or in the manner stated in this document, or as to the achievement or reasonableness of future projections, management targets, estimates, prospects or returns, if any. Any views or terms contained herein are preliminary only, and are based on financial, economic, market and other conditions prevailing as of the date of this document and are therefore subject to change. The information contained in this report may include forward-looking statements. Forward-looking statements include a number of risks, uncertainties and other factors beyond the control of the Firm, which may result in material differences in actual results, performance or other expectations. The opinions, estimates and analyses reflect PCA’s current judgment, which may change in the future. Any tables, graphs or charts relating to past performance included in this report are intended only to illustrate investment performance for the historical periods shown. Such tables, graphs and charts are not intended to predict future performance and should not be used as the basis for an investment decision. All trademarks or product names mentioned herein are the property of their respective owners. Indices are unmanaged and one cannot invest directly in an index. The index data provided is on an “as is” basis. In no event shall the index providers or its affiliates have any liability of any kind in connection with the index data or the portfolio described herein. Copying or redistributing the index data is strictly prohibited. The Russell indices are either registered trademarks or tradenames of Frank Russell Company in the U.S. and/or other countries. The MSCI indices are trademarks and service marks of MSCI or its subsidiaries. Standard and Poor’s (S&P) is a division of The McGraw-Hill Companies, Inc. S&P indices, including the S&P 500, are a registered trademark of The McGraw-Hill Companies, Inc. CBOE, not S&P, calculates and disseminates the BXM Index. The CBOE has a business relationship with Standard & Poor's on the BXM. CBOE and Chicago Board Options Exchange are registered trademarks of the CBOE, and SPX, and CBOE S&P 500 BuyWrite Index BXM are servicemarks of the CBOE. The methodology of the CBOE S&P 500 BuyWrite Index is owned by CBOE and may be covered by one or more patents or pending patent applications. The Barclays Capital indices (formerly known as the Lehman indices) are trademarks of Barclays Capital, Inc. The Citigroup indices are trademarks of Citicorp or its affiliates. The Merrill Lynch indices are trademarks of Merrill Lynch & Co. or its affiliates. FTSE is a trademark of the London Stock Exchange Group companies and is used by FTSE under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. No further distribution of FTSE data is permitted with FTSE’s express written consent.

Page 1 of 2


A. Subject: April 26, 2017 Special PFRS Board Meeting Minutes From: Staff of the PFRS Board

Recommendation: APPROVE April 26, 2017 Special PFRS Board meeting minutes.

B. AUDIT AND OPERATIONS COMMITTEE – MAY 31, 2017

B1. Subject: Administrative Expenses Report From: Staff of the PFRS Board

Recommendation: ACCEPT an informational report regarding PFRS Administrative Expenses from July 1, 2016 through March 31, 2017.

B2. Subject: Potential PFRS Rules and Regulations Changes From: Staff of the PFRS Board

Recommendation: REPORT of Audit Committee Review of PFRS Rules and Regulations.

B3. Subject: Procedures for member hearings involving private medical information

From: Staff of the PFRS Board

Recommendation: REPORT of Audit Committee discussion of procedures for member hearings involving private medical information.

B4. Subject: Discussion of 2006 management audit of PFRS administration From: Staff of the PFRS Board

Recommendation: REPORT of Audit Committee discussion of 2006 management audit of PFRS administration.



RETIREMENT BOARD MEMBERS

Walter L. Johnson, Sr. President

Jaime T. Godfrey Vice President

Robert J. Muszar Member

Steven Wilkinson Member

Steven J. Bernard Member

John C. Speakman Member

Christine Daniel Member



SPECIAL MEETING of the BOARD OF ADMINISTRATION of the OAKLAND POLICE AND FIRE RETIREMENT SYSTEM (“PFRS”)

AGENDA

OAKLAND POLICE AND FIRE RETIREMENT SYSTEM SPECIAL BOARD MEETING MAY 31, 2017

ORDER OF BUSINESS, continued

Page 2 of 2

C. INVESTMENT & FINANCIAL MATTERS COMMITTEE AGENDA – MAY 31, 2017

C1. Subject: Investment Market Overview From: Pension Consulting Alliance (PCA)

Recommendation: ACCEPT an Informational Report regarding overview of the global investment market through April 2017.

C2. Subject: Investment Fund Performance Report for the Quarter Ending March 31, 2017


Recommendation: APPROVE the Investment Fund Performance Report for the Quarter Ending March 31, 2017.

