City of San Jose, CA Federated City Employees' Retirement Board, 17 Mar 2022

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From YouTube: MAR 17, 2022 | Federated City Employees' Retirement Plan Board

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City of San José, California
Federated City Employees' Retirement Plan Board of March 17, 2022

This public meeting will be conducted via Zoom Webinar. For information on public participation via Zoom, please refer to the linked meeting agenda below.

Agenda https://sjrs.legistar.com/View.ashx?M=A&ID=937238&GUID=1519F899-6604-43E8-A608-0444E227AB5F

A

A

B

A

A

A

A

C

To order the federated retirement and health care trust board meeting of march 17 2022, uh we will have a roll call vote in order of tenure, uh trustee chandra.

D

Just roll call, yes, aye.

C

Trustee orr, I know, is not present. uh Trustee keller.

C

Hi vice chair jennings, here uh trustee linder here and our very new trustee, uh uh miss avasti hi. Are you good? Thank you. um We are continuing to meet virtually at this meeting and are doing so pursuant to ab361.

C

As such, all votes will be roll call votes. If you are not speaking, please be on mute to cut background noise for discussion items. Each trustee will have return to speak in roll call order more than once if desired, and the public will also have an opportunity to speak on each item after trustees.

C

The public will additionally have an opportunity to speak again at the end of the meeting on any other item, not on the agenda that is within the subject, jurisdiction of the board.

C

um I we have a very full agenda today. I hope to take a break uh five minute break around the 10 o'clock hour and we will also have a recess from 1 to 105 pm to accommodate the civic center tv broadcasting system.

C

And then I will ask board members to please stay on the zoom meeting after the regular meeting ends so that we can have the various committee meetings that need to take place uh to stay in compliance with ab361.

C

So now I would like to welcome our new uh trustee uh and hopefully not putting you on the spot too much. But if you want to say a few words about yourself, I'm sure we would all love to hear that and including how to properly pronounce your name. So trustee awasti.

B

Good morning, everyone, my name, is prachi alaski.

B

I am an employee of the city. I joined the city three years and nine months back in the investments group and recently I joined the risk management and the contracts administration division of the community energy department.

B

I am a chartered financial analyst by profession, and I've held various positions before the city in companies like ernst, young moody's, analytics cisco systems and I'm looking forward to work with you all and contribute to the and serve the best interest of the employees and the retirees.

C

Well great, thank you for stepping forward to to take on this position and we look forward to your your guidance and insight uh and with that we will move to. I believe the next item is to wave sunshine. I believe we received uh uh some information on item 4c after the uh the deadline.

C

uh So do I have a motion to wave sunshine on 4c.

D

And chairman horowitz, I will uh I'll go with someone else, making a motion.

C

Please go ahead. Trusty chandra, yeah I'll make the motion then. uh Thank you. That's a motion by trustee chandra do I have a second from trustee keller.

A

C

Very good any seconds, trustee keller is the second uh any discussion. Any any public comment uh hearing. None we'll have a roll call vote, trustee, chandra, aye trustee uh keller, hi vice chair, jennings aye, trustee linder, aye trustee, abbasi aye and I vote. I it passes um and now we need a motion to accept the orders of the day.

C

uh Do we have a motion to accept the orders of the day.

E

I'm motioned to accept the orders of the day so.

C

We have a motion for secretary jennings and a second from, I believe, trustee kelleher. If I heard correctly that is correct, uh okay, any discussion, any public comment: we have a role called vote, trustee, chandra, hi trustee keller. I vice chair jennings aye, trustee linder, aye trustee abusti.

F

C

And I vote I so it passes and now we move to the consent calendar and we once again need a motion and a vote to accept the consent calendar. Do I hear such a motion.

E

On motion to accept it.

C

We have a motion from vice chair jennings.

C

Yeah I see that uh we have a second from trustee keller uh brad. Would you like to make a comment.

G

uh Thank you, mr chair. Excuse me. uh Maybe uh I'm a little out of order with this, but I did put in a request to uh to director uh director pena regarding the order of uh the public and retiree comments be placed at the beginning of the agenda. I understand he's going to discuss that with you during your april agenda review meeting. So uh just for uh public record.

G

I am requesting that, uh rather than wait until the end that the public and the retiree comments be placed at the beginning of the agenda- and I just want that so noted. Thank you.

C

Okay, uh so noted, uh since the agenda is already set for today's meeting, we cannot accommodate that request today, but, as you mentioned, it sounds like we will be discussing that for the future. So currently we have a motion on the table to accept the consent calendar. It was a motion by vice chair jennings, as second by trustee kelleher, any further discussion or public comment hearing none. We will have the roll call vote, trustee, chandra, aye trustee kelleher aye vice chair jennings aye, trustee linder, aye trustee avasti.

A

C

And I vote, I it passes and now we move to.

E

uh Just so you know, uh brad's hand is still up, I don't know if he has another question or if it just.

C

Hasn't, okay, it looks like he took his hand down. Thank you, bro, okay, and and thank you for helping me spot any hands raised, because I cannot see all the participants at the same time as the agenda is up. So I don't know if anybody else has their hand up. But now we move to item number two uh death and survivorship notification.

C

At this point we will have a moment of silence for those who have served the city and who have passed.

C

C

Item number three investments: we haven't begin uh this lengthy section with an oral update from our cio, mr palani.

H

C

Honey the floor is yours,.

H

Thank you, mr chairman, good morning, everyone happy st patrick's day. I just realized. I don't have any green on me, but I do have my starbucks cup, which I'm hoping there's green in the portfolio. Oh well. It will become green eventually.

E

That's a good one. I like that.

H

uh So anyway, well welcome to the new trustee trustee avasti. We look forward to working with you and uh before I actually, uh as as always, I will share with you pro forma performance numbers, but before I do that we do have a guest here, uh steve mccourt, who's, the chairman of makita investment group, and I know russia is, on top of everyone's minds: the invasion of ukraine and its impact on the portfolio.

H

So before I drill down to the specifics on the portfolio itself, I would like to uh invite steve mccourt, with your permission, mr chairman, to make a few comments on the macro effects of the invasion of ukraine. um Steve are you on.

I

I am yeah, thank you and um thanks uh to all of you for inviting me to say a few words uh today.

I

uh I am irish, I'm wearing green and happy thanks, happy st patrick's day, um so I probably asked me to say a few words about the recent market volatility and, in particular, the the impact of the war in ukraine, which which I will do I will highlight before I start, uh which I think what I think is the obvious, which is um each time I speak about the the market volatility, uh the the comments change somewhat, because uh the the nature of the conflict uh changes and the volatility changes as well.

I

So, um but this will this will get you up to date uh to uh to today, anyway, uh to begin, uh let me just kind of highlight some of the uh the broader market uh movements so far this year, this calendar year uh we're two and a half months through at this point uh through this morning.

I

U.S equity markets are down nine percent uh this calendar year, uh international equity markets uh in the developed world, largely western europe and japan, are down. Nine percent and emerging market stocks are down 12 percent, um largely driven by uh further declines in uh in the chinese uh stock market.

I

I've uh most interestingly, uh the the bond markets are also down uh nearly as much uh investment grade. Bonds through this morning are down about six percent on the year, which is uh a huge move for bonds. That is not um something that we're used to seeing in the marketplace.

I

High-Yield corporate bonds are down uh six percent, um so the uh most major asset classes are are down uh and in a sense, diversification has not so far yielded many risk, mitigating benefits, um so you might ask what's up well the the obvious I think that's up is commodities. uh The commodity complex is up 22. So far this year, uh that's commodities, broadly metals, food uh energy uh commodities. Certainly some of those are up much much more than uh than 22 percent.

I

uh I highlight those market changes, uh because the context I'll present uh to you on the impact of the war of ukraine uh is largely one that uh so far diminishes the impact on the capital market of the the direct impact of the war.

I

As we stand here today, arguably the biggest impact that the war in ukraine has had at the capital markets is to amplify pre-existing concerns. The market had about inflation and rising interest rates. uh Equity markets before the war began were already down um close to eight percent and they were down because uh the us economy uh was starting to feel significant inflation.

I

Consumer prices were up uh over seven percent year over year for two consecutive months, and the bond market started pricing in quite quickly in january, um six to seven federal reserve interest rate hikes starting in march of this year.

I

uh The the threat of higher interest rates uh had a particularly direct impact on stock prices because, as you all are all aware, the stock market had ballooned up the last couple of years during the pandemic on fiscal stimulus and monetary stimulus and investors, particularly with growth stocks rationalized ever higher stock prices by pointing to low interest rates, the lower the interest rate, uh the higher the present value of all the future growth that you're going to expect from the companies that you own.

I

So when rates go up, uh all us equal, the price of risk assets, go down uh the war in ukraine.

I

I've added fuel to that fire, largely by causing uh oil and energy prices to go through the roof starting uh in late february, and so the feds required actions to quell the tide of inflation prior to the war got a lot more difficult once the war began, and that has led, of course, to a lot more volatility in the markets and interest rates to go even higher. As we stand here today, uh the the yield on the 10-year treasury bond is uh uh 2.15.

I

Roughly we started the year at 1.5, um so really really big increases in interest rates um on long-term interest rates.

I

uh This year the fed met yesterday and said what the market expected it to say, which was it was raising rates by a quarter point and that it would likely raise rates uh six more times uh this year, uh the the central bank bank moves to titan monetary policy uh is so far consistent across the globe.

I

In the uk, uh the central bank has increased rates twice already and in europe. The european central bank has started to discuss pulling back on uh support uh of long-term interest rates uh in europe despite the war, so inflation seems to be high on the mind of central bankers right now, and that's caused monetary policy to uh begin flipping from an accommodative stance to a more hawkish stance which all else equal is negative for risk assets.

I

There are some secondary effects of the war that, uh particularly if the war persists for um a while, which it very well may uh are, are worth paying attention to um the first and most obvious, is that um when, in the us, people pay seven dollars a gallon for gasoline, uh there are direct impacts on consumer confidence and spending uh and uh and on gdp.

I

So, while the us economy right now has continued to benefit from momentum uh from the snapback from the the pandemic, recession and the economy is still growing at a reasonable rate.

I

The the risk of recession down the road has certainly increased uh because of uh rising oil prices, energy prices and the demand destruction effect of of higher prices generally uh in the economy, and if those prices are were to remain high or go higher from here. The risks of recession certainly increase.

I

Arguably, the risk of recession in europe is even greater at this point, uh because the energy impact has been even greater.

I

The uh the next secondary effect I would highlight is um the the uh the west's response to this war with respect to sanctions uh has been, to say the least, like nothing we've seen before, and arguably uh one of the more penalizing sanctions that the u.s implemented on russia, and it did so to afghanistan just a couple of months ago, was it froze the russian central bank's assets in u.s treasuries that are held at the federal reserve bank of new york.

I

This was a unprecedented move to limit russia's ability to finance its economy and has the potential impact of causing other countries that hold large amounts of treasury bonds in new york to question whether or not that's a wise strategy going forward.

I

The most significant holder of u.s treasury bonds, of course, is china and the the us's ability and willingness to freeze uh russian assets for um geopolitical concerns um certainly has china thinking about the wisdom of holding three trillion dollars of u.s treasury bonds um to uh to uh to support its economy.

I

No evidence yet that china is changing its um approach to its treasury holdings, but something that the the bond market is certainly looking at and then the other secondary effect that highlight, which is longer term, is also related to the sanctions.

I

The the um the russian economy has more or less been closed off from the global economy, uh and uh in retrospect, it's quite clear that putin had been uh preparing his economy for sanctions for the last 10 years, and so, as a consequence.

I

The russian economy today relies far less on external trade than it did 10 years ago, but there are other large economies like china that rely a lot on external trade to make its economic engine run, and uh one has to wonder if uh the threat of sanctions uh will now cause china or other countries to pull back on their globalization uh as they see it as a as a geopolitical threat uh to rely on foreign trade as much uh in a world where sanctions can be as severe as they are.

I

So no no evidence yet, but that's certainly a risk that is um that arises from the war. So I'm going to conclude with with uh with three things I'm making zero predictions on. You know what's gonna happen in the future, uh uh but I have you know so far. Three, uh I think uh lessons uh to take away from the ukraine crisis so far and there'll be more as we move on the first is the federal reserve can't solve every problem the market has going into this.

I

There was a common wisdom in the markets that, because the federal reserve uh and the federal government uh was able to stimulate the economy out of the pandemic recession, there wouldn't be any risk that the the federal reserve couldn't handle uh in the markets and uh the ukraine war simply highlights what uh should be the obvious uh central bankers have their limits and how they can manage the economy and what they can do to to mitigate risks.

I

Second, second lesson um again, which hopefully is obvious: uh the future is intrinsically unknown.

I

uh The the um the russian skirmishes with ukraine are not new they've been going on since 2014 and before there were discussions prior to this year um and people who thought that uh a invasion was imminent, um but uh those in the market uh put more or less a zero probability on that until mid february of this year, and so even the the best and the brightest and um the most incentivized to uh try to predict probabilities in the future are incapable of doing so, uh and I think that's um that's evidence by the ukraine crisis.

I

It was also evidenced by kovid and his evidence by more or less every significant market risk in the past by definition, market risk is risk that is not priced into the market already, and so the as long as the future keeps handing us surprises, which it has a good way of doing uh volatility will persist uh in the markets and uh the final lesson as we go through this is uh relates to kind of investment strategy and policy, particularly for long-term oriented defined benefit plans like yours, because you can't predict the future.

I

It's unwise to rely on market timing to mitigate risks. I can more or less guarantee you that the big risks that will hurt you as an investor are risks that you will not see coming and, as a consequence, risk management has everything to do with setting up a portfolio. That's well diversified across many asset classes and many different risk factors and staying committed to that portfolio. Staying invested and I think that's a common wisdom in the industry, but I also think it's worth kind of reinforcing during during times like these.

I

So I'll conclude my comments there and happy to uh to take any questions that anyone might have.

I

C

You very much uh maybe before mr palani proceeds are there any questions from trustees yeah. This is.

A

Actually kind of a question regarding your comment on the chinese treasuries being held at the new york in new york: uh could they just hold them offshore? Do they have to be custody in new york.

I

So it's an interesting question. My understanding is that the custom historically was for the uh the new york fed to uh facilitate all central bank trades uh with treasuries, and uh I'm I'm guessing. There are smart people that are in china that are thinking about just that point today.

A

Thank you, yeah. No, just uh despite having been at the bank of new york mellon for 30 years, I still don't know my basic custody issues.

A

D

If I uh chairman, horowitz, is okay, if I jump in, I have a channel related question as well. This is trustee chandra. Please go ahead yeah. Thank you, um yeah! Thank you for the presentation, so you made some comments about how the chinese may be viewing the sanctions that were levied against russia in the wake of the invasion of ukraine, but I wonder their interdependence on the global economy and their growth over the last 30 years has been generated by a a wonderful import export uh net, positive balance.

D

um You know I and you know, with all the domestic travails they're having lots of bad debt. uh Lots of stagnant corporations, lots of more bun real estate investments.

D

How I mean is it even feasible that they could switch to a domestic demand based economy, given the amount of growth they need to support a 1.3 billion person, population.

I

Not not without a lot of economic pain, but.

I

The the I I would, I would argue, the the the calculus internally at china is intrinsically different than the calculus in a democratically governed country, so so in the us and western europe economic pain isn't tolerable because it means you're, not elected. I in china or russia. For that matter, uh economic pain might be a better outcome in the short term than the long term challenges that you face of staying in power.

I

So I think I think, the it's it's it's hard to know uh from china's perspective, how much of a threat they view their connectedness with the global economy as clearly they need some connectivity, unlike unlike russia, china doesn't have its own energy resources, it has to trade, um but certainly to your point, uh the the development strategy of china for the last 40 plus years now has been focused on trade with the us and they've tried to migrate to more of a domestic demand economy for the last 15 years.

I

In fits and starts, it largely hasn't really worked, and that's largely because, exactly to your point, each time you shift to domestic demand, your gdp growth goes down. You have uh corporate uh defaults, lower profits, recessions and, and it's just it's- it's a lot of pain to take. um If you don't have to so um it certainly would be painful for the the chinese government to stop buying treasuries that would cause their currency to increase, which would make them less competitive as an exporter.

I

It would be painful for them to stop buying or selling goods and services from the west, and their growth rates would certainly be lower. Their inflation rates would other would be higher than otherwise.

I

But the open question is: um uh what's what's the what's the geopolitical calculus on their side of the uh of the downside of of global integration, um which is that you are now much more exposed to the threat of sanctions from the west, which now appear much more painful than they did before ukraine, uh in the event that the the us and europe decide to impose sanctions on you for whatever geopolitical reason they may want to so uh hard to know.

I

But I would certainly acknowledge uh it would be a painful process for china to go through.

D

Okay, thank you, I'm interested in the uh the the implications for china. I mean the human toll in ukraine and I worked with ukrainians uh and my whatsapp feed is filled with horror stories. um I don't want to undermine that, but from a geoeconomics point of view, the china question is far more interesting. So thank you for addressing it.

C

Any any other trustees with questions for our guests.

C

Okay, mr palani I'll turn it back over to you, then, for further comment.

H

Thank you, mr chairman, thank you steve. As always, we appreciate your comments um so getting to portfolio specifics, uh so you did hear about the impacts of the invasion uh from a macro perspective from steep.

H

uh More specifically, is the federated portfolio exposed to russia, and the answer is yes, it is um we don't directly by as you you all know, we don't directly invest in these markets, but we do invest in uh global markets through our managers, and we do have uh a sizable emerging markets allocation in our portfolio. Having said that, uh it is the good news is that the impact is pretty minimal uh as of february 28th.

H

um Just this is I'm now talking public equity. Our exposure to russia was 10 basis points versus 19 basis points in the benchmark. By the way russia has now been kicked out of the indices and it's no longer part of the emerging markets index and also there's no trading going on in these in these securities.

H

So this is some combination, so the underlying managers who invested in these stocks uh started actually liquidating their positions even before you know all of this happened just given the you know, because there was some headline risk surrounding this, even before the actual invasion took place. So some combination of selling out of these holdings and write downs as of feb 28 that valued this at 10 basis points now. My guess is that it's actually worth less than 10 basis points, uh but that's where the managers have marked it so worst case scenario.

H

We should think of this. As you know, zero basis points as in we've written off those 10 basis points. um So so the the damage is is pretty minimal. uh From from this exposure and in emerging debt again, the we do have through one of our managers, some exposure to russian debt, which is less than three basis points, and you know, as as as trustee questions clearly uh suggested.

H

China is, of course, a bigger issue globally than russia and has a lot more impact on global markets, and since the questions uh were related to china, let me just say you know our. I do have these numbers here. Our china exposure is three percent in our portfolio in our equity portfolio, compared to 3.8 in the benchmark. So we are slightly underweight china as well, and we will continue to monitor uh our russian exposure. uh As of as of now, we've also looked at our private market exposures and it's.

H

It appears that we have zero exposure to russia or ukraine uh with that, um let me give you pro forma performance numbers. As always. uh Let me start by saying these are unaudited numbers. These numbers come from makita, and these are estimates as of march 15th fiscal year. To date, our pension plan is down to 2 2.04, to be precise and uh fiscal year. To date, the healthcare trust is down 4.89 and, interestingly, quarter to date, all these losses came us from january 1st onwards.

H

So this this calendar year to date, the pension plan is down 7.3 and the healthcare trust is down 7.36.

H

So the first six months of the year, we were positive, but this calendar uh year to date you know that markets, the pension plan is down seven percent, and this this makes sense. As steve said in the overall market, equity markets down nine percent- or so our exposures, you know to growth, our growth beta is about 75 percent, so more or less aligns with that.

H

So I wanted to share those numbers with you also, and I know we have a long agenda, mr chairman, we will try to get through it as efficiently as possible without compromising on the quality of the discussions.

H

So unless there are any further questions for me, I will uh hand it over to casey boyer of new burger moment to tackle item 3b.

C

Thank you, but are there any questions from trustees for mr palani.

C

Okay, let's proceed then to the uh next presentation.

J

Okay, thank you very much. I appreciate the opportunity to present to you all each quarter. Today we will be going through the private equity portfolio for q3. 2021.

J

um q3 was a great quarter, much like previous quarters in in 2021 and even uh 2020. So we continued with that trend in q3 with the portfolio overall being marked up quite a bit.

J

The net multiple, which you'll see in the middle at towards the bottom of this first summary page, was for q3 1.9 to be a little more specific 1.89 in q2, so just the the quarter before it was 1.75, so this quarter of uh 2021 q3 was actually the largest increase in the portfolio over over its its time.

J

Here, um more specifically, on this page, one of the other highlights is, you will now see distributions uh back from the new burger strategic partnership of 24.4 million um in in q3 there was a total of 11.5 million distributed, so previously at 24.4 million was quite a bit less. There was a lot of realizations and exits within the portfolio during this time period um through today.

J

If I, if I went back through the portfolio- and I looked at distributions um back to the program post q3, we've distributed nearly 14 million 13.97 million back to the program, so that 24.4 million will go up quite a bit um in in q4 when we present that number. So that's great we've been seeing more and more realizations. As you know, we are nearly five years into this program in may, we'll come to our fifth year anniversary and we're really now starting to see that development of more mature investments.

J

You know we are still actively investing regularly committing to new primary funds, so we're constantly putting capital into the ground as well, but now also starting to see some of the realizations coming back from investments that were made in 2017, 18 and 19., um and maybe just to step back one one moment.

J

Overall, you know touching on russia, ukraine, we've went through the portfolio. We also do we. We do not have any exposure to companies within russia or ukraine and, to the extent of our knowledge, nothing headquartered there and and none of the companies with significant um business in either of those areas. So um from that aspect, um not in the portfolio of course, I'm sure there will be other results from from the on ongoing.

J

Ukraine, russia problem: um let's go to page three, so as you, as you know, these next few pages show both um legacy investments, so investments made prior to the newberger partnership as well as newberger fund investments and really benchmarking those underlying investments to their peers in the industry.

J

This quarter we actually added an extra column, which you um didn't see previous quarters. uh It's the column, contributions kind of there in the middle.

J

We added that so you can see, and maybe, um if we want to move to the first new burger page there, we go um it's more relevant on the new burger investments since they're, actively still investing you'll see the commitment amount, which is obviously how much we have committed to that specific fund and then the contribution amount you'll see how much of that commitment has actually been put or contributed invested into underlying portfolio companies.

J

So that will give you an idea of if the funds still um getting started, if they're still deploying capital and give you a little bit more idea of kind of where they are in their process.

J

So for the most part um overall, the funds are, um you know compared to peers. Looking pretty strong, but this is a good way to kind of benchmark how the underlying investments are are doing.

J

Maybe we'll move to the next perfect, so looking a little bit closer into the exposures within the portfolio, we're showing a few different items here and it's based on the committed amount, as well as the invested amount, and that was exactly what I was highlighting on the previous page, what we've committed to and what has actually been invested into underlying portfolio companies.

J

You'll see this here by investment type, which is at the very top. The top three pie, charts you'll, see the biggest difference here and in bet in between committed and invested is the primaries compared to the co-investments.

J

Obviously, the co when we make an investment into a portfolio company, a co-investment directly that capital goes into very quickly on the primaries, those that capitals invested over two three, sometimes year time period, so that takes a little bit of time to catch up to the committed amount, and that's where you see the difference there in those pie charts.

J

This will also give you a good idea of where exactly we are invested or committed.

J

Geographically you'll see there is a heavy weight towards north america, the most mature kind of long-standing market and then also we've added at the very bottom, committed and invested by vintage year. So vintage year is the year um that we committed to the fund or the year that capital it was invested into investments. So you'll kind of see there that we've maintained that consistent vintage year commitments and investing.

J

So here on this page, this is analysis showing the total neuberger portfolio you'll see at the top.

J

This is basically an analysis that shows how each investment type is performing primaries. Secondaries and co-investments.

J

Each each one is doing very well for its time. Primaries do take a little bit more time to gain uh and generate return, as they are investing not just in the first year but second year and third year. So we would expect the primaries um to be where they are. The 33.2 percent gross irr is, is very good. um You'll see a higher generative performance from co-investments, which is definitely why we like to add them into the portfolio.

J

They tend to mature, quicker and you'll you're able to see that return generation a little bit quick more quickly in the portfolio and at the bottom you'll see how the program benchmarks against peers, as I mentioned before, the net tbpi for q3 is 1.89 times that benchmarks very nicely and puts it into first quartile compared to other um programs within q3, um with the top quartile being at a 1.71 and above so great performance there, as well as on irr.

J

The next few pages are really just all the detail on all the underlying investments: um how much we've committed? How much has been distributed, what the total value is and then the underlying gross irr in moic.

J

um So I won't go in into too much detail on there, but I think from here I'll just open it up for questions happy to um answer anything that might be on your mind.

C

Great, thank you so much um uh before I turn to trustees. It looks like we have a hand raise from jill borders.

C

Jill go ahead.

K

Thank you. um So this is going to be one of my really broad ignorant questions, but um so last month, when I came to this meeting, um it was mentioned to me that I kind of had some of my investment lingo confused. So I'm just wondering in this particular conversation when we're talking about private equity. Are there any funds here at all that have to do with real estate investment funds? Are there any real estate?

K

um You know items invest assets embedded within all of these investments, these primary secondaries co-investments, whatever they are, I'm trying to unearth if we are a part of any of these reads so to speak. Thank you. Yeah.

J

So, within the newberger portfolio there is no real estate. um We basically do every every industry outside of that we are um our. Our largest industries are technology software healthcare, but uh we we do not have any real estate in in this portfolio and I don't believe the legacy that's shown here has private equity either, but I'll. Let dinesh correct me if I'm wrong. That's.

K

Correct. Thank you so much yep.

C

Thank you. Any questions from trustees.

D

uh This is trustee, chandra, not a question, but just a comment. I I just wanted to um thank the newberger berman folks and the staff for patiently building this portfolio over time. uh I work in the private equity industry.

D

It is a slow build. I think that the staff and newberger have been thoughtful about the co-investment, slash direct investment strategy. It's been a nice uh boost to the overall performance, and so um I wanted to make sure they were acknowledged.

J

Thank you very much. I appreciate that.

C

Okay, any any other questions.

C

I I had a question myself. uh Something I like to monitor is uh where each of these investments rank in their quartile for the iir and the moic, and compare that with previous quarters, and I noticed, for instance, in this latest summary: certain funds have improved their quartile performance.

C

Other funds have have seen a downgrade in their relative performance to the to the universe, and I'm wondering if we can see something like a waterfall chart that will show the progress of their quartile rankings for each of the investments.

C

So we can see if they're moving up moving down. My concern here is that we have a lot in the new burger bourbon that are ranked uh in the first and second quartile, but maybe that will erode over time and I'd like to be aware of that.

C

So I don't know if that's something that can be easily added to the spreadsheet, for our next visit.

J

I I understand your question: um let us go back with that. We can try to figure out the best way to present that in a straightforward manner. So we will take that back and um and come back next quarter with um something that highlights that.

C

Okay, thank you so much.

C

If there are no further questions, let's move on to the next agenda item.

H

Thank you, mr chairman, uh and for to address 3c I'd like to invite. Excuse me laura wyrick.

L

And I will actually invite my colleague jared pratt to talk about private markets and then I will cover the uh the general reports.

M

Laura good morning, everybody I'm trying to share my screen here.

M

M

H

H

One second, okay,.

M

uh So yeah good morning, everybody here is the um the private markets report. As of the third quarter. uh This is the public version, so staff gets more detailed uh version than this, uh but to get started here on page two, here's a snapshot of the portfolio, so you can see if we look at the far two right columns in particular that we usually focus on. We look at the irr of each asset class compared to a public market equivalent.

M

You can see in general as you go down the columns that the comparison for the pension is favorable in three out of the five places and a good overall irr of north of nine percent.

M

um I would note for private debt and real estate, where the public market equivalent comparison, is unfavorable uh that that's primarily the result of older investments that haven't done quite well that predate current staff. So look at some more reinvestments, more recent investments here in a minute getting into private debt here on page three, there's 15 investments in this group. You can see on the bottom left that the contributed amount is very close to the committed amount. So a mature program.

M

In that sense, the current weight is very close to the three percent target, um so performance for this group of assets isn't as good as as others as I just briefly mentioned.

M

uh It's primarily due to some very large 2010 commitments that we've mentioned before that haven't done quite well, but more recent investments have done much better, and if you go to page six, where a lot of these individual lines are, you can see that more recent investments have irrs well into the double digits and ahead of pure median in many cases, moving on to uh real assets.

M

So there's eight investments in this group. That's up to about half of the target weight, um so one in one point: four percent weight against the three percent target, as this is still building.

M

um You see a very solid irr at the bottom right of 11.1 percent. That's handily, beating the public market, equivalent return of nine point two percent and to look at individual line items again on page 11..

M

um You know strategy level details you see that cambridge energy, five in particular, is really boosting the total irr uh giving its individual irr of 60 uh to keep moving on in the interest of time. um Here's real estate here on page 13. we're very close to the 3 target weight with the 3.1 percent current weight.

M

uh The seven point, the seven percent irr you see on the bottom right- is trailing the public market equivalent return of eight point two percent, um but we'll look at a couple of uh individual names here in a second, uh you see on page 14. That distributions have notably kicked up here recently, as this space has done really well, and underlying companies uh have distributed quite a lot as compared to contributions, and then here's page 16 with the individual funds. There's several funds here, so I won't highlight anything in particular.

M

I would note that six of the ten lines where there is a pure irr comparison uh that the fund is outperforming and then finally on uh page 18, is venture capital. So this is the newest program. um As you all know, it's it's very new. It was a four percent target and it's just building. So there's just three investments in here so far and on page 21 highlights the three investments that were committed to last year.

M

So now that was that was fairly quick but happy to take any questions as usual. The rest of the document is just background on private markets in general. So I'll stop here and see. If anybody has any questions.

C

Thank you so much. I was muted there for a moment um again. uh Miss jill borders uh has a question. uh Please proceed.

K

Thank you. It's just the same question as for the um last report, I'm just wondering you mentioned and there's something about real assets, and I don't know, does that mean real estate? Do we have any real estate in this particular portfolio at all.

M

Yes, so so real estate and real assets are both in here and they are separated as two different groups. So if I back up some, so you can see on page 16 is multiple real estate, specific investments here and then there's a whole separate section on page 11, which has real assets, um so infrastructure energy, those types of investments.

K

Am I allowed to follow up? Is there any housing in there at all.

M

Maybe I'll go to page 16 and and um I'm not sure, if uh laura maybe somebody on staff would like to address the housing question: hey it's uh dinesh from the san jose investment staff.

N

So we do have residential exposure like any real estate portfolio, so there is both.

M

Apartment and single family rental type of real estate.

N

Exposure within this program.

M

C

Any further questions from trustees.

C

Or any other questions from the public uh miss borders. Your hand is still raised.

K

My apologies I'll turn it I'll I'll put it down. Thank you.

C

All right uh hearing: none, let's proceed to the next agenda item. Thank you. So much for the presentation.

L

Right, thank you. Okay, we'll move to the um performance report for the full fun and we have good news as of the end of 2021 um in terms of the market environment. um Obviously a lot has changed as my boss, steve mccourt, talked about uh this morning. But if you take a look at page four of these materials, you see that um the s p 500 was up 11 in the three month period ended december 31st, which of course seems like a long time ago.

L

Right now, but you see that the msci efa index or developed non-us stocks was up 2.7 and that u.s tips as you'd expect in an inflationary environment, treasury inflation-protected securities have performed well recently up 2.4.

L

You can see that hedge funds high-yield and the barclays aggregate were all either flat or up about one percent during the fourth quarter. Emerging markets and commodities were negative. Obviously you know, as steve talked about, there's been a major shift in the commodities return to uh to more positive since the end of december and on the next page, you can just see how strong the long-term returns have been.

L

Even though we've seen a lot of market stress recently for the 10-year period, you have an average annual return for the s p 500 of 16.6 per year and the bloomberg barclays aggregate bond index up 2.9 per year over the past 10 years on average um I'll move ahead in the interest of time to your fund's specific performance.

L

If you take a look at page 24., we can look at the overall asset allocation. As of the end of december, the fund stood at over 3 billion 3.085 billion, and you can see that asset allocation was very close to policy and we're going to talk about strategic asset allocation a little bit later in our meeting today performance on the next slide on page 25, you can see for the quarter.

L

The fund was up almost five percent for the fiscal year to date, period of 5.6 and for the trailing one year, the full calendar year, 2021 performance of 16.5 and beating every benchmark that you have for that time period. So you all should be um very, very proud. I think of that that calendar year, 2021 performance and as you'd expect with beating all those benchmarks.

L

um For the most part, major asset classes were very positive, I'll look at page 26 and show you that private equity was a large supporter of that return for the one-year period. Of course, we just looked at irrs for private equity and the internal rates of return are the best way to measure private equity, because um private markets managers have the ability to call and distribute capital when they choose to, and so an internal rate of return takes into account how good they are at doing that at good times.

L

However, for the purposes of total fund reporting, we look at time weighted returns and you can see a one year time. Weight of return for private equity of 64 for 2021.

L

um In terms of individual managers, the vast majority of your managers have done quite well. um I won't go into too much detail, but both of your global equity managers are well above median um oberweis international opportunities, which is small cap growth within the top decile of their peer group.

L

Overall, your um your investment uh selection of managers has been quite strong over the long term to take a look at at risk as well, because we want to focus on risk and not just return, which is something we'll talk about more a little later on in today's meeting.

L

If we take a look at page 52, you can see that the um the return for the one-year period ranked in the top third of the peer group- and you can see that volatility was a bit above the peer group um in the second column here, but still hanging pretty close to the middle for a sharp ratio or a risk adjusted return that ranked above median.

L

And then, if we look at the three year period on the next slide, we see again a return above median a standard deviation below median, so the fund over the three year period had a standard deviation of 9.3 relative to 10.1.

L

You want a lower standard, deviation or less risk which which placed the sharper ratio and the top quartile of the peer group so over the five year period as well on the next slide. You also see um a standard deviation or volatility below that of the peer group for a strong, sharp ratio, and the last thing that I'll point out before wrapping up and taking questions is peer relative information.

L

So if we take a look at page 57, you can see that the total fund return was in the top quartile of the peer group for the quarter right around the top third for the year and for the three year period, also around the top quartile and then on page 58, we'll get more into peer relative asset allocations during the strategic asset allocation review.

L

But you can see the allocations relative to peers and nothing here looks really outsized on the on the higher low end, emerging markets. Equity does rank um pretty high within the peer group for asset allocation. However, as we've discussed in the past, these are self-reported and a lot of folks consider emerging markets to be within their non-us or their total equity and don't necessarily break it out. Like you all do so, I think um really that that emerging markets, equity dot, should be a little bit closer to the middle of the road.

L

um I'm happy to take any questions on your total fund performance.

C

Great. Thank you. Any questions from trustees.

C

Any questions from the public.

C

I have a couple of quick questions if we can flip back to page 25.

C

So if you can remind me and and maybe also for the benefit of the newer trustees, what exactly is the difference between our policy benchmark and our investable benchmark portfolio? Sure.

L

So it is a bit complicated. um I know that uh when we did the project, when the board did the project with cortex, there was um part of that project was um was putting in place updated benchmarks. um So the entire history, with every change that you've had historically, is on page 63 in terms of the benchmark history.

L

So the the policy benchmark is, if you were invested in passive indexes and peer universes that are sometimes made up of non-investable sorts of sorts of situations, so you might have um say for for certain asset classes like private markets. The fund is is benchmarked to its actual return, and we look at things on an irr basis in your in your private markets report and then in terms of the investable benchmark portfolio and the low-cost passive portfolio, really, the difference there is which benchmarks we're using.

L

So I think the um the investable benchmark portfolio um is what you could capture um with less advice from staff and consultants and the low-cost passive portfolio is using. You know: 100 investable passive benchmarks, so you know there are certain asset classes that you might want to invest in, like say core real estate. um Even if you didn't have a staff and consultants, um but the bench there's not really an investable benchmark there.

L

um So that's the difference between the investable benchmark and the passive portfolio and we're we're constantly we're actually doing a benchmark project right now with your staff to try to simplify some of these benchmark descriptions in your report, because we realize that they're very confusing, but the full definitions are outlined in your investment policy statement, which is posted on your website.

C

Okay, great thank you and then under um growth we have public equity, we have their global equity, u.s, equity and international equity. I'm not clear on the difference between global and international equity. Sure that's.