C3. Subject: Status of the Updated Asset Allocation to the PFRS Fund From: Pension Consulting Alliance

Recommendation: ACCEPT an Informational Report regarding the status of the Updated Asset Allocation to the PFRS Fund.

C4. Subject: Watch Status Update – Reams Asset Management From: Pension Consulting Alliance

Recommendation: APPROVE PCA recommendation regarding watch status for Reams Asset Management.

D. Subject: Member Resolution(s)No. 6971-6974 From: Staff of the PFRS Board

D1. Resolution No. 6971

APPROVE Resolution Approving Death Benefit Roll and Directing Warrants Thereunder in the Total Sum of $1,000.00 to Donald E. Jones, Son of Edward L. Jones (F).


APPROVE Resolution Approving Death Benefit Roll and Directing Warrants Thereunder in the Total Sum of $1,000.00 to Estate of Floyd J. Romiti (F).


APPROVE Resolution Approving Service Retirement Allowance Payments to Virginia A. Malone, Surviving Spouse of Thomas V. Malone (P).


APPROVE Resolution Approving Death Benefit Roll and Directing Warrants Thereunder in the Total Sum of $1,000.00 to Ana E. Balaria (P), spouse of Frank E. Balaria (P).

E. NEW BUSINESS – No Report.

F. OPEN FORUM

G. FUTURE SCHEDULING

PFRS Board Meeting Minutes April 26, 2017

Page 1 of 4

D R A F T

D R A F T

A SPECIAL BOARD MEETING of the Oakland Police and Fire Retirement System (“PFRS”) was held April 26, 2017 in Hearing Room 1, One Frank Ogawa Plaza, Oakland, California

Board Members Present: • Walter L. Johnson, President • Jaime T. Godfrey, Vice President • Steven Wilkinson, Member • Robert J. Muszar, Member • John C. Speakman, Member • Christine Daniel, Member

Board Members Absent: • Steven J. Bernard, Member

Additional Attendees: • Pelayo Llamas, Jr., Deputy City Attorney / PFRS Legal Counsel • Katano Kasaine, Plan Administrator • David Low & Teir Jenkins, Staff Members • David Sancewich and Sean Copus, Pension Consulting Alliance (PCA)

The meeting was called to order at 11:02 am.

President Johnson rearranged the Board agenda.

F. PFRS INVESTMENT COMMITTEE MEETING – APRIL 26, 2017

F1. Investment Manager Performance Report – Reams Asset Management – Clark Holland and Jason Hoyer from Reams Asset Management presented their firm’s performance report through March 31, 2017. Mr. Holland noted that Reams will be purchased by Carillon Tower Advisors and represented that Reams will maintain autonomy with no turnover in employees or managers. Following the reporting of the performance report and some Board questions, member Godfrey made a motion to accept the informational report from Reams Asset Management, second by Member Wilkinson. Motion passed.

[BERNARD – ABSENT / DANIEL – Y / GODFREY – Y / JOHNSON – Y / MUSZAR – Y / SPEAKMAN – Y / WILKINSON – Y ] ( AYES: 6 / NOES: 0 / ABSTAIN: 0 )

F2. Investment Manager Overview – Reams Asset Management – Sean Copus from Pension Consulting Alliance presented an overview of Reams Asset Management’s investment performance and management notes of their firm. In light of the expected ownership change for Reams, Mr. Copus said PCA will bring a review for consideration of placing Reams on watch status at the May 2017 PFRS meeting. Member Godfrey made a motion to accept the informational report from PCA, second by Member Speakman. Motion passed.


President Johnson returned the Board meeting to the original schedule, moving back to Agenda Item A.

A. Closed Session – There were no public speakers. President Johnson convened a Closed Session of the Board at 11:22 am.

B. Report of PFRS Action from Closed Session – Regular Session of the Board resumed at 12:10 pm. PFRS Legal Counsel Pelayo Llamas stated there was no reportable board action related to the Closed Session Agenda.

C. Approval of February 22, 2017 PFRS Board Meeting Minutes – Member Speakman made a motion to approve the February 22, 2017 PFRS Board meeting minutes, second by Member Muszar. Motion passed.

[BERNARD – ABSENT / DANIEL – Y / GODFREY – ABSTAIN / JOHNSON – Y / MUSZAR – Y / SPEAKMAN – Y / WILKINSON – Y ]


Page 2 of 4

D R A F T

D R A F T

( AYES: 5 / NOES: 0 / ABSTAIN: 1 )

D. Approval of March 29, 2017 PFRS Board Meeting Minutes – Member Speakman made a motion to approve the March 29, 2017 PFRS Board meeting minutes, second by Member Muszar. Motion passed.