L

A good question: global equity includes the us as well, whereas international equity is excluding the us okay. So so you know, there's there's different schools of thought and different philosophies around whether or not it makes sense to just hire global managers and have them able to go anywhere within the u.s, non-us and emerging markets, or if it makes sense to segregate out managers and have dedicated managers in each of those spaces um and you've sort of done both in your portfolio, which I think makes sense, because there's not.

O

L

uh You know defined answer to that question. You have a couple of managers, the two artisan managers that can go anywhere. They can invest in some emerging if they want to, for example, but if you were to only use global managers, you might not get exposure to some areas of the market at all times that you might want to keep exposure to.

C

Okay, thank you. Excuse.

A

E

Excuse me, mr chair, brad has his hand up.

C

Yes, thank you uh brad. You have a question.

G

Thank you, mr chair, and thank you to uh makita for the presentation. uh You know uh I don't know how many people are actually thinking of this and I'm speaking to the public, and you know, beneficiaries as well, but you know I'm interested in in while looking through the rear view. Mirror is very important, but I'm really interested in looking through the windshield. You know where are we going, and maybe my comment in question uh is best addressed to mr palani.

G

I know you indicated that our yearly the federated fund, the yearly performance, was down. He said I think you said 7.3 percent.

G

What I'm kind of interested in- and I think it's pretty would be pretty easy to do- is uh since uh makita spoke about peer groups. Well, I'm wondering about the peer groups with regard to uh retirement funds and I'm speaking of independent funds similar to san jose such as, like city of san francisco city of san, diego city of fresno. How do we? How do we perform in relationship to those?

G

So I'd like to see that and if it's possible, mr chair, to get that also posted, maybe on a on a quarterly basis, to see how we're ranking with uh our peer groups and uh thank you for allowing me to speak. Thank you.

C

Okay, thank you uh would makeda or mr palani like to uh to answer that question.

L

I mean I I can mention that those those funds are part of our career group right now that public defined benefit plans greater than a billion dollars. We have in the past, sometimes put together custom peer groups, and that can be interesting at information as well, but generally we try to cast a wide net when looking at peers, which we we've done on pages 57 and 58 of this report.

C

Yeah, if you just want to show page 50 those those pages, because we we did just cover that- and this is precisely answering that question- how we are performing uh versus our peers and our peers are other public defined benefit plans such as the ones mentioned elsewhere in the state of california.

C

So our quarterly performance was quite high one year better than average, and you can see the data here, so this is covered on a quarterly basis.

C

Any other questions from trustees.

C

Okay hearing none any other questions from the public. If not, then uh thank you makita and we will move to the next agenda item.

L

Just um quickly since you have very similar managers in the healthcare trust and we'll look at the asset allocation slide here on page 23, so the total assets in the san jose federated retiree, healthcare, 115 trust as of the end of december or over 400 million, and you can see the asset allocation here very close to policy performance starting on page 24.

L

You can see a quarter return of 3.6 and a one-year return of 10.5.

L

um These numbers are lower than the pension trust, but you can see that they rank very highly within the peer group here of other health and welfare funds, so both are top quartile and really have top quartile for the quarter, the one year and the three years and then in the top. Third, for the five years since inception, and as we've talked about in the past, um healthcare trusts tend to be more conservative and so you're sort of more growth, centric um asset allocation here.

O

L

In up markets done quite well relative to health and welfare peer group, so I won't go into other detail unless um there are any questions.

C

Thank you. Are there questions from trustees.

B

I have a question on page 23.

B

I'm looking at low beta and I'm wondering why is the current allocation over the policy.

L

um So the current allocation of seven and a half relative to five for the policy is because there was some cash um at the end of december. That was waiting to be allocated, I believe, within core real estate. So that's more of a sort of function of just the timing of what date we're looking at this, but that's a good question. There are especially with cash, some some short-term.

L

um You know sort of amounts that end up uh there when, when there are allocations that haven't taken place yet um one thing and that's a good question that gives me a chance to to mention you know. Historically, we've tried to invest the health care trust and have a policy in this fund.

L

That's similar in strategy to that of the pension fund, even though it doesn't make sense to do illiquid assets given this asset size and how liquid it needs to be so following our strategic asset allocation discussion today on the pension fund, we will next, um if there are any changes made to the pension fund asset allocation, make sure that the health care trust asset allocation reflects that same spirit.

B

C

Thank you any any other questions. I see a hand raise from miss jill borders. Please go ahead.

K

Thank you just as a follow-up to that. That was really interesting, because you brought up that the difference in the allocation and the policy then you mentioned, was having to do with real estate. So there was some cash involved, you're saying at some point and it makes some difference etc. Could you put it in terms that I might understand, as far as like um there's extra cash, and why is it sitting around and what does it have to do with real estate?

K

I just what would be the reason that the actual like fundamental sort of five-year-old explanation, if you, if you will.

L

Sure, of course, um so uh when, when we rebalance when your your investment team internally on staff rebalances between asset classes, sometimes they need to put in a redemption notice from one of the funds that then is paid out in cash and then once the cash arrives, they need to reinvest it in another fund. So sometimes, if we look at a point in time like we're looking at just december 31st here, sometimes some cash will have come in from a redemption, but not yet been reinvested.

L

And so you have a custodian bank um that holds all of your assets and reports on your assets and we received the information from them and they reported that there was some cash. um uh You know sitting in cash at the end of december. At that exact point in time.

L

um If you are interested in looking at the real estate in this particular fund, you can look at page 28 and see the two core real estate funds, blackrock, core property and clarion lion properties fund made up um 8.9 of his portfolio are about 36 million dollars.

K

um Actually, thank you so so much because, yes, I will investigate page 28 more thoroughly, because blackrock is actually the company that I'm most concerned with at this point in time in the world. Thank you.

C

Okay, thank you so much any further questions.

C

If not allow me the privilege of a slight amendment in the agenda and that I understand our council liaison has some time constraints and I, if there are no objections, I'd like her uh to address us uh now and that would normally have been item number um 5b. So if we can hear item 5b now.

O

Thank you. I appreciate that um hi. I want to welcome the new trustee. uh It's good to see you, I hope, to meet you in person trustee avasti sometime soon, and uh the update that I have is that the forecast for the five-year forecast for the budget, the city budget, has come out and it actually looks good. Although it happened, the the five-year forecast came out before the war started in the ukraine or right around that same time.

O

So all numbers are subject to change, which we, I think we all know, but the five-year forecast had an ongoing, uh very small surplus of about 20 to 27 million dollars each year for the next five years.

O

So, unfortunately, though, that does not include the 100 million dollars that we spent in the last year on one time with one-time funds on programs such as food distribution. So there still are a number of programs that we are going to need to cut. We won't be able to sustain without the the stimulus package that came from the federal government, so the mayor's march budget message came out and was discussed at council this week. uh It was, it was passed unanimously, there's uh with with everyone who was there.

O

I unfortunately was was not able to be there on tuesday, but the focus is is really on um public safety and the environment and ensuring that we have enough resources to make a dent in our trash and blight issues and our homelessness issues. So those those were kind of the overarching themes, and there was, if you didn't, get a chance to read the march budget message um right away. At the beginning, there was praise for the retirement accounts having had a great year and being able to have a better projection, because our.

O

Our contributions to the unfunded actuarial liability have have decreased, or at least the projected contributions have decreased slightly. So that has been a key for our general fund and I very much appreciate it and I wanted to make sure that that you knew there was a nice shout out to the boards for for that great work in the last budget message.

O

So that's it for my report and actually I think this is probably one of the longer ones that I usually have, and I'm I'm happy to answer questions or to point you to the mayor's march budget message. If you didn't get a chance to look at it yet.

C

Thank you, uh council, member davis, any questions from trustees or from the public.

N

Mr chair, if I may, uh this is roberto with retirement office uh good to see you councilmember davis. um I I just wanted to. It was part of my comments on my own report, but since you are speaking now, I wanted to raise the issue.

N

I wanted to share with the board that, as you well know, early march uh council issued support for the ukrainian people in response to the russia military action against ukraine, and there were a number of directions, but the the one particular direction that impacted our office uh had to do with requests by the council on information memo uh on any investments in russia, uh and so the divestment of russia assets may be considered, and so I just wanted to share that with the board.

N

uh I will work with investment staff and this uh prabhu uh palani, our chief investment officer on drafting the information memo for the council and copy the boards, but I wanted to um sort of give you a chance to. I don't know if you have any further comments to what I just said, or you wanted to provide kind of any sort of uh flavor to have that discussion ensue at the at the council level so that we can take that into account when we draft a memo. Thank you.

O

Sure the the main concern is about um being in line with the sanctions that the federal government have put in place against russia, while at the same time it started out as a discussion about our sister city relationship with the ketterinburg in in russia and what we determined at the end of a multiple conversations. One happened at rules, and one happened at the council meeting was really that we wanted to maintain our citizen diplomacy that we have with our sister cities, but that we did support and do support very much.

O

The economic sanctions- and I think all of you have read and know that many many u.s companies that are not required to to pull out of of their business in russia have done that as a show of support for for democracy and for ukraine and against against russia's aggression, and we really want to ensure that what we, what we are invested in as much as possible, can be supportive of ukraine and really be send a clear message to russia that they, they are alone in this, and that their choices are have consequences and they are severe consequences.

O

That's really the the message that we that we're interested in and we.

J

O

We, as a council know that we don't have. uh We aren't able to give direction on that, but I will tell you that that is really what what the sentiment of the council is and.

L

I would welcome.

O

Discussion at this board about that.

N

Understood, thank you for the message. uh I think that that does provide some further uh explanation on where the council is coming from, um because I have not been able to watch the uh the meeting yet so that that's what I was looking for- and I don't know if you're able to join on the discussion earlier in the meeting uh from mikita on the and the potential impacts of the the war and then the comments by the our cio on on our exposure to to russia investments.

N

But we certainly take that into account when we drop the memo and we'll hopefully uh get it out either, if not later this week sometime next week. So thank you very much. I don't know if you have uh if anybody else have any other comments or questions, but thank you, casamay davis much. I appreciate it.

A

Thank you excuse me, roberto and mr chair brad has his hand up.

C

uh Thank you, linda brad. Do you have a question.

G

uh Thank you, mr chair, through the chair, uh thank you, council, member for painting such a rosy picture of the budget going forward. My question is: what is the current? uh Maybe this uh question is addressed to mr palani: what's the current funding status for the federated fund and uh for the council member so well, the talks for the potential uh discussion regarding pension obligation bonds is that now off the table.

O

Well, I'll, let um mr palani talk about the funded ratio. I very much oppose the issue of pension obligation bonds. I don't know if it's off the table or if it's likely to still come back, it's going through the courts right now. I believe and has been scheduled to come back in the fall.

O

I think with the frankly with the rising interest rate and scenario that we've been discussing this morning and with the uncertainty of what's going on in the uh you know on the global stage.

O

I certainly don't think that pension obligation, bonds are a great bet, but then again I never have thought that they were a great vet and that we should go forward with them. So I I don't know what is being planned. I will keep this board updated when I find out what is what is happening with the court and what is happening with the schedule.

C

And well, thank you is that a slip in the schedule I thought pobs were going to be discussed in the spring or summer and now you're saying fall so well.

O

I think the courts are a little slower cheryl's on, so she could probably give a better um a better sense she's much closer to this, but my my understanding was: the courts are backed up a little bit and we weren't going to be able to be heard as quickly as originally thought understood, I'll defer to cheryl for.

B

Thank you, councilmember davis, I'm happy to give uh the update that I have, which is absolutely correct. The courts are backed up. Currently there is a judicial validation action, that's in santa clara superior court and that matter is still pending and so right now we do not have a definitive timeline of when the actual issuance or approval of the issuance would go back to city council, as it is ultimately their decision of whether or not to issue the pension obligation bonds.

B

So I think that our best laid plans were to come back in in the spring or summer when that action is complete, but unfortunately we do not have that timeline.

H

And on the funded status, I believe on an actuarial basis. The funded status of the federated plan is in the in the low 50s um and and bill hallmark may have the the actual number, uh but around 53 or 54. If I'm not mistaken,.

N

Yeah, let me address that prabhu uh brad, so a couple of things first, prabhu is absolutely right. uh On the on the on the plus side, you you should be receiving our quarterly newsletter sometime next month, which will have a little write up on the actual evaluations and prabhu is correct.

N

The the fed from the status as of june 2021 on an actual basis is just north of 55 percent and we don't expect the actual evaluation, uh the actuarial value uh fund to really uh change considerably over time, because um obviously the whole concept of the actual evaluation is to limit the volatility of the markets.

N

So I would say we will remain near around the half mark of the 55 percent, probably next year as well. The market value is a completely different discussion right. The market value on june was 63 percent and given the the current uh um returns, even though the market has come up this week to some extent, uh so it's quite possible that that two point zero four percent negative. As so march, 15 is close to zero right now. uh That will be a lower number. But again that will be part of the quarterly newsletter.

N

uh We will have some uh detailed information, along with the link to the whole actual report, so that will provide you more detail and, as always, if you have any further questions, feel free to reach out to the office. So thank you.

A

And uh this is uh trustee kelleher. I also think it's important to uh recognize that, despite our funding ratios, our partner, who is the sponsor of this plan, is extremely extremely strong and we have a great economic city, uh so we will be able to meet the pension obligations. I'm confident of that.

G

Well, excuse me, if I can interject the partners in this plan, are the taxpayers I'm a taxpayer, we're the shareholders, and I think I can't speak for other shareholders. I wish there were more people that were in on this discussion, but uh it's this is abysmal in terms of looking at ranking at funding status, and I think you as fiduciaries recognize that and I I just hope for more honesty when it comes to where we're at and it doesn't really paint a rosy picture.

G

To be honest so, uh but I thank you all for at least attempting and trying to participate, but I I'm disappointed that there isn't more people speaking up about this. Thank you.

A

D

Ask a question uh chairman horowitz: um I I don't know who would have the answer, I'm I'm! I don't want to put cio palani on the spot, but what was our? uh I mean.

D

I've been a part of the plan for five years now I recall our funded status being somewhere in the 48 47 percent uh status, uh so so that this uh mess that brad speaks of uh certainly for me was inherited, um and I would like to know that number, because, under the stewardship of the cio and largely this board, the funding status has improved dramatically.

D

So brad, I think, needs a little bit of perspective in his commentary.

A

uh Can I interject.

D

I I'd first like an answer to my question just to make sure I I have my I'm somewhat directionally accurate. Is anyone able to answer.

N

So let me let me attempt to address that issue trustee chandra, so I joined the board uh just a little over nine years ago and and obviously uh there's a combination of data and issues that makes up the funding of the plan and uh when I joined uh it was in the uh low 60 percent, the the fund, the status.

N

So a couple of things right. That has impacted that from the status to decrease and- and I made one of these comments when I first started- uh presenting the evaluation results to to the council- which I'm quite sure, they're really excited about me- coming back next next month to present the ones for 2021 and is that two things number one.

N

um One of the main reasons for that uh for that from the status to continue going down is directly related to the board's willingness to be very, uh very methodical on decreasing the the assumed return. In fact, we as far as I'm concerned- and I know we were the first public plan in california- that actually went below seven percent on the assumption of return for any open-ended plan.

N

uh That was a huge accomplishment and in one of my presentations to the city council, one of the analogies was, I remember, presenting the federated plan data that, on in a nutshell, seemed um just a bit uh um a bit worse than the detroit pension plan at the time which was actually going to uh a bankruptcy, and I made the point that it's not enough to look at the funded ratio.

N

It is important to also look under the hood and look at the assumptions. How reasonable are those assumptions and to the comments by trustee keller? Here? uh Also look, as you well indicated, brad and these tax barriers look at the health of the plant sponsor. So there was two main differences between san jose and detroit.

N

First and foremost, the health and the plan sponsor detroit has been impacted by a decreased, considerable decline of population and economic factors over the last 20 30 years. That is not the case with san jose and again, at least from the balance sheet standpoint. It has it's a strong city and number two.

N

uh The assumed return for this plan has always been lower than the city of detroit and even though it's no longer the lowest uh plan in california, it is a six point, six to five percent, one of the uh lowest uh assumed returns in the state and in the nation and again it just speak to the willingness by the board to not only be conservative but more than anything being realistic about the assumption. So um I would just argue brad that the uh funding ratio number, although certainly is a key data component of understanding.

N

The health of a plant, is by no means the only factor and it has to be. The health of a plant have to be looked and considered along with a number of other factors that I just mentioned. So as always, we welcome the comments by by the public and we stand ready to to answer those issues, hopefully uh trustee chandra.

N

I answered your question, but in closing what I wanted to say is that it is important that we discuss these issues on nano basis and obviously we do work with mikita with the staff and with the the actuarial firm, and we have these assumptions and if you look at hopefully to the future, uh based on the assumptions and again we know assumptions are not going to pan out every year, sometimes they're going to be better, sometimes they're going to be worse.

N

If things worked out the way we are expecting them in the next 20 years or so, the plan is to uh surely but uh slowly to consider to increase that funding ratio over time and again, uh yes, it's 55. We realize that we we everyone would like it to be higher, but I think uh the key point here is not the only data or factor to be considered on the strength of the plan. There's a lot of other factors that I just mentioned, and I think you have to look at it from that standpoint.

N

G

Thank you, mr chair, you can. Can I interject something.

C

Well, uh if it's a question, this is, this is not meant to be uh un agendized debate.

G

No no, but I can't let it come and just go. uh I think I'm I'm.

C

G

Real disappointed that mr chandra, uh you know, cops out and says: well, we inherited all this well you're now on the board. You're all fiduciaries- and you know if this was a private board and the performance was this bad. I, and I'm with all due respect. You probably would have all fired yourselves.

G

Okay, I was a trustee for 12 years and I'm not saying this just to brag or anything, but I was a trustee for 12 years. When I left the board, the fund was 90 funded, so it's obviously attainable and of course it's all different times. Every fund is different. Everything is different, but 90 and and now we're in the 50s.

G

This is abysmal, I'm it's just troubling to me and unfortunately, most retirees have no clue as long as they get their pension check. Every month are happy right and, unfortunately, a lot of boards uh exploit the ignorance and the timidity of of of the shareholders to come up and speak, and again I wish more people would speak.