[BERNARD – ABSENT / DANIEL – Y / GODFREY – ABSTAIN / JOHNSON – Y / MUSZAR – Y / SPEAKMAN – Y / WILKINSON – Y ] ( AYES: 5 / NOES: 0 / ABSTAIN: 1 )

E. PFRS AUDIT COMMITTEE MEETING – APRIL 26, 2017

E1. PFRS Monthly Administrative Expenses Report – Investment Officer Teir Jenkins presented the details of the PFRS administrative expenses report from July 1, 2016 through February 28, 2017. Member Speakman made a motion to accept the Administrative Expenses Report from July 1, 2016 through February 28, 2017, second by member Godfrey. Motion passed.


E2. Review of PFRS Rules and Regulations – Member Muszar reported the Audit Committee would continue to review the rules and regulations at upcoming meetings. He reported that the Board would be asked to submit questions, concerns and ideas about the current rules and regulations to staff by May 15. Member Muszar then said the committee would review these responses and discuss them and other issues related to the rules and regulations at upcoming audit committee meetings starting in May 2017, working to prepare a report and possible action by the October 2017 PFRS Board meeting.

E3. Review of PFR Protocols regarding handling of confidential medical information – Member Daniel reported that Audit Committee discussed the matter of PFR Protocols regarding handling of confidential medical information at their meeting and will read an Attorney General’s opinion on the subject (to be furnished by PFRS Legal Counsel).

E4. Review possible administrative/management audit of PFRS Administration – Member Muszar reported that the Audit Committee directed staff to bring to the next audit committee meeting the package of information from the original Request for Information regarding the PFRS administrative/management audit. He said discussion on this matter was tabled until the May 2017 Audit Committee meeting at the request of Plan Administrator Katano Kasaine.

E5. Resolution No. 6965 - Travel Authorization for Board Member R. Steven Wilkinson – Member Muszar made a motion to approve Resolution No. 6965 - Travel Authorization for Staff Member R. Steven Wilkinson to Travel and Attend the 2017 NASP Pension and Financial Services Conference (“2017 NASP Conference”) from/on June 26, 2017 to June 28, 2017 in Los Angeles, CA with an Estimated Budget of One Thousand Seven Hundred Fifty-Seven Dollars ($1,757.00), second by member Speakman. Motion passed.

[BERNARD – ABSENT / DANIEL – Y / GODFREY – Y / JOHNSON – Y / MUSZAR – Y / SPEAKMAN – Y / WILKINSON – ABSTAIN ] ( AYES: 5 / NOES: 0 / ABSTAIN: 1 )

E6. Resolution No. 6968 - Travel authorization for Staff Member Pelayo Llamas – Member Muszar made a motion to approve Resolution No. 6968 – Travel authorization for Staff Member Pelayo Llamas to travel and attend the 2017 CALAPRS Attorneys' Roundtable Conference (“2017 CALAPRS Conference”) from/on June 2, 2017 in Burbank, CA with an estimated budget of Eight Hundred Nine Dollars ($809.00), second by member Speakman. Motion passed.


E7. Resolution No. 6969 – Travel authorization for PFRS Board Member R. Steven Wilkinson – Member Muszar asked Member Wilkinson questions about the Consortium West and Consortium East conferences. After some discussion, member Muszar made a motion to


Page 3 of 4

D R A F T

D R A F T

approve Resolution No. 6969 – Travel authorization for PFRS Board Member R. Steven Wilkinson to travel and attend the 2017 RG+Associates Consortium East Conference (“2017 RG+Associates Conference”) from/on June 14 to June 15, 2017 in New York, NY with an estimated budget of One Thousand Six Hundred Seventy Dollars ($1,670.00), second by Member Speakman. Motion passed.

[BERNARD – ABSENT / DANIEL – Y / GODFREY – Y / JOHNSON – Y / MUSZAR – Y / SPEAKMAN – Y / WILKINSON – ABSTAIN ] ( AYES: 5 / NOES: 0 / ABSTAIN: 1 )

E8. Resolution No. 6970 – Travel authorization for PFRS Staff Member Katano Kasaine – Member Muszar made a motion to approve Resolution No. 6970 – travel authorization for PFRS Staff Member Katano Kasaine to travel and attend the 2017 IIR Public Funds Roundtable Conference (“2017 IIR Conference”) from/on April 26, 2017 to April 28, 2017 in Los Angeles, CA with an estimated budget of One Thousand Two Hundred Seventeen Dollars ($1,217.00), second by member Speakman. Motion passed.