G

I want to have an open invitation to mr pena and mr palani to have a meeting, I'm open to any trustee, to have a meeting with me uh and and that's an open invitation, and I hope someone uh takes that up so again. Thank you, mr chair. I respect your position and I respect the fact that uh you're conducting this meeting so uh again. Thank you for the time.

C

Again, thank you for your comments. um We are aware and are concerned about the issues you raise and actually it gives me an opportunity to come back to something that uh council liaison davis said, and I she she referred to the mayor's budget message and I would I would like to actually read directly from it. It was prominently featured in in the leading paragraphs, and I think it goes also to mr pena's remarks, which is what's important, is not just the level of the funded status but the direction and on a market value.

C

We are now in the low 60s up from the low 50s.

C

The direction of travel is is positive and we are moving in the right direction to move from the low 50s to the low 60s in a single year, which is what happened is a rather remarkable result and now I'll read from uh mr lucardo's the mayor's uh budget message directly more than a decade of pension reform battles, difficult negotiations, shared sacrifice and ballot measures has resulted for the first time in two decades in a projection that the cost of retirement benefits will consume a declining share of the general fund over the next half decade, though it will never hit the headlines.

C

This collective achievement of our employees and residents should not be overlooked. It will pay many dividends in many future years of restored services and programs.

C

uh So for all board members, what we do matters and it's uh it's recognized- uh it may not get the headlines it deserves, but what we do isn't very important and with that, as we approach uh the very exciting next agenda item uh the strategic asset allocation as we are at 1005.

C

I would like to take our five minute break at the 10 o'clock hour. We will resume at 10 10.

C

A

C

The agenda for today are all trustees uh present and accounted for.

D

A

Trustee killer is here: I'm president linder present.

C

Right, that's a full house.

C

uh Item uh 3f asset allocation.

A

H

A

C

Mr palani, will you present on this.

H

Yes, thank you, mr chairman,.

C

H

Before I hand it over to makita I'd like to make some preliminary remarks on asset allocation, but I also want to let the board know that uh you know I forgot to mention during my oral update, that the federated retiree association invited me to speak to them a couple of weeks ago to talk about performance, the russian situation and former chair castellano, and mr dave armstrong very kindly invited me to address that group, which I did and also I forgot to mention to the board. I'm sure mr pena will cover this later.

H

We did present to calipers, which is the association of all california, public retirement systems, on the very important topic of governance and the strides that san jose has made, along with some of the other sister plans in the state, and also I'm happy to let the board know uh that I've actually completed four years as cio this week.

H

And um thank you um to be honest. I didn't expect to be here for four years, uh but uh when you're having fun, why leave and- and I think a huge shout out to the board and each and every one of you- I mean you really make it real for us and every trustee is, you know it's hard working every conscientious and you engage with us. It's a and and roberta has worked with many systems in his career, and he often makes this remark he's never seen more engaged boards elsewhere.

H

So you you, you make it real, and you know- and and and that's that's a huge reason why my team- and I are here and we're very focused and- and I'm also committed to developing uh the next level of leadership, uh jay dinesh christina and we have a terrific. You know we have lots of bench strength, and so I think, there's there's going to be a lot of continuity in our approach uh going forward and so on. On the topic of asset allocation. Makita will actually present this.

H

So it's a very important function of the board and in fact 90 of returns are driven by strategic asset allocation and only the manager's selection and what staff does is only 10 of it and so being in the right asset class and taking on the right amount of risk is what really determines uh returns and- and so you know, our board did a study, uh along with a consultant, a risk consultant varus a few years ago and decided that the optimal risk, level uh or standard deviation of returns is 12 and multiple stakeholders were consulted uh in coming up with this number, including our sponsor, and so ever since then, you know, we've decided that that's the right risk level, and so when we look at strategic asset allocation, it's not so it's not as important to look at the underlying asset classes, though they do play a role, but what really drives it is how much risk are we taking?

H

And to that extent you know we often get questions on. How do you do relative to your peers and we like to show off you know when we do well say we are top quartile and all of that? But it's really not that relevant. What is relevant is. Are we taking the right level of risk for us as a plan in keeping with you know what is required of our plan sponsor right and our our actuary chiron bill has consistently pointed out that we are an outlier in terms of the maturity of our plan.

H

The impact of of funded kind of you know annual contributions on our city's budget. So we have a tough task of not being able to take too much risk, but at the same time trying to increase our funded status, it's an extremely difficult, delicate balance and that it's something that we strive hard to do right, and so, while the pll, when we look at you know how we've done versus our peers, it's not that important.

H

What is really important is: are we taking the right level of risk for our plan for our sponsor and are we maximizing returns for our pensioners and so in the in the build-up to today's discussion? You know this. We you know we we usually come up. Makita comes up with capital market assumptions annually, and this is strategic asset allocation. It's meant to be long-term right. So when we come up, we we look at 20-year projections for expected, return and risk, and we come up with the right mix, but markets do change.

H

You know, and we've seen this in the last 12 weeks, so makita does come up with a fresh set of capital market assumptions every year. So we do look at our saa in light of those revised capital market assumptions that doesn't mean we have to change it. We don't need to change it, but sometimes we, you know we look at inflation.

H

Inflation was not as much of an issue 12 to 18 months ago, but it is now so in light of these developments, we look at the portfolio and say: can we actually improve on what we have, and so we've had extensive discussions, investment consultant and staff and the investment committee, and we actually presented our various options to the investment committee.

H

The last time we met and the investment committee gave us great feedback and we've incorporated some of the suggestions and, as laura will point out, so I'm going to turn this over to laura, to make the presentation and following laura eileen will also present from a risk perspective from varus's perspective, and then we can open up open it up for discussions.

D

uh Ciao palani can I interrupt for just a quick comment and a quick question.

H

D

Yeah, the quick comment is, I didn't know where appropriate, but I wanted to congratulate you on your four years and, more importantly, to congratulate you on on the professionalization of our plan during your tenure. um We, I believe, are investing much more like the big girls and the big boys do.

D

I think that it has manifested in terrific returns, and I specifically want to point out that I think it showed a lot of conviction and caring about the plan on your part when, in march of 2020, you convened some special board meetings and special investment committee meetings, because you saw an opportunity for the plan. um My experience with public institutions is people tend to act like bureaucrats and they tend to just want to.

D

You know kind of protect their job, and that was a risky bet that you asked the board to make you and your team came exceptionally well prepared to those conversations. We all decided to take the leap of faith with you and the plans have benefited tremendously as a result. So thank you for your leadership um and with that, my question for makita is before you begin discussing the options.

D

I would like to understand the degree to which you have refactored inflation and maybe change some of your assumptions: around inflation over a 10 and 20 year, horizon vis-a-vis what those um expectations were when we last had this asset allocation discussion. I know makita knows and and trust uh cio bolani knows and and for in the committee note, but for the benefit of the board. I have a bias toward not changing asset allocations.

D

We we make 20 year projections and then we change them every year, so it kind of renders the 10 and 20 year, projections kind of silly, um but of course there are are often event-driven reasons to reconsider, and so I just would like to know how much inflation is baked into these numbers and and if that's an appreciable difference in the way inflation was viewed. When we were presented with options last year.

L

Sure- um and you know I just wanted to start off today- you know thank you for having me keita to discuss this important topic by saying that you know we at makita have the perspective um not just of having worked with you and seen a lot of changes over the past 10 plus years in terms of the board and your internal investment team and your governance process, but also working with many other large public pension plans.

O

And other investors, like.

L

Endowments and foundations- and you know I would say, that the professionalism of the board and the progress that you all have made on both a board and investment team and governance level um over that time period has been really incredible and I would agree with trustee chandra's comments about the level of professionalism and really, I think, best in class sort of governance process and this strategic asset allocation process that you have is an outgrowth of that and did it allow for that pivot in early 2020 and um and the way that the board now focuses on this very important question and looks at risk in addition to potential future returns, and then has the um the investment team internally work with their advisors to implement decisions is really a very efficient way to to run a pension fund.

L

So you all should be congratulated on the progress that you made and also on the efficiency of this process that we'll talk about today in terms of inflation.

L

We do prefer to look at very long-term expectations, so our primary expectations that we develop at makita on an annual basis are looking out over the next 10 and 20 years. For that reason, you aren't going to see huge shifts in numbers. Year to year. um We have increased our inflation expectation from about two percent a year to about three percent a year over the next 20 years, and so that's a median expectation.

L

You would expect that half of years would have a higher inflation number, and I would expect that to be the case this year and then half of years would have a lower inflation number.

L

So where we do take inflation more into account is when we look at other types of analysis like historical scenario, analysis and stress testing, and we do look at past inflationary environments and how the different asset allocations that we're going to discuss today would have done in those past environments, and so that's where you'll see inflation taken into account a bit more.

L

um So in terms of this process, you know we start by working with your internal investment team on looking at. You know a wide variety of different options. Then we we funnel those into the ones that we bring to the investment committee.

L

So the investment committee has already discussed different asset allocation options and then we take into account feedback from the investment committee to bring options to the board. um So the good news is that your asset allocation has performed quite well and it still meets your expectations around a risk level below 12 and a an expected 20-year return. That is above your actuarial, assumed rate of return. So I think just to sort of um lay the groundwork here, I'll I'll just point out page four quickly.

L

Actually I'm sorry start on page three, just to review the um and I'm sorry jrd, perfect. um The investment policy statement, language on page three notes that the board recognizes that establishing strategic asset allocation is critical to the long-term success of the investment program and also talks about the process that we use so every three years. There should be a formal asset allocation study or more frequently, and so we do look at it annually.

L

So, as you know, we look annually and then, if there's a major shift in the market environment or our expectations like we did in march 2020, um so the capital market assumptions we we update annually and we currently model 95 different asset classes that an institutional investor might want to invest in and then also it says that it will also look if the s p 500 experiences a decrease in more than 25 20 from peak. So right now we're just doing the standard asset allocation process.

L

The s p 500 isn't quite in bear market territory yet, but it is a good time I think, to talk about this. Given the market stress currently on page four, the title of this chart could be that your job is harder than it used to be, because back even up till the year 2000, you could have invested 100 in bonds and earned a 7 return. That, obviously, is not the case anymore.

L

When we have historically low interest rates, even if they're rising, we don't expect to get back to 7 return on bonds, um necessarily and- um and you can see that the forward-looking expectation for equities is- is quite low as well. So the probability of earning a seven percent return, which is just sort of a benchmark that many folks look at, has gone from 99 in 1980 to 19, where we sit today. So the job of board members, like yourselves, has gotten much more difficult than 10 or 20 or 30 years ago, given the market environment.

L

um So we start this process with with mean variance optimization, and then we move into other types of analysis like scenario, analysis and stress testing.

L

So um the main chart that I wanted to discuss today is on page seven, it's a bit of an eye chart, but we wanted to show you all of the individual asset classes that are currently in your plan and how these different mixes would change them. So you can see the fed current column on the left. That's your current target asset allocation, which was adopted initially in march of 2020.

L

With about the best timing that anyone could have with moving more into equities and the split between growth and income and diversification is 75.25, this is sort of a rough number that there's no one agreed way of calculating, but we just want to give sort of a basis for comparison here, and that doesn't mean that 75 of your plan is in public equities. It means that 75 of your plan is in asset classes that are grown, that grow over time due to economic activity, um they're a bit more risky than the 25 that is diversified.

L

We then look at mixes a b and c here you can see that they all have a higher allocation to growth and how they achieve that is different between the allocations.

L

If you look in the dark gray box at the bottom, you can see that the fed current asset allocation is expected to return an average return of 7.2 per year over the next 20 years. So that does meet and exceed your actuarial assumed rate of return and then, in your investment policy statement, it states that um the board should strive to keep the projected standard deviation below 12, and you can see the various standard deviation at the bottom there of 11.6 for the current allocation.

L

So there's no reason, based on our analysis, that you need to change the asset allocation, but should you choose to do so given the market, environment or other factors, it could also be reasonable to consider mixes a b or c I'll mention that mixed c was added, since we have the investment committee meeting based on the feedback of the investment committee members, and you can see and I'll mention that this does differ slightly from what you saw in your original materials virus, revised their standard deviation number for mixed c in the materials that were posted.

L

It was just over 12, um but your in the internal investment team discovered an error and um it should be 11.8 shown here. So that means that mix a would have a standard deviation slightly above your target of 12 mix b would have one right at 12 percent and mix c slightly below that 12 limit the other differences between these asset allocations.

L

You can look towards the top of the table under growth. That mix a would have more in u.s equity mix b would have the same amount in u.s, equity and mix c would slightly reduce u.s equity mix. A would have a bit more in developed markets. Non-Us equity mixes a and b have the same emerging markets as the current allocation, whereas mix c would take emerging markets down by one percent, so taken in total mix c would reduce your public equity exposure by three percent between those those reductions in u.s equity and an emerging markets.

L

Equity in terms of private markets mix b would have a higher buyout allocation by one percent mixes b and c would have higher venture capital by one percent. Mcc would have a higher private debt allocation by one percent, and mixes b and c would have more private real estate. So we are looking as we move sort of to the right in terms of these mixes in a bit of a shift from public markets to private markets assets.

L

If we look in low beta here, you can see that all of the mixes keep the same amount in absolute return in cash, and if you recall that cash equivalence or immunized cash flows is, um is based on being able to pay your benefit payments for the next five years, and that was instituted to make sure that you know we all felt comfortable, taking some risk to capture returns in the rest of the portfolio, because we knew that, even in a short-term market correction that the upcoming benefit payments were provided for and we wouldn't have to liquidate other asset classes at fire sale rates.

L

If you look at core real estate, you can see that in mix c it would go up by a percent mix. C would also have a higher percent in tips and mix c would be funding. Some of these higher allocations to inflation, hedging type assets by reducing investment grade bonds from eight to six mixes, a and b would reduce investment grade bonds from eight to five, and then you also see long-term government bonds, typically long-term government bonds. You know they have a long duration, so they wouldn't do as well in a rising interest rate environment.

L

The reason we're holding them in the portfolio is not an interest rate bet. It's mainly because when you have geopolitical problems a lot of times when there's a major equity market drawdown, the only positive asset class is long-term government bonds. So it's more of a you know, a systemic risk hedge than it is a bet on interest rates, but mix c would be more cognizant. I think, of the current interest rate environment, with rates rising and would take long-term government bonds from two to one.

L

We also included an all public allocation here which, based on ic feedback, reflects exactly that 75-25 split between growth and income and diversification. We just wanted to show you as an example. If you use no private markets assets, what would the expected return and risk? Be the risk would be slightly lower than the current allocation, but the return would be below your actuarial assumed rate of return.

L

We also showed a 60 40 allocation for the exact same reason. We went as sort of a shorthand for a diversified portfolio 60 in global equity and 40 in uh investment grade bonds, and it would have a lower risk and also a significantly lower return.

L

So you can see that, given that chart, I showed you about how your job is getting harder and it. You know, a equity bond portfolio isn't expected return to return the same in the future as it has in the past um a lot.

L

That's the reason for including a lot of these other asset classes, particularly private markets and emerging markets, equity, so mix c here was added based on ic feedback, and the main goal was to put some additional assets in sort of inflation, hedging assets and um perhaps to uh to also raise private debt a bit given some.

L

You know comments that you've heard and market predictions around that being a more more attractive place to be going forward.

L

So with that, I will move ahead to a couple of other types of analysis. One is on page nine to take a look at the peer allocation. So, as I mentioned some, you know, most funds use different classifications for their individual underlying asset classes, but I would point out total equity. The total equity median here across 40 portfolios was an equity allocation of 48.

L

Currently, your current asset allocation has a total equity allocation of 49, so your current allocation looks quite close to peers and actually, if you were to say, adopt mixed c, your total equity would go a bit lower than peers.

L

I'm taking a look at risk analysis on page 10. You can see um you know, despite there being different expected rates of return and different expected.

L

You know the actual experience um in these you know severely down. Market environments or the chance of experiencing negative returns are not very different between the different asset allocations, as you'd probably expect, given that they all return relatively.

L

Similarly, in the grand scheme of things, so all of them would have a chance of experiencing a negative return in a one-year period of less than a third less than one and three, and then that goes down over the longer time period that you look at and then, when we look at the chance of achieving the assumed rate of return, as you would expect, the asset allocations that have higher expected returns, particularly max b, would have higher expectations of of achieving that.

L

Typically, when we work with boards, there's no hard and fast rule about this probability, but most folks like to have at least a 50 chance, based on the expectations of hitting their assumed rate of return.

L

Jared pratt is going to talk a little bit about some other types of analysis that we do.

M

Thanks laura um so here on page 11,.

A

M

At historical scenarios, which basically looks at the exposures of each of these mixes, it basically attaches them to an index, and we look at how.

D

M

Index actually performed in these various historical periods. So, as you might imagine, the high equity mix in particular- and each of these would have had a materially negative impact uh in these negative scenarios.

M

We show here on page 11., for example, you know the experience that we had in early 2020 uh when coveted realities first set in you can see, as laura mentioned, there's not a huge difference as you look across each mix, um and so you know the results and the um you know the exposures that they have probably not real surprising, um so there's a very marginal difference. Directionally mixed c shows the best downside protection of the mixes being considered.

M

But again it's just a slight advantage. uh On page 12, we look at scenarios going the other way, so there's been huge market bounce backs how these mixes have done so mix a has the highest public equity and so generally has the most upside volatility. If you want to think of it that way. Looking at these these periods, you'll notice, we do not have a coconut recovery period yet because we can't officially and confidently put an official end date on that. Quite yet.

M

So that's why that's not here, but the drawdown coveted drawdown was on the previous page. Another way to look at this is to stress testing. So here we look at you know, forward-looking hypothetical. What if there was you know a big rise in rates? What if credit spreads blew out and consistent with what I previously said about the equity sensitivity?

M

In particular, you can see that credit spreads blowing out as well as equity, significantly drawing down here on the bottom. Those are the events that would have the most negative impact on the current mix, as well as the alternative mixes being considered, and I'd also point out just since rates. Rising is certainly a hot topic at the moment that those first three lines here reflect as those scenarios, and so you can see that the current mix, which uh has slightly more fixed income than the alternative mixes that has the most risk for rates rising.

M

um But again it's it's just a slight disadvantage uh compared to the others. On page 14, we look at things that would have had a positive impact. So you know every option would benefit from things that help equities. In particular and again mix a has a slight edge on this page.

M

Another way to look at various risks in these mixes is to look at what we call economic regime management. It's basically looking at four broad factors that you know when, when risk really spikes, these are the things and the causes generally, and it's always uh as as steve mcquart mentioned earlier. It's the surprises like the market's always pricing in expectations, and it's the surprises that really spike volatility.

M

So here we're looking at surprises for interest rates, for inflation, for growth and for systemic risk, and here on page 16, uh it's probably the results that you would imagine. Given the uh you know, stock market exposure compared to bonds that it's growth and systemic risk that are going to have a greater influence versus inflation and interest rate risk. uh But I'd also point out, as the bottom uh bullet point here note, that those are also the risks that you're most highly compensated for, which is why you own them in the first place.

M

So with that, I will turn it back to laura.

L

Thank you very much jared, and to summarize, we believe that your current asset allocation is reasonable, but we also believe that these additional mixes are reasonable as well and and could you know, take more into account potentially the current market environment um and, as I mentioned before, if um the board does select a different asset allocation for the pension, we would work with your investment team to evaluate whether or not the healthcare trust should have an asset allocation as well.

L

So we look forward to discussing this analysis with you after virus talks a bit more about risk.

P

Mr chair, shall I proceed.

P

um I'm going to uh I'm going to assume that's a yes.

A

E

We need to unmute.

C

Sorry about that, yes, please proceed. uh I see we have some questions, but let's let those uh wait until the end of the virus presentation. We will have a general discussion about the strategic asset allocation, uh so virus. Please proceed.

P

Thank you, mr chair, and I'm going to um share my screen so bear with me.

P

And can everyone see my screen.

D

Yes, thank you. Okay,.

P

I'm going to put it in full slide mode, so it's a little bit clearer and I will try and be brief because I know this meeting is already uh uh quite long and there are more items on the agenda so uh in in summary, and laura just walked you through the details.

P

um Varus, of course, as the board's risk consultant, looks through these asset allocation alternatives that largest walk through via a risk lens, and so you know, speaking from that lens, uh the proposed asset allocation changes versus the current policy portfolio are very minor and we'll see they're very minor in terms of the risk exposures and of the six mixes that were reviewed. Only one really falls outside of the balls of the board's 12 percent target for volatility, and it was very modest.

P

It basically almost rounds to 12 the equity market sensitivity, which is the key risk. Exposure in any of these portfolios is within a narrow band as we'll see, and we see that equity risk factors are the largest driver of overall portfolio risk again based on comments that were made earlier.

P

Another key risk exposure is interest rate sensitivity and clearly, in an inflationary environment that interest rate sensitivity is front and center and we'll see that that really is is not a meaningful risk across these various mixes.

P

We also in light of the fact that many of our clients in san jose included, are very focused on the question of how this portfolio is structured and potentially will perform an inflationary environment. We added some specific inflation scenarios that will uh we'll look at and in terms of the historic scenarios and stress tests. We did observe again very similar potential performance based on those the amalgamation of those underlying risk exposures.

P

So turning to slide three, we see how each of these mixes compare relative to the board limit and, as I said all with the exception of mixed, a are below the risk limit and also wanted to point out that courier printed materials, there is a change very slight change, roughly 20 basis points to the expected risk of the mixie relative to what was in the printed materials it's actually somewhat lower, and that is the newer mix that was introduced as a result of the investment committee feedback.

P

uh The 6040 is the only portfolio with meaningfully lower risk and not surprisingly, given the much higher exposure to fixed income.

P

I mentioned earlier about the equity beta sensitivity. What the equity beta measures is essentially the degree to which the federated portfolio will move in tandem with the trends and returns in equity markets, so, for example, using the current policy portfolio. Our expectation is if the equity market goes up or down 10, for example, we would expect the portfolio to go up or down seven percent in that environment, because it has a 0.7 rounds to 0.7 equity, beta sensitivity.

P

So all of these portfolio options, with the exception of the 60 40 portfolio, would perform in a similar fashion, I.e when equity markets go up or down, they will experience returns roughly 70, of whatever the equity markets are providing again, the exception being the 60 40 mix, which, because of the higher fixed income allocation, does have a somewhat lower equity, beta or sensitivity to those movements in equity capital markets in terms of risk decomposition.

P

While the capital allocation target of the current policy portfolio is 7525, when we break down the allocation by risk factor exposure, we see that there's actually a much higher exposure to the equity risk factor and it's roughly 85 um across most of these mixes mixty is slightly improved at 83 percent, but even at 83 percent, the lion's share of the risk experience of the portfolio is expected to come from equities, even though the portfolios all of these portfolios, with the exception of the all public and 60 40, are very diversified.

P

What's interesting to me is the 40, even though it has a high fixed income allocation, actually has the greatest contribution to risk from that smaller equity exposure relative to the policy portfolio, and you might ask why is that? And that is a demonstration of the power of diversification.

P

The fact that this portfolio is not diversified. It is just equities and bonds and doesn't contain private markets or real assets or other types of investments that the federated portfolio is exposed to. Even though it has a higher fixed income allocation and exhibits, lower equity sensitivity, it actually will have a greater sensitivity to equity risk overall.

P

Mentioned also in the summary on the slide slide, six, that the interest rate sensitivity of the portfolios are similar and they're, not very large. So here we're measuring the duration. Duration is essentially a measure of sensitivity to interest rates for each of these portfolios and the sensitivity to interest rates is below two years. So each of these portfolios, while somewhat sensitive to interest rate, shifts it's not a main driver of returns in the portfolio, and we saw that on the prior slide, very in fact, on the prior slide.

P

If I could jump back to slide five, the sensitivity to rates is actually a diversifier. You can see the small sliver below zero under each of these mixes.

P

That means that fixed income or rate sensitive assets act as a risk reducer in the portfolio, whereas everything else is additive to risk in the portfolio, and so that's confirmed to some degree by this low interest rate sensitivity that it is a very modest risk reducer in the portfolios that we looked at again, mixie being slightly less sensitive to interest rate, shocks or impacts than the current policy portfolio or the two other alternative portfolios. Originally modeled.

P

On slide seven, these are the different inflationary scenarios that we looked at so as we know yesterday, the fed did raise interest rates modestly and is expected to do so six more times by the end of the year. So that's four more times than what had been predicted just a few short months ago right so if all eyes are on the fed, so the first set of comparisons are these mixes.

P

If we have too much too early scenario, that means the fed cuts rates too much and they do so too early and that has the effect of choking off growth. So right now the economy, barring the effects of the ukraine situation, the u.s capital markets are relatively healthy because the u.s economy is pretty healthy, but if the fed overshoots and does so too quickly, then that will have potentially a meaningful negative effect on the portfolio in terms of a drawdown in excess of 10 percent.

P

Conversely, if if the fed maybe doesn't cut sufficiently or and or they do so too late, what happens is is then inflation gets out of control, so under the too much too early growth gets choked off under too little too late. Inflation is out of control and inflation is deleterious to financial assets, both fixed income and equity financial assets.

P

So the goldilocks scenario is the fed, does just the right amount of cuts at just the right time and if they get their timing right and they don't chalk off growth and they're able to continue to control inflation, if not within that two percent or so or two and a half percent target at least certainly lower than what we're seeing manifest today, then that actually would be a slight benefit to the portfolio and all of these alternatives perform.

P

Similarly, with really the exception of that 60 40 portfolio, it does a little better in these drawdown environments, but it doesn't do as well if the fed gets every decision correct.

E

um Can I say something trust me jenny, um so what I heard earlier, I think it was um one of the consultants. uh They were saying that uh right now fed came out with 0.25 increase and that the plan is that they might do it six more times. um So that sounds to me. In the I mean it could be too little too late, but it also could be ideal timing scenario right I mean it's a gradual, slow uh side of the house right.

P

Correct and and of course the fed has, the ability to um you know increase the next cut relative to the 25 um basis, points that we saw yesterday, but what we've observed, at least from the modern fed? Modern being you know, sort of the post-80s um uh when we disinflationary environment has been to act uh very modestly and incrementally and and not use a blunt tool with respect to changing rates.

E

E

Back in the 70s right, wouldn't that be too uh well, I guess it wasn't too much. It was a lot but yeah.

P

That was a good example where well, the economy actually wasn't experiencing growth. So it's hard to say that that choked off growth, but um because it wasn't a lot evident, it was a very painful economic period having just come off the oil crisis.

P

um But if there was going to be you know, growth or growth was just starting that that certainly did at that point, but it had the.

O

P

Of being very painful for a short period of time before the benefits did start accruing.

O

P

As you as you remember or recall, the 80s were an extremely good period economically, once we got past 1982 right, okay,.

A

Thank you sure.

P

So in this slide, we look at some historical scenarios, so this is not returns based. This is based upon the current levels of risk that we're seeing or more recent levels of risk that we're seeing from the factor exposures we measure in the portfolio. So, if you think about in in the makita presentation, it showed how the returns reacted in some of these environments.

P

This actually shows much more negative returns than what was observed in a presentation that was based on just historical returns, because again, this is um projecting if you will or modeling returns based upon these risk factor exposures in these different portfolio, combinations and the levels of volatility that we've seen really in more recent time periods and trends in volatility, so more more significant drawdowns in general.

P

I would say, however, all of these portfolio alternatives perform very similarly in these drawdown environments, the worst being the subprime and credit crisis, and here we see that the current portfolio policy portfolio compares well relative to mixes a and b and mix c is a very reasonable alternative.

P

In fact, under this you know, couple of these scenarios um mix c actually performs just slightly better than the current policy portfolio, but uh the the all of the experiences are of similar magnitude in terms of the drawdown, and we do have what we call the covid shock environment, which is the most recent drawdown period that we've experienced and again you can see that the current policy portfolio is is the best alternative relative to the sort of what, if the all public or the 60 40.

P

And then we also model stress environments again based upon the combination of factor, drivers, equity sensitivity, interest rate sensitivity, currency sensitivity, etc that we observe in the portfolios today how these portfolios would behave in these stress environments again because of that high equity, beta sensitivity and high contribution to risk from equities.

P

Not surprisingly, the the worst stress environment is one where we see equities draw down by quite a bit, in this case, 20 percent, the interesting environment. To me.

P

That I point out is where we see commodities sell-off and the portfolio does not have a lot of commodity sensitivity so that in that environment we would not expect to see any meaningful drawdown in the portfolio and again under an inflationary environment.

P

Where here we see interest rates, increase by 200 basis points, so an interest rate shock, while the portfolio would draw down modestly, it really wouldn't draw down a lot, certainly not relative to one where we see equities, draw down so an inflationary environment.

P

While it seems scary right now, it's something we haven't seen in a long time that could be a potential for assets or the portfolio to not achieve its expected rate of return for a brief period, but that is not as bad as if we have an environment where that growth goes away or we move into a recession and equities really sell off. That really is the worst environment for this any of these portfolio alternatives.

P

I I will say that portfolio c is a slightly better portfolio than the policy portfolio under this stressed environment, and that really concludes my formal comments. I'd be happy to entertain any questions. Anyone has.

C

Great, thank you very much. Thank you.

C

Maybe if we can go back to makita uh slide number, seven, the I believe that's the showing all the mixes yeah there we go is that on full screen.

C

That as large as possible- and uh I see we do have a hand raise from a member of the public brad, you have a question.

G

Yes, thank you, mr chair, uh and thank you for that presentation. I know we're dealing with a lot of what ifs. My question is: uh what, if the asset allocation was entirely based upon index index funds or indexing, how would that? uh Where would we be right now, let's say we started indexing five years ago?

G

Do you have something like I'm sure you play around with those? What, if scenarios, so I'm just wondering maybe off the top of your head, would we would we be better off now than we we current? We currently are.

C

I'm I'm not sure we have an historical perspective on that, but that is essentially what we are trying to show in the quote: public uh public column, so that is using using uh public equities and probably using passive strategies.

L

Yeah yeah, so I'll mention you know, we do also that's one of the benchmarks in the report, so our report shows that um using a low-cost, passive portfolio, which is essentially index funds, the return or an investable benchmark would have been about 10.1 percent. We don't need to go to the slide um of two, um but uh your return was 10.4 per year.

L

So, while 0.3 percent per year doesn't seem like a big difference on a multi-billion dollar fund over a period of five years, being active has added a lot of value historically and then to your chairs point. um The all-public portfolio here looks at the forward-looking expectations for index funds.

G

Okay, great- and I appreciate that for that clarification, because that that question always seems to come up, people are going to say: why aren't we in the s p, 500? Why isn't the fund doing this, but I think you've kind of demonstrated that there is a small bit of alpha going uh active management versus passive management. So uh thank you for that clarification.

A

C

Okay and so let's open it up to trustees, I see the uh elasti has her hand up. So please go ahead.

B

Thank you makita uh for this presentation, uh so uh I'm wondering if you have looked at any of the mixes uh with a relatively uh you know: conservative, on a relatively conservative side, because when I look at mix a b and c, uh all three of them are on a relatively aggressive side.

B

So I'm wondering how the risk and return profile of a mix would look like if we reduce the growth uh allocation and increase the other, specifically in the current environment, when the interest rates are increasing and and there's a stock market downturn, and there are definitely uncertainties in the stock market.

L

um Sure so I I know that it's been um it's typically the the goal of boards to to target at least a 50 probability of hitting their assumed rate of return.

L

So if you take a look at the current allocation, it's expected to return an average of 6.2 percent per year over the next 10 years, which is below the assumed rate of return of your actuary uses to model things like funded status and the 20-year return is is just above, and so you know we can easily look at more conservative asset allocations, but it generally hasn't been the appetite of boards to adopt something: that's not expected to hit the assumed actuarial rate of return and therefore wouldn't be expected to earn enough to um to fully fund the plan over the time period that the actuary has considered.

L

So when putting these together with your staff and talking about them with the ic, um we we didn't look at um at more conservative allocations because they wouldn't reach that target return.

H

And if I may add, uh also in response uh trustee avasti, I think you're also referring to the current market environment, and this is strategic asset allocation, and this is meant to be over a long period of time.

H

The current market environment will factor more into tactical asset allocation and that's something that we generally stayed away from as an investment program.

C

A

I will add.

C

Up until march of 2020, we did in fact have a more conservative stance and I believe that was a not insignificant contributor to our unfunded status. So there's just no avoiding the the trade-off of taking more risk to get more return. So we can play it safe, but at the expense of not coming anywhere near our expected rate of return over the long term. So.

D

Yeah, if I could jump in um since I've been on the ic, for uh I think five years now, um spencer horowitz has bounded it correctly. I mean we, we are an underfunded plan. We would like to continue to improve our status, so we've tried to focus on is what's an acceptable level of risk. We haven't gotten much guidance from um the city uh who ultimately would backstop us and uh if they said hey, we can backstop everything.

D

Then we could take a lot of risk if they said we can't backstop anything, then we would be taking no risk, but we've gotten zero guidance, and so we've tried to uh really at least now. Maybe I'm speaking personally, the most important thing is knowing your risk budget, and this is why the work that varus does is incredibly valuable and important.

D

We've decided to have a certain risk tolerance profile of around 12, so you'll see that every mix that has been presented is you know, pivots around 12.. I know mix a is 12.1, but 0.1 really is negligible for discussion like this, um and so we've tried to be as thoughtful and responsible as possible around risk, and then, within that, we've asked makita and the staff to come up with a mix of plans uh and and as you've seen in the presentation, these different mixes perform slightly differently under different duress situations right.

D

If you want to succeed in the market stock market, there were 13 days that mattered and you didn't want to miss those 13 days. uh The degradation of returns has usually been the result of about 20 days um and if we could avoid those 20 and always be in those 13, um I would not be on this board.

D

I would be counting my billions of dollars from my yacht in the caymans, um but instead I'm on this board as a volunteer, trying to help figure out how we get this plan to fully funded within an acceptable risk budget.

E

And I would like to say something too: um I just wanted to be noted that the board is also conservative.

E

It is our fiduciary responsibility to ensure the funds ensure that there are funds for the the active participants and the discount rates that we use are more conservative than some of the other municipalities or counties in the state, and we do that to make sure that you know we are being conservative and not totally taking a risk if we had a discount rate of 7.75, we'd probably be close to, um and I'm just grabbing at this babu. You can um correct me, but you know we would be much higher funded.

E

Okay, that I can state, so um other boards have higher discount rates, and you know we have taken it. Conservative and I've had council member davis tell me that you know so. um I just want to make that clear. um All right.

C

That's that uh council chin. You have a comment for us.

F

Yes, so I'm just bringing us back to the agenda item here. We have a discussion and acts action on asset allocations and, if I understand the the item correctly for the board is to decide whether or not to maintain the current asset allocation or whether to adopt mix a b or c based on the presentations of makita and varus today, and so with that framed.

F

I do want to get comments from either the members of the ic or cio palani, regarding what their take is on, whether we should change the asset allocations and or adopt a mix, a b or c.

C

I would amend, I would amend that comment only slightly to say our job is to adopt either the current policy mix a b c or the public or 60 40.. All five, all six are are possibilities. I.

A

I do have a question for makita uh regarding what sort of transaction cost did you factor into these um us allocation comparisons.

L

um That's a good question, um so, in terms of the actual asset class returns, um we are assuming um a net, a fees, return for asset classes that um that can't be invested passively and we're not we're not assuming manager alpha, which I think might be part of your your uh your.

P

L

But in terms of actual transaction costs moving to a b or c, um they would be incredibly minimal. You know selling a couple percent of u.s equity and transitioning that over a long period of time into private markets, assets would be would be minimal. Moving to the public allocation, you really couldn't accomplish that immediately. Given the allocations that you already have in private markets, it would you know all of the private markets allocations.

L

You know if you were to increase them, take place over a very long period of time, because you have a pacing study and those funds that you commit to call capital slowly, if you were to try to eliminate um private markets. That would also be something that would draw down over a very long period of time.

A

Thank you very much for that.

C

Well, in the spirit then, of uh council chin's uh request uh would uh cio palani like to comment and then uh other members of the ic.

H

Mr chairman, I'd like to first defer that to um I see members and then I will chime in okay.

D

I trustee sorry chairman horowitz uh with uh trustee or absent. It's uh you and I so I'm happy to go first or second.

C

uh Why don't you take the lead since you're sporting, the uh new york mets logo,.

D

Oh I'm still on. Oh I'm back from the airport. Well, I didn't realize I was and guess what, though I still have a mets hat on so uh definitely representing.