F. PFRS INVESTMENT COMMITTEE MEETING – APRIL 26, 2017 (continuation)

F3. Investment Market Overview – Mr. Copus reported on the global economic factors affecting the PFRS Fund. Member Godfrey made a motion accept the Informational Report from PCA, second by member Muszar. Motion passed.


F4. Preliminary Investment Fund Performance Report – Mr. Copus reported the PFRS Investment fund had a 13.9 percent investment return against a benchmark return of 13.1 for the one-year period. Member Godfrey made a motion to approve the preliminary performance report, second by member Speakman. Motion passed.


Member Godfrey moved item F6 forward.

F6. PFRS Watch Status update – DDJ Capital Management, LLC – Mr. Copus reviewed current information about DDJ Capital management and reported PCAs recommendation to end the Watch Status for this firm. Following Board discussion, Member Godfrey made a motion to approve removing DDJ Capital Management, LLC from “Watch” status, second by Member Muszar. Motion passed.


F5. PFRS Fund Asset – Liability Study – David Sancewich presented the details of two proposals for PFRS’s Fund Asset Allocation strategies for Board consideration. The details are set forth in the April 26, 2017 Agenda Report “Asset Allocation Approval and Evolving Policy Implementation.” He reported the principal differences between the two asset allocation portfolio scenarios were the allocations between the Crisis Risk Offset Asset class (CRO) and the Fixed Income asset class. Graham Schmidt from Cheiron, Inc., the PFRS plan actuary, provided the actuarial perspective of these two options. The Board and PCA had extensive discussion on this matter with PCA and Cheiron.

MOTION: Member Godfrey made a motion to approve PCA proposed Portfolio Allocation No. 1, setting the PFRS Asset Allocation at 40 percent US Equity, 5 percent Covered Calls, 12 percent Non-U.S. Equity, 21 percent Fixed Income, 2 percent Credit, and 20 percent CRO, second by member Muszar. Discussion continued.


Page 4 of 4

D R A F T

D R A F T

SUBSTITUTE MOTION: Member Daniel made a substitute motion to implement PCA’s proposed Portfolio Allocation No. 2 (setting the PFRS Asset Allocation at 40 percent US Equity, 5 percent Covered Calls, 12 percent Non-U.S. Equity, 31 percent Fixed Income, 2 percent Credit, and 10 percent CRO) as the asset allocation for the PFRS fund, with a long-term plan of achieving proposed Portfolio Allocation No. 1, second by member Speakman. Motion passed.


G. Member Resolutions No. 6966-67 – It was noted that Brostrom is expected to seek reclassification of her husband’s death as caused by “on duty” injury.” Following some Board discussion, Member Speakman made a motion to approve Resolution No. 6966 Fixing the Monthly Allowance of Marida G. Brostrom, Surviving Spouse(s) of the Retired Member(s) of the Police and Fire Retirement System, second by member Godfrey. Motion passed.


Member Speakman made a motion to approve Resolution No. 6967 Approving Death Benefit Roll(s) and Directing Warrants Thereunder in the Total Sum $1,000.00 to Claudia Threkeld, daughter-in-law of George Green (F); and Dagny O. Cooper, Significant Other of Henry A. Otto (P), second by member Godfrey. Motion passed.


H. NEW BUSINESS – No Report.

I. OPEN FORUM – No Report.

J. Future Scheduling – The next meeting was scheduled for April 26, 2017.

The meeting adjourned at 1:10 pm.

KATANO KASAINE, BOARD SECRETARY DATE

OAKLAND POLICE AND FIRE RETIREMENT BOAftD CITY OF OAKLAND, CALIFORNIA

RESOLUTION No. 6971

ON MOTION OF MEMBER~ _______ SECONDED BY MEMBER ________ _

RESOLUTION APPROVING DEATH BENEFIT ROLL AND DIRECTING WARRANTS THEREUNDER IN THE TOTAL SUM OF $1,000.00.

WHEREAS, due proof having been received of the death of the person(s) named in Column (1) below, active or retired member(s) of the Police and Fire Department, under Article XIV, XV or XXVI of the Charter of the City of Oakland; and

WHEREAS, the beneficiary(ies) to whom the death benefit provided in Charter Section stated in Column (3) is payable, is the person(s) whose name(s) is/are stated in Column (5) opposite the respective name(s) of the deceased active or retired member; and

WHEREAS, the amount of said death benefit is stated in Column (6) opposite said respective name(s); now, therefore, be it

RESOLVED: That the Retirement Board approves, and it does hereby approve Death Benefit Roll Number in Column (4), a copy of which is attached hereto, providing for payment of such death benefit to the person(s) named in Column (5); and be it

FURTHER RESOLVED: That the Director of Finance, be and is hereby directed to draw and sign warrant(s) for the amount in Column (6) payable to the respective person(s) whose name(s) appear(s) in Column (5):

{1) {2) (3) (4) {5) {6} Death

Status Benefit Death Name of of Charter Roll Name of Beneficiary Benefit

Deceased Member Member Section Number (Relationship of Beneficiary) Amount

Edward L. Jones (F) Retired 2612 8690 Donald E. Jones (Son) $1,000.00

IN BOARD MEETING, CITY HALL, OAKLAND, CA ________ -""-'M"""A-'-Y-'-""3-'-1 ...... 2.._0"""1"""'7 __ _


AYES:

NOES:

ABSENT:

BERNARD, DANIEL, GODFREY, MUSZAR, SPEAKMAN, WILKINSON, AND PRESIDENT JOHNSON

ATTEST: ------,P,,-RE-Sl_OENT ____ _

ATTEST: __________ _

SECRETARY


RESOLUTION NO. 6972

ON MOTION OF MEMBER ________ SECONDED BY MEMBER ________ _







( 1) (2) (3) (4) (5) (6) Death



Floyd J. Romitl (F) Retired 2612 8685 Estate $1,000.00

IN BOARD MEETING, CITY HALL, OAKLAND, CA _________ M~A~Y_3~1-'-'-"2 .... 0._1 ..... 7 ____ _


AYES:

NOES:

ABSENT:


ATTEST: -----,P~RE-Sl----DE-NT ____ _

ATTEST: __________ _ SECRETARY

RESOLUTION No. 6973

ON MOTION OF MEMBER--------SECONDED BY MEMBER----------

RESOLUTION FIXING THE MONTHLY ALLOWANCE OF THE SURVIVING SPOUSE(S) OF THE RETIRED MEMBER(S) OF THE POLICE AND FIRE RETIREMENT SYSTEM.

WHEREAS, the retired member of the Police and Fire Retirement System, whose name appears below, died on the date shown; and

WHEREAS, the surviving spouse, whose name appears below, does not claim such death resulted from injury in or illness caused by the performance of duty; and

WHEREAS, there is now presented to this Board, the amount in Column (6), as shown on Service Retirement Allowance Roll No. 8691 and as calculated by the Actuary in accordance with Article XX.VI of the Charter of the City of Oakland; now, therefore, be it

RESOLVED: That the Police and Fire Retirement Board fixes, and it does hereby fix, the amount in Column (6), as the monthly allowance to which said surviving spouse is entitled, effective on the date shown in Column (4):

(1) (2) (3) (4) (5) (6) %of

Name of Effective Compensation Name of Deceased Date of Surviving Date Attached to Monthly

Member Death Spouse of Allowance Ava. Rank Held Allowance

Virginia A. Thomas V. Malone (P) 03/12/2017 tMalone 03/13/2017 26.668% $2,842.82

IN BOARD MEETING, CITY HALL, OAKLAND, CA ________ ____;M:.:..::....A.:....:Y'--3=-'-1 L..:2=0=-1::...;;7 ____ _


AYES: BERNARD, DANIEL, GODFREY, MUSZAR, SPEAKMAN, WILKINSON, AND PRESIDENT JOHNSON

NOES:

ABSENT:

ATTEST:------.,,....------PRESIDENT

ATTEST: ------,,S-EC-RE-TA-RY ____ _


RESOLUTION NO. 697 4

ON MOTION OF MEMBER--------- SECONDED BY MEMBER----------







(1) (2) (3) (4) (5) (6) Death



Frank E. Balaria (P) Retired 2612 8690 Ana E. Balaria (Spouse) $1,000.00

IN BOARD MEETING, CITY HALL, OAKLAND, CA ________ --'M'-"-"-A~Y'-'='-3-'-1 '--'2::.;Q,._1.:....:7 ____ _


AYES:

NOES:

ABSENT:


ATIEST: __________ _ PRESIDENT

ATIEST: __________ _ SECRETARY