C

As a fellow new yorker, I can appreciate.

A

And trust you chandra we're gonna get the best help for you. We can.

N

Yes, I was confused because I thought you were a boston supporter, but.

D

I am born in boston raised in new york, so I have split loyalties and uh trustee kell heard this. The best time of the season for the mets hasn't begun, yet, um okay. So what I guess? Let me organize my thoughts a little bit here. um I I'll start off by saying as chairman, that I believe this is the most important thing. The board does vis-a-vis our investment program due to the professionalization and the fortuity of hiring someone of cio polani's caliber.

D

We have over the past four years, gotten more comfortable uh delegating investment decisions because, quite frankly, he and his staff are more qualified for most of them than all of us on this board and and that's a real asset. I don't think that's always been the case, but we do set asset allocation and I think cio palani would agree with me that this is really the most. I mean this drives the ship more than anything done at a tactical level.

D

um I personally focus on the risk budget, I'm beating that drum yet again, for the second time, this meeting and probably the hundredth time uh while I've been on the board or done uh joint meetings with the city, um I think each and every one of these uh mixes, uh I I I have a strong lack of preference.

D

I guess that's a weird way of of trying to communicate for the public in the 60 40., um but as between the fed current, a b and c, I think they're, all they all satisfy our needs from a risk perspective and from a returns perspective, they're all in the same ballpark, I personally have a bias toward staying the course we are a long-term investor.

D

Traditionally, this board has not behaved as a long-term investor. It has fiddled with asset allocation, if not annually biannually.

D

If you look at the best endowments that are long-term investors, they take 50-year horizons and by the way they also have increased drawdowns. Now the the percentage of endowment income that comprises university budgets has quadrupled, or maybe even quintupled over the past 30 years, so the same way that we have drawdowns to make sure that our pensioners get their checks.

D

They have the same limitations, but yet they take a long-term view and- and I think we should act accordingly- some of the best returns posted are by the endowment in the endowment model and other sophisticated investors who have similar approaches.

D

um So if you're going to set a a policy which we did when our cio joined um or you know, took his job, his post um and things are going quite well. I think one reason to maybe reconsider is this: inflationary environment may have been a surprise and- and maybe some of you will feel influenced by that to change. uh But uh for me I believe, based on the answers I received from akita in my questions earlier, um they have baked inflation in sufficiently for their 10 and 20 year.

D

Forecasts that I don't think we should be tinkering on a one or two quarters of inflation basis. um If we were to change the mix, I would have a bias towards c, as it increases our exposure to private assets.

D

There are fewer public equities available in the stock market today than there were five years ago or 10 or 15 years ago.

D

If you look at the returns of washington university in st louis, which was the best performing endowment plan, you would see that they have increased their exposure. Private assets to as high as 35 percent duke university has increased its exposure to venture capital in and of itself to 20 and the new cio of calpers.

D

um Another pension plan in california, the largest on the cio, has just said that her new cio, her intention is to increase exposure to private assets uh and, in fact, build a team that invests directly in growth, equity and in venture capital. So um and there's a lot of statistics and data that I could bore you with.

D

So if we were to change, um I think c is the best option, but I have a strong bias toward staying the course and before I conclude my comments, um I trust sorry cio palani, I don't know if you had a chance to speak with trustee orr. She did send me a brief message and she did tell me uh correct me if I'm wrong. If she's spoken with you, I think she has a slight bias toward moving to mix c and her second choice would be to stay stay. The course, with the current plan.

C

Actually, she sent me a note and I was going to read that out: um okay, terrific yeah.

D

C

But you're entirely correct. uh She can't be here today. So, of course she cannot vote, but she did want me to convey that her first choice is mix c okay, uh but that she would also believe staying the course with the current uh allocation is quote reasonable. So uh that is very much uh her. Her view of the matter.

D

Okay, thank you. Thank you, chair hearts. I conclude my remarks thanks. Thank you and we'll.

C

Happy to come back to you as we go through the discussion, sure um sure that said, um I guess as an the other present member of the ic, uh I take a somewhat different view. This may not be a surprise to any members of the board.

C

um First of all, I would say that the the numbers presented, particularly the the expected returns and the standard deviations um you know by by taking it out to one decimal point. I think it implies a degree of of precision that doesn't really exist so so um that is, these are all you know somewhat. um I don't want to use the word speculative, but you know the the differences between 12.0 and 12.1 or or even 11.6 are very very hard to to quantify in quite such a precise way.

C

The mixes are are quite similar, they're, not very different. We've seen that and how they respond to different potential draw down scenarios. I would like us to seriously consider the public option.

C

It gives us exposure to all of the key asset classes, equities, real estate, fixed income tips, etc with much less uh obscurity that you have with private assets, with much less illiquidity and with much more simplicity, which is a benefit in and of itself.

C

um I I have some concerns about private assets, so I think when we increase our exposure to private assets, as is the case in mixed c. I do. I don't believe the numbers capture, a number of the risks of private assets and the numbers that present here don't don't capture three levels of risk: private assets, particularly the most volatile ones, which are are buyouts or private, equity and venture capital.

C

They are fantastic and they and they deliver fantastic returns. If we manage to get into the top quartile of managers and the numbers here that are used to present these expected returns, they presume an average buyout and an average venture capital return, but we can't buy the average. We can buy the average in in public equities. We can't buy the average and private equities.

C

So if we were to simply be unlucky or mistaken and to to uh engage with a a manager who was in the lower quartiles or below average, we would have much poorer returns at much higher expense and we would not achieve the higher returns that we would hope for, and that is why I was asking the questions earlier about the slippage in our private equity portfolio, in terms of their performance relative to the quartiles for each of the investments.

C

So that is one risk that is not quite captured. The other risk, of course, is the fact that private equity numbers the returns, the the volatility these are self-reported by the investment managers themselves. They are estimated on a quarterly basis, so they're not really at all comparable with public markets, where we get minute by minute mark to market data, and of course, since these numbers are self-reported, they have a tendency to well put the best possible light on the manager's performance, which leads to the third source of risk.

C

That's not quite captured, and that is these are very long-term investments. They they have a 10-year uh lifespan and in the case of endowments that may work out quite well, because some of these endowments, like the yale endowment, famously had a leader who was there, I believe for 30 years.

C

The tenure on this board is much less than five years. The tenure of our cio is four years, and I just wonder if ten years from now, a future board would look at our passive, I'm sorry, our private investments and also call them legacy investments as a way to distance themselves from the decisions we make today.

C

So I believe, there's a number of risk factors that are not embedded in the numbers that are aggregated here. So for that reason, I I cannot enthusiastically support mixed c that increases the exposure to private assets and if the point of mixi was to make the portfolio more inflation resistance, a better hedge against inflation, I I struggle to understand why that would mean an increase in venture capital or a decrease in the u.s equity exposure, which typically has been a fairly good hedge against inflation.

C

uh I do appreciate a lower uh allocation to emerging markets. I think if you move to page.

C

The next two pages- page nine amongst our peer group, we are in one of the highest percentile in terms of our emerging market exposure, so uh that is some place where I do believe we, we can trim a little bit of our exposure.

C

So I think my my first advocacy would be for the public for the public option. We can achieve uh very significant returns with much less.

C

Much higher liquidity, much higher transparency and much greater simplicity with a public option and I'm not sure how much is added by private private assets.

A

Sure so, chairman uh horowitz, I would like to respond to that sure. um We do not need daily liquidity, we're able to plan out how much liquidity we need and that's just a spreadsheet exercise. There is definitely a premium. We can earn on investing in illiquid assets over 10 20 30 years, and we should take advantage of getting that alpha.

C

Well, I certainly agree. We do not need daily liquidity.

C

As I mentioned, the alpha accused to those who are in the top quartile of managers, and we cannot assure that we will be in the top quartile managers and that that is my concern.

C

We seem to be doing reasonably well with our buyout portfolio. To date, I'm not disinclined to let it run, but I I would certainly object to increasing our exposure to private assets. At this point.

D

Would uh uh chairman horowitz? May I also address some of the the statements you made because I think some of them um probably beg being poked at a little bit in terms of their accuracy. um The the first comment that I want. So your first comment about need to be in the top quartile or second quartile, absolutely true, so I think you're accurate about that. um I think newberger berman.

D

I think that's. Why and newberger berman actually predates me. The very first board meeting I attended was to vote on whether or not to um work with newburgh or berman. So I think I either abstained, or I passively said yes, because I trusted my fellow trustees for all the due diligence that they had done and the prior cio andrew arn, um their reputation, precedes them and their performance over four to five years in putting us in first in top quartile and second quartile funds and, more importantly, their um ability to help find really interesting.

D

Co-Investment opportunities that are both low fee and high return has been has been terrific. So while I can understand, if you've had no exposure and and have more of outsiders or you know view into private equity, um it can seem daunting how to pick managers but to select a small percentage of our portfolio to see if we can work with the newberg or berman.

D

If now that we have a much more professional staff that we can um develop, the the experience the know-how and the bona fides and and while doing that, call it with training wheels achieve first and mostly first quartile returns, only suggest that it might make sense to continue and to increase, um to address your second point, um it's kind of a distinction without a difference for a longer term plan. So your point was that valuations by private equity and venture capital are opaque, obscure and that they are purposefully, always burnished to the positive side.

D

um Well, first of all, that's not true in private equity and private equity, they have their own version of mark to market their very strict accounting standards. Venture capital is a little bit more loosely goosey. I would agree with that. um The problem there is valuations in in the middle term of an investment, don't mean too much, um but uh these funds tend to mature. In fact, it's not ten years, it's actually worse than tenure. So I'm going to be honest on all sides of the analysis.

D

It's probably 15 16 17 years before you get full liquidity out of a private equity or venture capital fund. That's when you actually get the the full dbpi back um at that point in time cash is cash um and the alpha to which uh trustee kelher speaks is real. um Achieving a 5.6 expected return versus uh currently modeled 6.2 for the fed plan uh and 6.4 for mix c is dramatic. um I think laura wyrick earlier in her conversation showed the difference of a .03.

D

uh Was it laura? You can correct me, but I think you said it was 0.03 or 0.3 percent um incr performance uh improved alpha that we, which we achieved versus being in just an all-public plan over the past 10 years right and that on an annual basis over 10 years, is a is in the aggregate in a very large number. I can't do that math in my head, because I don't know the cost basis that we're starting with.

D

So this seems to me precisely the time where we should be either staying the course or we should be taking advantage of alpha opportunities, and I'm just a little worried that chair horowitz, that your comments are derived more from a personal bias than sort of the the like inaccurate portrayal of of how private asset markets work.

C

Well, I would object to the idea that it it stems from a personal bias. I think, there's been a number of uh very respected academic studies that have shown that, uh while private equity has had a very good run in the late 90s that their returns relative to public markets have diminished in the in the past decade.

C

But with that said, let's make sure we open it up to other trustees. If there are other questions or comments or perspectives on which mix we might pursue.

E

um So this is trustee jennings and I've kind of followed this back and forth. I think there's a lot to be said with staying the course, so I kind of agree with trustee chandra. You know with that aspect of it. um Our job is to take an asset class. I mean allocation and pretty much hold to it. I mean we shouldn't be moving it around.

E

I know we look at it and I understand and appreciate the thought that's gone in because we are dealing with inflation and hopefully we will try to get that in control with some of the federal you know, reserve actions. However, um I think uh the guy who was I'm sorry, I'm terrible names so uh and the makita uh at the very beginning um who uh gave us that overview uh was pretty much saying. You know that the fed cannot solve everything right.

E

You know there's a number of like three takeaways there, so hopefully we do kind of get some gain from that on the inflation-based basis, but inflation is a concern. um Also, what I've heard is we're not really that exposed to the russia war that they have um taken on, and so but china is a concern you know and depending what happens with that, I mean or if we actually go into world war iii. No one's brought that up, but you never know um so.

E

Yes, there are a lot of unknowns and I think the three things that he said was there's a lot of unknowns and there's no total takeaway there. So there's something to be said with staying the course and when I looked at all the numbers, I really didn't see a major gain one way or another and we're still within our risk factor um we're not super high. I mean it's 6.2 and we're 6.6.

E

What 665 is our discount, but you know in 20 years we're at 7.2. So um so I guess I'm going to split the difference here and go with staying the course. That's my recommendation.

A

So uh trustee jennings uh was your remarks that um there are a lot of unknowns. uh The only thing we know about changing our asset mix is, it will incur transaction costs having run um management, business for bny melon.

A

If transitions go poorly, it can cost a great deal. I certainly appreciate laura's comments that we would be moving very slowly and there probably would be low transaction costs, but I definitely think it would be a mistake to shift from our current mix uh to a public mix with a much lower expected return and known transaction costs.

A

um I certainly could be uh talked in or actually I could support mix c, um but I think that there's uh a lot to be said for uh stay in the course not trying to tweak things by a percent or two percent and incurring known transaction costs.

E

And that's an excellent point: uh trustee kelleher because we are trying to minimize uh these costs and um you know we still have a source in use that you have to look at and go for you know and that just um you know, lowers the overall um amount of money. So anyhow, um I guess uh trustee linder. Do you have any input on this? One.

C

Well, you know what I want to come to trustee, zlinder and avasti, but I see that uh council leaderman has his hand raised. So, oh, we should let him.

E

C

To interject uh quickly here.

A

Thank you, mr chairman, a question. I think this is more for staff uh for prabhu.

A

The the current ranges around our current asset allocation provide a sufficient tactical capability that we can stay with the current mix and still give us an opportunity to be a bit more nimble if staff believe on a tactical basis that was called for over the next year or two.

H

uh That that's right uh harvey we do have. uh We do allow just to minimize transactions costs and because of volatility. We do allow our strategic asset allocation on an asset class basis to drift up to 10 for each asset class, though we do rebalance them back on a quarterly basis or sooner, if required, but it does give give us that option to do it. We have an exercise that taa right, but it does give us the option.

A

And is that something that the board would consider in deciding which, whether to change the current.

O

A

Mix knowing that you had that latitude tactically, if necessary,.

C

I I believe that is currently in our investment policy, so that is something the cio can execute on his own volition, without further board approval. Is that correct.

H

That is correct, mr chairman, yeah.

A

C

uh Trustee linder did you wish to weigh in.

D

I do I won't take long. I do.

A

Want to thank all of you for all the information we have and for all the work that was done to lay out all these uh options.

Q

I see nothing here that has told me that I ought to change from the current long-term plan that we.

A

Have I see tweaks, but nothing compelling and.

Q

I

D

Plan, it's worked for us.

A

So I'm in favor of uh staying with the current current plan and not uh tweaking it.

C

Okay, thank you and trustee avasti. Would you like to share some comments.

B

uh I'm in favor of staying with the current, uh given the fact that it is a strategic asset allocation and the mixes are kind of like more aggressive, um and we have you know. I think mr planning has uh this. Flexibility of uh you know taking the tactical decisions, so I I feel that staying with the current uh is is fine.

C

Okay, are there any further trusty comments, and would someone like to make a motion.

D

Sure I would like please go ahead. Sorry, trusty kelleher, yes, trusty chandra. I would like to make a motion that we continue with the fed current mix as our asset allocation policy for the coming fiscal year.

A

Would like to second.

C

Okay, so we have a motion from trustee chandra to maintain the current allocation seconded by trustee kelleher. Is there any further discussion from trustees.

C

Any further questions or discussion from the public.

C

Hearing none we'll have. We will have a vote, roll call, trustee chandra. How do you vote? I trustee keller, I vice chair jennings aye, trustee linder, aye trustee avasti.

F

C

And I also vote I, it passes unanimously.

H

All right, thank you, mr chairman, um and you know before we move on to the next uh item. uh You know someday the long bond will be a ten percent yield and you and I will serve on the same board and give you those seventy percent bonds and thirty percent cash, and we will hit the seven percent target.

C

I'm glad you didn't mention our allocation to bitcoin. So that's good.

H

I I do. I will be uh remiss if, if I don't thank uh our consultants, uh laura jared eileen danny, I'm generally an easy guy to work with, except these past eight weeks when it comes to saa, I can be pretty demanding- and I want reports yesterday and there's just a lot of back and forth and and thanks for putting up with me and it's it's a very important function of the board and and which is why I take it so seriously.

H

So thank thanks for uh for your contribution here and I also want to thank an unsung hero which is uh which is ellen lee on our team. uh There's just a lot of iterations and lots of changes that go back and forth back and forth and uh she's. You know she never gets the recognition for this, but she stayed on top of it and I worked with admins for over 20 years and she simply ranks among the top. So thanks, ellen and and the whole team and my whole staff for that you're here go ahead!

H

No, mr chairman, I was just going to go to uh item 3g unless you had other things.

C

Well, I just wanted to thanks. Thank you and the staff. This is one of the more important functions that we do. It has a huge impact and uh it's important to get it right. So all right that said, moving forward to item three g.

H

All right, thank you, so I'll I'll make some comments before I turn this over to senior investment officer, jay kwon, who will actually be presenting this again. This is another item we presented to the ic. We made a recommendation, the ic approved it and the ic actually acted to recommend this to the board.

H

uh So we all know that the city, uh you know pre-funds retirement contributions every year, has the ability to pre-fund retirement contributions and it's to the tune of about 400 million dollars. uh 400 plus million dollars, among both clients, and so the municipal code gives the exclusive right for the city to elect to pre-fund contributions.

H

But harvey and team have told us that the board has discretion regarding the discount rate used for determining actuarial equivalence. I know that's a mouthful and so the the the and what that really means is the board can make a decision. Is it what's the risk in taking all of that money?

H

You know in one go right, and so, if, if if the city does elect to pre-fund, it's it's usually on july 1st, and so the city has actually done both uh in the past few years, so my predecessor had developed a methodology for determining actuarial equivalence in 2014 and it's it's a very sound framework and we've never felt the need to change it, but we have looked at it closely and we have discussed it over time over the years and the one thing we thought was missing and we thought we could improve or enhance the methodology is by actually adding a valuation component to it and which is what staff has come up with and which we presented to the ic, um but to give greater clarity on all of this I'm going to before.

H

I turn it over to jay. I do want to tell the board you you, don't you don't have to feel compelled to change this. This is just a framework. This is just one additional data point on look on: assessing the the risk situation of taking in all that money uh in one go, and so I think this this, uh the additional factor that we've added actually adds some value to the analysis.

H

uh With that, I'm going to turn this over to jay.

M

Thanks and uh like all of the other presenters we'll try and be brief here, but uh so it's probably noted uh this is the other thing. The plan does at this time of year, is determine the discount rate offered to the city for pre-funding uh and just to walk through that process.

M

Again, the sponsor the city has the option to pre-fund their contribution for the next fiscal year, but you as the board, have the ability to determine the discount rate, assuming the choice results in that phrase, something that's actuarially equivalent right, and so there were four attachments to this item on the agenda.

M

uh All for your reading pleasure, uh but one of the attachments was a note from harvey that he wrote originally for the police and fire board, but applies here as well, and that outlines uh kind of your rights and responsibilities as a board defined in the municipal code and that kind of gives you the outlines of what is actually equivalent.

M

And so, as probably noted, um you know, the the the city has done both in the past and in 2014 the staff attempted to put some kind of a framework around the decision right. The decision of what to offer the city in terms of a discount rate uh and so staff came up with a methodology that had two independent triggers for adjusting the discount rate and that's also laid out in one of the attachments to uh to this item, but just keep in mind.

M

It's probably noted that this is really just a framework, a starting point for your discussion. So in practice you always have the uh the ability to make a final decision uh that differs from the framework. It's your prerogative as a board to make that adjustment.

M

We went over the uh the methodology and detail at the investment committee, so I'll be kind of brief here, but the 2014 methodology cuts the discount rate by 15 each year that the economy was in either a long business expansion or the s p. 500 was in a large rally, and so those were two independent triggers.

M

So what staff is proposing with this modification is that we add a third trigger for a situation like like now, where uh you know it hasn't. We haven't been in that long of an economic expansion right, and that was kobe. Just you know a couple years ago uh and as well, the market hasn't rallied uh since that bottom, beyond the the existing trigger level, that's built into that 2014 memo.

M

So, according to the 2014 memo, neither trigger would have been activated. uh But as we look around today, we find ourselves in a market where equity valuations are very high right. uh So that just means that stocks are are trading uh expensive uh and so the the proposal here is to add a third trigger uh being basically equity valuations, and so we tried and trying to keep it simple.

M

uh We're calling evaluations on the s, p, 500 and we're using a version of the price classic price earnings ratios is the cape ratio, which is just a long term version of that price earnings ratio, and so the exact recommendation is to add the cape ratio as a third trigger, and it triggers when the the cape ratio is two standard deviations, above its long-term historical mean so, and that kind of assumes a bunch of statistical uh things that you know the distribution is normal and and and so on, but uh the the trigger level here um that we're recommending should hit and very limited circumstances, uh maybe five percent or less of the time uh that we find ourselves today in exactly that situation, though.

M

So, um if you want to talk about the impact of this recommendation again in the current market, uh neither of the 2014 uh triggers would be hit, but uh because we find ourselves in an expensive market, uh the third trigger that we're recommending would be hit. And so, uh if you know you adopt this new framework, the framework would recommend that the city be offered a 15 reduction of a reduced discount of 15.

M

um That's that's a summary of the item. I'm happy to take any questions.

C

I'm wondering if um yeah uh council chin, I see that we also have a a pre-funding memo from reed smith. So maybe uh you would like to weigh in before we make a decision here.

F

Sure, thank you so much. I just wanted to put a few uh finer points and highlight a few points from the memo. One is that, although the memo was written for the police and fire fund, the there is a municipal code that has identical provision in the san jose municipal code for this board so with, although it's for the police and fire whatever is contained in there equally applies here to federated, so I just wanted to make that clear.

F

A second point here is that you know whatever the board decides to do here will be judged on an abusive discretion standard, and so one of the things I wanted to ask staff is whether or not we've consulted chiron in determining whether or not the staff recommendation matches to um the definition checked with chiron, to see that the recommendation would um be suitable to to qualify as an actuarial equivalence um amount.

H

uh It's it's really no different from previous years, so the actual equivalence is the way chiron uh calculates. It will continue.

F

H

F

Just want to confirm that.

C

Okay, thank you any any other questions, then, from trustees.

C

Or from the public.

C

So we this is, we need to take action to approve or to not approve this suggested change in the pre-funding algorithm. I guess I would call it do. We have a motion on this item.

F

And just for the clarity of the record, there's in the staff member there's a recommendation here to adopt a modified methodology for determining the pre-funding discount rate in providing the city with the 15 reduction of the full discount rate and to be included in the calculations. um Consideration of equities is that correct, uh cio, pawnee.

H

That is correct.

F

C

Thank you so so that do we have a a motion to adopt uh uh what uh council chin just read out.

E

On motion to put that forward.

C

Thank you. We have a motion from uh vice chair jennings, that we have a second.

A

C

And that's a second from uh uh trustee linder, any any discussion or questions from the public or from trustees.

C

Hearing none will have a roll call vote, uh trustee, chandra, hi trustee keller. I uh vice chair jennings hi, trustee linder.

G

C

Trustee avasti.

A

C

And I vote I as well, it passes unanimously.

C

Thank you now, moving forward to item 4a.

C

This is an ongoing issue related to siegel's audit of uh the plan, and we have discussion action on chiron's response and uh I suppose mr hallmark is here to present on this. I.

Q

Am thank you, mr chair.

C

Q

Let me share my screen here.

Q

So uh last month, siegel presented their actuarial audit report for the opeb valuation and the board requested a formal response from us. There were three items that they identified in their audit that we responded to the first one. We actually responded in the last meeting suggesting that there were a couple items that caused an increase or would cause an increase in the city's contribution, and they suggested that we discuss with you whether or not updated results in an updated report were necessary.

Q

The board uh elected to have an updated report and that's the next item on the agenda as we're providing that report.

Q

The third item I'm not going to scroll down to, but it was a a variety of enhanced disclosures for the report and we agreed with those and have incorporated them in the revised report so that you'll have that in the 2021 report.

Q

The other issue was uh that we should have really an educational session on the pros and cons of using the amortization, smoothing policy versus the asset, smoothing policy that we use for the pension plan. So I'm not going to go through that in detail here. We do agree that it would be good to have a session on that and go through it, and the board can revisit that decision, particularly given that we have mostly new trustees since that decision was adopted.

Q

But one of the specific issues siegel um asked about was the historical volatility uh of investment returns versus liability measurements uh in the pension plan versus the open plan. So we just added a couple charts here showing that historical volatility over the last 10 years and then an average over the 10 years. This is measuring the gainer loss from the assumption.

Q

So that you can get a sense of how far it varied from the assumption, gains and losses are both reported with a positive sign. uh So these aren't all gains or all losses, but it's the deviation from the assumption and the gold bars show for the pension plan. The deviation for the investment returns, the gray bars, are the deviation for our liability experience and the purple bars are the assumption change uh it bounces around a lot.

Q

But if you look at the average, you can see that the gold is about 140 million a year on average that we're deviating on investment returns compared to about 22 million for liabilities and 54 million for assumption changes.

Q

This is why we smooth the assets on the pension plan over five years in calculating contributions. It just dampens that annual volatility and investment returns and how it passed through to the city's contributions comparison.

Q

You look at the history for the opeb valuation of gains and losses. The gold bars are still the investment return and the gray bars are the changes in the liability in purple's the assumption changes now here the liability is changing principally with changes in health care costs. So we make projections of health care cost changes, but then the marketplace takes over and those those numbers change. Now the oped plan is much smaller, so on an absolute value basis, these numbers are smaller.

Q

But again, if you look at the average at the over the 10-year period, the most volatile piece is actually the liability changes uh compared to the asset changes, and so because of that relationship we developed a different smoothing mechanism that smoothed the impact of the liability changes, as well as the asset changes on city contributions.

Q

So that's that's just the uh the motivation behind the methodology. uh We do agree with sega that we should go through it in more detail in an educational session and show you how the mechanics work just so that the trustees are familiar with it and can revisit the decision and make any changes that might be warranted.

Q

So with that I'll take any questions.

C

Any questions from trustees.

C

Or from the public.

C

Okay hearing none.

C

Is there action to be taken.

F

Yes, yes, there is uh chair horowitz, so um I if, if ford recalls, last month, we had deferred this item pending uh chiron's response to siegel's actuarial audit of the evaluation fund, and so the action item here would be to adopt siegel's um audit as well as chiron's response.

C

Okay, great uh so, do we have a motion to do just that which is adopt siegel's audit and chiron's response.

D

This is trustee, then I'll. Second, behind trustee jennings.

C

Okay, so we had a motion from vice chair jennings.

A

C

A second from trustee chandra, any discussion of the motion by trustees or the public hearing. None. We will have a vote uh trustee chandra.

C

D

Sorry didn't realize I went back on mute.

C

Was that nigh? I believe it was that is an I okay, trustee kelleher hi uh vice chair jennings aye trustee linder, aye trustee obasti.

A

C

And I vote I as well. It passes unanimously.

C

And now we are on to item 4b.

Q

Yeah continuing uh mr chair, these are the revised opeb valuation report and the revised uh five-year projection letter five-year projection letter has both pension and opev information in it. The only thing that changed is the opeb information uh and the report reflects the the changes discussed with the audit.

Q

The impact is an increase in the city's contribution of about a half million dollars for the next fiscal year.

Q

So take any questions you have, but it's mostly just confirming the changes we discussed last month.

C

Okay, great, thank you. um As I recall, it was a relatively minor financial impact. Any questions from trustees.

C

From the public so again we need action to accept and receive these uh modified valuation reports. uh Do we hear a motion trustee kelleher submissions?

C

We have a motion from trustee keller to her to to accept the revised report and, second, second, that's a second from trustee linder. Any discussion of the motion hearing none we'll have a vote: trustee chandra hi trustee keller, hi vice chair, jennings hi, justin linder, aye, trustee, abusti.

D

C

And I vote: I, it passes unanimously on to item 4c uh discussion of the legal issues raised by the pension evaluation audit reed smith. Will this be council chin.

F

Yes sure, what's one second, let me share my screen.

H

F

Can you guys all see that.

C

F

Let me make it a little bigger, so you know better. Okay, so um from the actual.

C

You actually made it smaller.

F

Oh, did it get smaller? Okay, let me.

E

Try that again, maybe get rid of the left side. You know where the bookmarks are.

A

C

That's pretty big, you got it, you guys.

A

See it okay, yeah.

D

Once you went away from landscape and back to portrait, it worked.

A

Q

G

F

um As long as you guys can read along and see the text um so as I was stating from uh segal's actuarial audit and kyren's response of the valuation fund of or for the valuation of for 2021, two uh benefit issues came um out of that requiring legal interpretation of those issues, and so I have this chart here. um There's a more detailed memo with your backup materials that outlines are legal analysis behind it, but just to walk the board through the there's four issues, but two benefit issues that here, as you can see.

F

The first issue here is the tier one members with 30 plus years of service for those member in that population.

F

Under the san jose municipal code, it provides that those members may have may stop paying normal cost pension contributions after 30 years of service um and then the other benefit issue was the pre-retirement death benefit for two or two members, and so those are the big buckets that we're going to be talking about. So I'll start with the first bucket, which is the chair, 1 members, with 30 years of service, two issues came out of this. One was: how do you calculate the 30 years of service as you'll see here?

F

Seagull's view was that it included reciprocal years of service, so that would include non-city service chiron's view was that the years of service only included city service only um ors has been following chiron's practice and as you'll see here, we agree with chiron under the san jose municipal code it and its legislative history. It makes clear that this, the years of service 30 years of service, must be city service, to qualify to stop paying your member contributions for the pension contributions.

F

Now I would want to put one little footnote here under the san jose municipal code, apple applicable.

F

Is that um only to eligible tier one members who have uh are assigned to unrepresented employee units or represented bargaining units that have agreed to this provision and which the city council has agreed um to those agreements that they are falling within this um this uh bucket and as of today, my understanding from talking with the city's attorney's office is that there are only three employee groups that fall within this municipal code provision which are the a b m e.

F

I um l a l, p, the associative lawyers professions and unit 99, which is an employee group of unclassified management staff. So those are the three uh bargaining units uh so to speak, that fall within the tier one and are covered under this, and so that's um relating to the first issue, how to calculate the 30 years of service. The second discrepancy that came out of the actuarial audit was who's responsible for paying the funding loss from the cessation of collecting the member contributions from those members who have hit 30 years of city service.

F

E

I was just I read through this and I was a little confused by that. So, if they're not getting paid, you know beyond the 30 years, why is it a funding loss.

F

Well, it's for the normal costs for those benefits per year, so they so as those members pay and are continue to serve, they they are attributed from their um deduct. A certain amount of the pension contributions are deducted each year, so we would stop deducting that from their um payroll.

E

But you would stop deducting it because after the 30 years they're not I mean they're limited to the 30 years. That's correct! Why is it a loss? I don't get the loss aspect.

A

I I I think, there's something here. If I may, I think, there's a misunderstanding: um vice jerry jennings there isn't, they still get paid. No.

E

I know they get paid. What I'm saying is: why is it a loss to the pension? If I mean they're, not because.

A

The uh between the city and the members, they have to pay a hundred percent of the normal cost of the plan. If some members don't pay a contribution, it has to be picked up by somebody else. That's what this is about.

E

Okay, still not getting that, I'm just not getting it because if I mean mr.

A

C

It's getting calculated.

E

C

Think an actuary needs to sort this out.

Q

Yeah, can I jump in yeah? Go ahead, give it a try, so the the normal cost uh is designed to spread the cost of the benefits not on an individual basis, but on an aggregate basis over the entire career of the members working, and so it spreads it over their period beyond 30 years of service, and so the 7.4 percent, approximately that is charged to members is the the member's share of that normal cost and it's spread over their all of their years of service even beyond 30..

Q

The fact now that someone at 30 years of service would not be paying that we need to allocate that contribution piece somewhere else, or else we're not contributing at the targeted level, and so the question is: where does that missing piece of the contribution go and get allocated? Does it get reallocated to the other members? Well, yeah. I get all that reallocated to the city.

E

But why again I'm just stuck with you know: why is it going beyond the 30 years? I mean.

Q

They're still working and the normal cost spreads it over their entire working career.

E

Well, it doesn't sound right, I mean well, that's.

F

Part of right and trustee jennings- and that was part of the impetus behind the the city council, passing this particular provision, which is you're right after 30 years of service. They don't accrue the cap out. They don't accrue additional benefits but because they're still working under the municipal code, they are still responsible for a portion of the normal cost as an active member. um So that's why this provision exists.

F

They try to remedy that and so because they're still working but are not paying um normal pension contributions for the normal costs that that who so who is going to fill that gap? Is it the city or is it the remaining members? Because so there's no.

E

Normal cost- let me put words to this- is the normal cost, just the overall cost of retirement like so I mean like I'm an employee, I'm paying into you know for the pension, it's not just for myself. It's for you know the existing. You know retirees that are out there. I mean I still pay for that. So is it that piece that we're talking about when we say normal costs.

Q

Wait: it's not for the retirees it's the average cost for all active members for their next year of service, and so.

E

That's their share, it's their share of all of it. It doesn't mean that it's not so, even though it doesn't go to them, they're still on the hook, because they're still employees right. It's.

Q

E

Q

It's not based on an individual's circumstance, correct, you're, averaging across everybody.

E

Okay and then council said because they're not going to get paid beyond the 30 years, they shouldn't have to pay their employees share. Is that right.

F

Well, it's only for certain uh bargaining units who have agreed to this provision, so I do want to make sure that we make clear it's not all tier one members. It's the tier one members that um both the bargaining unit has agreed to the provision and the city council has ratified it, um but to make things a little bit clearer to walk through it. I will say that you know. Chiron has said that it goes to the remaining tier 1 members and that the seagulls view is 100 to the city.

F

I will say that, based on our review of the san jose municipal code and the backup materials for the implementing memo, it appeared at first glance that the uh remaining costs for this tier one uh members who stopped paying would would be split per normal pension contributions respectively at 3, 11 and 8 11 ratio.

F

But since we have talked with the city's attorney's office, they have provided to us in written confirmation that this it is the city's intent that they will pick up the funding for those members who are not paying into the system after 30 years of service for their member contributions.

F

For the normal costs, so I wanted to clarify for this chart this column here no longer applies because the city has provided us written confirmation that actually they are going to go with the seagulls provision, our view of the matter, so I just wanted to kind of shortcut them sure.

F

I know where you're going with it, but I wanted to make clear here because, um based on the materials in the municipal code, the city charter, the implementing memo- it didn't say that, but the city has now come forward and said in an email. They will do this, so I've worked with the city. I've talked to oer and I've talked with the city's attorney's office and recommended that they make changes to the municipal code to make that clear, um because it's apparently not clear. So I do see a hand up from oer from mrs parkman.

F

If she would like to chime in.

A

There's two hands up: one: five cheryl and one from brad. I.

B

Would like to go first, if that's possible, chair horowitz.

C

uh Yeah I'd like to hear from staff and counsel first and then, when their presentation is complete, we will take questions from trustees and the public. So please go ahead. Ms parkman.

B

Thank you. I want to thank uh council chin for her very accurate representation of what happened. We were able to have a conversation where we did clarify that the city's intent is that we would be allocating a hundred percent of the uh reallocated cost to the city. That was the intent when we were bargaining with with those three different unions.

B

This is this applies to a very small number of employees. Right now, I just want to say that if there are any other unions that want to agree to this, it would still be considered the city's intent that we would pay a hundred percent of those reallocated costs if they would like to uh do so.

B

But I just want to say I appreciate that we were able to to rectify that situation, and it is understood that the city will be trying to clarify this in the municipal code and I'm happy to take any other questions about this particular issue.

C

Okay, thank you.

C

uh Council chin: do you want to continue your presentation.

F

Sure so before I do, I do wanted to check with the member of the public brad if he had any further comments on this particular issue. Before I go to the end or to another, the next benefit uh bucket, so to speak, or whether or not he could hold his comments until I'm done.

G

If I can interject real quick and thank you, mr chair, um maybe this is more uh going to be addressed to uh mr hallmark, maybe I'm totally off base. Let me know I want to know if I'm wrong or whatever, but there are costs going forward, even though an employee might reach 30 years, etc and said. I think you have one employee that was addressed at this retirement board meeting. I think it was from the attorney's office.

G

She worked 34 years or something so she surpassed her 30 years anyway, regardless if they still continue to work they're, getting their pay, increases and they're, not contributing. So uh you know at tier one you get the highest year, so would that be factored in to to a cut to the cost? And that's the reason why.

Q

So, after 30 years of service, the benefit is a multiplier times years of service times final average pay and they reach the maximum multiplier, but their benefit still goes up if their final pay goes up, and so they do get some increase in benefit based on how much their pay goes up after 30 years of service.

Q

But they um part of the issue is they would get that whether they worked for the city or worked for a reciprocal employer, because if they work for a reciprocal employer, we also reflect their pay increases.

Q

So there is an additional cost for the pay increases after 30 years of service. We take that into account in the valuation it's just. They would get that whether they are working for the city or working for another calpers employer.

F

Okay, so going back to the presentation here, just to recap: for the tier 1 members for 30 years of service, you stopped paying normal cost pension contributions.

F

The city will take 100 percent of the funding loss, I.e, pay for those members portion of the normal pension, normal cost pension contributions, and that for determining whether a tier 1 member qualifies for this. We only look at city service for those particular bargaining units that have agreed to this provision. Now.

F

Moving on to the second category of benefits that came out of the actuarial audit, which is a pre-retirement death benefit for tier 2 members, so these are members who have not received retirement status but have died before receiving that product, so there this is a pure issue of statutory construction, so you'll see here. Siegel's view is that they must be eligible for retirement chiron's views that it must have five years of service siegel's view. If you look, the municipal code provision is based on subdivision b of the applicable statute.

F

Chiron's view is based on subdivision a um and so the orrs's practice has been following sigel's view and we agree with siegel, because if you look at the the statute hold on, let me just go back to the top there's a rule in statutory construction, that the more specific provision must control over a less specific provision, a general provision and so here's a provision for the eligibility for the pre-retirement death benefit. Can you guys see this or should I make it bigger.

C

If we can make it a little bit bigger, that would be great.

F

Okay, I just want to make sure you guys can follow along. Can you see this.

C

F

Okay, so this is eligibility provision, so, as you'll see here subdivision a which is the one that chiron used is not specific to any tier one or tier two, it's more general to the uh subdivision b, which specifies that it applies to tier two, so based on statutory construction, the more specific provision will preempt the more general provisions so for tier two members, because subdivision b specifies that it applies to your two members, the chair, two, the eligibility requirements and subdivision be governed here to determine whether the benefit should issue.

F

So here as you'll see in subdivision b, the member must be entitled to immediately commence retirement, meaning he he or she or they must be um eligible for retirement at the time of death, which coincides with sigel's view now. So if we go back to the chart, okay, my bookmarks are not working, um let's see so that coincides with sql's view here that they must be eligible for retirement.

F

um One thing I did want to note- and I won't bore you with the details of the municipal code, because it is a little bit of a patchwork here, but I will say that siegel's view was two percent um didn't have any statutory basis for it. It was based on um an email correspondence with the city saying that this seems anomalous to have um the death benefit paid at two point: five percent, uh while the the benefit formula for service retirement is two percent, so ors and siegel said: okay.

F

Well, if that's the city's intent, we are going to do that. So that's why ors's practice in siegel's practice use the two two percent multiplier in the formula, whereas chiron followed, what's provided in the um san jose municipal code, which does specifically provide a 2.5 multiplier.

F

um So we've had a conversation with the city's attorney's office in the oer and they acknowledge that this is an error in drafting in the san jose municipal code. So we have again asked the city to amend the municipal code to provide for the two percent. If that was their true intention and but unless and until they make that change uh ors. So many acronyms ors must provide the 2.5 percent up until that date, so I do see a handout from ms parkman again from oer.

F

If, um if that's time for the chair to allow her to speak.

A

B

Thank you again. Yes, it was absolutely the city's intent that the benefit multiplier for this particular survivorship benefit would be 2.0, so we will be coming forward with the municipal code change very shortly that will re-clarify what this means uh you know. In the meantime, we understand that that is what the interpretation is of that, so we will proceed as quickly as possible, so we do not uh have any have any uh people in this situation uh in the intervening time and that's all and again available for questions.

C

Okay, please uh please proceed council chin! Oh, I have a question.

A

I had my hand. Oh, I didn't see that it's the background.

E

Okay, um so I'm just curious um with that is: um what is the difference between member must be eligible for retirement versus member must have five years of city service. Are they the same?

E

I mean, aren't they the same? It's.

B

Sorry, sorry yeah, I'm happy to take that so a member can have five years of service, but they may not have reached the actual age of retirement which, for uh tier two, you can start to retire at age 55 with a reduced benefit or you need to have. I guess for tier two. It is actually only age, so you need to reach at least 55 in order to be eligible for a benefit in our tier two.

B

I think so that's why. So. It is a big difference right because you could have five years of service, but only be 40 years old, and so you would not uh not be eligible for the survivorship benefit for tier two, if you, if you unfortunately pass away before uh before, you've reached your retirement age,.

E

B

E

um Do we happen to have anybody who's?

E

You know I mean, since this has been in the unicode and has there been tier two people that fall into this scenario um that were that died and were um eligible for retirement.

Q

Tier 2 has not been around that long and there we only found one person who had died with more than five years of service, who was not eligible for retirement, not out with that person did not have a spouse so that the issue has, as far as we know, has not come up.

E

Okay, so we don't owe it to anybody and we're gonna take care of it so that it follows what tier two.

B

Is right and when somebody does pass away before retirement in tier two, their beneficiary receives a return of contributions plus interest, so they do receive. uh You know some amount of the funds that were contributed. It's just not a annuity or perennial benefit for the rest of that beneficiary's life. Is that the same with tier one? Do they? That is not the same with tier one um that is different, and that is, I think, base the the question that was that was asked so uh for tier one.

B

If you do have five years of service, uh you can't, if you unfortunately again pass away before retirement your spouse or beneficiary is eligible for a survivorship benefit. Oh really, yes,.

E

Even if you're, not um at retirement correct, that's.

B

Correct, I do want to point out that for tier two, if you have a service connected death- and you are not eligible for retirement, we do provide a survivorship benefit. In that case,.

F

B

F

That that's uh either subdivision d, uh or I think it's the subdivision d of that um municipal code provision that we discussed with eligibility so putting that issue aside. The question from the actuarial audit was: do we use subdivision a or subdivision b for people who uh pass away um without on not on the job so to speak, and so um this was kind of the legal analysis that we wanted to come back and provide the board for those two four issues, but really two benefits um that came out of the actuarial audit.

F

We will work with the actuary of mr bill hallmark as well as staff to make sure these uh get implemented appropriately.

F

A

All I had here for it.

F

C

Goodness and is action required on this item, it does not say in the agenda.

F

No, it does not it's just.

C

Informational, only very good any further questions by trustees or the public.

C

Okay hearing none we'll move forward to item 5a oral update from mr pena.

N

Thank you, mr chair, and I think everyone, it's been a long meeting so far, so try to be quick. First, I just wanted to echo the words by everyone and welcome trustee avasti. I I hope I'm not really making a very mad bad uh uh pronouncing your last name badly. So in any case, we welcome you to the board. We look forward to working with you.

N

uh We will be reaching our staff directly to you to schedule an on-boarding uh meeting in the future, whether it's virtual in person so welcome, and thank you for making time to be with us this morning.

N

I also wanted to share that federated employees of retirees will be receiving their cost of living adjustment in the paycheck next month.

N

For april, a staff is working, as I mentioned before, diligently on uh finalizing the newsletter that will be issued to our members uh uh sometime mid-month next month in april, the office will be closed on the march 31st for cesar chavez days. Of course, the op the office has been closed for uh two years now. Today is actually the the two-year anniversary when we actually went on on covet uh from the office. The last time we were at the office was monday uh march, 16, 2020 and starting on tuesday november 17, I'm sorry march 17.

N

We started working remotely.

N

I also wanted to share with the board and thank barbara for the hard work and we did hire a new I.t network technician and he will start working at the office on march 21st, which is this coming monday and also wanted to share with you board.

N

You heard from me sometime back that we early around the holiday time january. We share that. We pause our plans to start bringing staff back to the office on a hybrid approach due to the omicron variant. At the time we actually started back this week. This past monday staff actually come into the office one or two days a week. uh So we are going to see how that develops. We're gonna, monitor um the process and certainly we'll keep you posted.

N

um The office is still closed to the public, although uh that does not mean that from time to time, we do have members coming in uh to drop information or ask some questions. We will open and we do open the door for them, but of course you also know that what even when the none of the offering staff is working remotely- and we still have virtual meetings with members, so we are in fact conducting business- it's just not at the office.

N

So as part of this process again we'll see how this go. uh I foresee having this hybrid approach uh for a very foreseeable future and at some point, assuming that there are no new variances and the pandemic is subsidizing them at some point. We'll then entertain opening the office, whether it's, firstly, maybe half time and eventually fully, but that that is forthcoming in the future. uh We're not really we're not there yet, and I also wanted to share that for the it manager.

N

We did kick off the interview process and there is a second round on interviews scheduled for some time later this month, the same for staff, specialist positions will be conducting interviews later this month and, lastly, I think cio palani mention it. We did have the uh calipers, the california association of public retirement assistant general assembly, this uh past week from sunday uh march 6 to the 8th some trustees. As trustee horowitz was in attendance.

N

I moderated a particular section of delegating to investment staff. We have participation from different plans, but it included prabhu from our office. uh It was very well received, and again I wanted to thank you, our cio, for his willingness to attain and to be part of the panel 24 hours after he just had arrived from india, so I was surprised he was still awake, so thank you, prabhu.

N

That actually concludes mr chair. My comments. I'm happy to answer any questions.

C

Thank you, mr pena. Are there any questions from trustees or from the public.

C

All right hearing- none 5b, we've already covered, so we move forward to 5c discussion and action on an increase in the administrative budget. Thank.

N

You, mr chair, so um I know benji, who is our accounting manager is joined. The meeting um I don't know if you can actually call the memo to the screen benji but um you'll, see on item 5d, which we present every year. Our administrator budget actually is comprised of what we refer to, as the four main buckets.

N

This particular request is, is dealing with one particular bucket, which is the budget for professional services.

N

I do want to make the point here that when we present this to you board every year, we made the point that if any any of the four particular buckets are going to be exceeded, we will come before you to request an adjustment during the fiscal year. This is my 10th year presenting the budget to the board. It's only the second time that I have to come up during the fiscal year to request an adjustment.

N

This does not mean that the total amount that you approve for the fiscal year ending june 30th 2022 will be exceeded, but we are exceeding the professional services and that's what we are coming before. You asking you to approve an increase just for that particular bucket. The original amount was 850. 000.

N

projected expenditures are just over a million dollars, which is a 187 thousand dollar difference. We are really requesting a an increase of 200 000 for a million uh 15 000 uh for the current year, and this is uh this increase is mostly due to uh legal costs associated with cases that quantitatively were not expected.

N

The way that we developed this process and I'll speak a little more during the next item is we look backwards, five years to the expenses for the the various areas, and then we uh come up to an average, and then we look forward to the expectations for the coming year to see if we have any particular projects, so any particular expectations as that's how we arrive to that number.

N

uh In this particular case, this legal and some of the litigations that were either unexpected or that have been more challenging than anticipated, uh have impacted the legal cause uh by an amount that exists. What we had anticipated and so we're asking you to approve uh this afternoon. An increase of 200 000 for for this particular bottle. uh That, actually, is the total explanation.

N

You can see on the right hand, side that the total administrative budget is not going to be exceeded. It's just that particular bucket. So I'm happy to entertain any questions.

C

Thank you, mr pena. Any questions from trustees or public.

C

A

Yeah, when you say um you had unanticipated expenses uh in legal, exactly what were there.

N

um So there are see I had an information for my last board meeting with police on fire, but I don't have it handy for a federated all day that I can tell you. There are specific litigations that we actually have spoken to you board in closed session, uh some of them and okay. They have impacted uh the increase in costs.

A

Sorry, thank you for the reminder.

N

No, no, that's! Okay! I I don't know if you wanted to add anything. Maytag.

F

Yeah sure, thank you um so another a couple of other things too, that have increased the budget, so one of them, for example, is the ab1 361 issues regarding the memos and preparations of that that came up. um That was not an anticipated cost that we thought we would be incurring on an ongoing basis.

F

As you know, we do this every month um and another thing that, in terms of ongoing costs, we you know, we've got a number of subpoenas that have been served on federated so for members and to provide the records and other litigation where we're not directly a party, and so council has been working with rs staff to address those historically, I don't think that we've received as many subpoenas as we have in the past year, um but given the circumstances. Those are a few examples for that.

F

I can think of the call of mine that are outside of standard litigation that we would generally receive for for our plan.

N

And thank you for the reminder. Ab361 you're correct on that. That's that's the other. The other idea. Thank you.

C

uh I am curious: do we allocate these legal expenses uh simply 50 50 between the two plans, or do we seek to allocate them according to uh who's actually filing the suits and.

N

It depends on the suits right, so there are shoes that are specifically to the board or federated which have been known in the police and fire. So it's by plan and it's particular to that plan. The legal uh experiences in the past and forthcoming litigations or challenges going forward.

A

Okay, that's correct.

C

So this requires action. We need to approve the new budget. Yes, please is there a motion to approve this budget request.

E

A motion to approve it.

C

So we have a motion from vice chair jennings. Is there a second second that was a second from trustee keller?

C

Any discussion on the floor for the motion on the floor. We'll have a roll call.

C

Okay, thank you. I didn't see that uh brad. Do you have a question.

G

Thank you, mr chair, uh and uh thank you for bringing up the the budget. Increase. Request was, and I understand some of these are in closed session, but could possibly be the uh additional uh attorney's fees have to do with the uh ongoing lawsuit that the san jose retiree association is filing against the federated fund. Is that a part of that.

N

um Can you be more specific brad to what litigation you referring to.

G

uh I believe it has to do with 415 san jose retirees association.

N

uh No, he does not.

A

N

Thank you, you're welcome.

C

Okay, any other further questions or comment on the motion on the floor to approve the budget.

C

So hearing none, we will have a roll call vote, trustee, chandra, hi trustee keller. I vice chair jennings aye, trustee linder, aye trustee avasti and I vote. I. It is approved item.

C

5D discussion.

N

C

On ors administrative budget for fiscal year.

N

So, uh thank you benji. This is the uh the annual presentation of staff uh budget proposal for your board for the upcoming fiscal year july, 1st 22 to through june 30th 2023.

N

I do have to say um I want to give kudos here to trustee jennings.

N

She actually reached out to staff, and we had a meeting last friday where we thought we were going to be educating her on the process and it turned uh turns out that she actually ended up educating us.

N

So I'm seriously, considering when trustee jennings retires, uh to ask her to join our office as a retiree employee and help us through the body process, so um certainly julie. If you want to consider that uh we will welcome you with opportunities.

E

As long as I can work from home right, you know.

N

But in any case, uh this is the italian work I do want to give kudos to obviously staff. In general, we have meeting with the senior staff and and every manager have meeting with very specific areas. So I want to thank the staff for the work I specifically want to thank accounting and the accounting manager uh working with us and preparing the documents and working with the budget office. So uh is a task that takes a few months.

N

So I want to thank you for that and before we kicking off, if you can go to the next page um benji, so I just want to give a little background. Many years back.

N

um The this process um was a little different from the standpoint that um we staff presented to you board this kind of detail for that we're going to be presenting today in terms of the request for the budget, but um we did not present the same detail to the to the city council and so sometime back, the mayor requested the city auditor to do an audit of the plan of the plans and, as part of that audit you have seen me, especially those of you in the audit committee, give you updates on any outstanding recommendations by the city auditor audit, which is still a couple of things outstanding, one of which had to do with budget and rightfully so.

N

They suggested listen. um Since your budget, based on metro g, have to be actually approved by city council, you should actually share with the city council the same kind of documentation you prepare for the for the board, and so that actually meant that we then needed to uh then bring to the boards specific areas of memos and detail that we didn't bring before and vice versa.

N

To present to the city council, some detail that we only left it with the boards, and so as part of this item, I'm just going to be keeping my comments to the powerpoint presentation, but you have two items. Besides that two documents you have the memo, which is explaining our request, which I will go through in the video presentation, and you also have a document that actually refers to the uh um uses and uh and sources of fonts.

N

That particular document was a request that we started presenting to you board that actually used to go to some extent to the city council, and that is really one of the reasons why one of the recommendations by the city auditor is still outstanding, um because we take the position and so does your board based on council's legal interpretation that will become before you all we're presenting to you is the administrative budget request administrated by definition does not include investment expenses, uh although I I am going to explain, there are some personal investment related expenses in this version, and I would explain why it is in here, but in a nutshell, um this the city auditor's view, and the city's view is that investment expenses should be part of the budget and should be approved, of course, um because we don't agree in concept with that.

N

That particular um audit recommendation has not been clear, but suffice to say that we have taken steps uh in the nature of the recommendation to somehow provide the city council if enough information, so they're comfortable with the investment expenses and the overriding factor there is that investment presents every year uh in the fall.

N

One of the most detailed investment expenses of the plans, not only in california, but I would argue, nationwide of what the expenses have been in terms of not just managers that are public managers, but also private private managers as well. So it's a very good job, and hopefully what that does is provide the city council, a sense that we are in fact keeping track of the expenses and making decisions, making sure that we are efficient and effective on the charging, our duties and- and we also present the same, the same report to your board.

N

We do that to the board first and then to the city council, but for purposes of this budget process. What we do is uh for purposes of the sources and the usage we just assume. We have no idea, but we assume we're going to earn the assumption of return and that's part of the sources of funds. So if you look at that document, that's what that means.

N

When you have the sources of funds on the earnings on the users, we just assume, based on the assumption of return, that we are assuming that we're going to pay expenses based on that return, and that is part of the that's part of the uses of funds. I just wanted to give you an explanation on how those documents came about if we can go to the next slide. Benji.

N

Oh there, you go so again sources of funds. It really includes three items: city contributions that we have spoken about early in the meeting, uh members contributions or participant contributions, and then the one I was referring to the investment income, which again, we assume the the assumption of return for the for the uh for the earnings in the uses of funds.

N

uh Again we have uh benefits and health insurance and those are the the payroll um benefit payments which actually is shy of a quarter of a million of a billion dollars a year federated and then the administrative expense, which is really the presentation of this budget.

N

If we can go to the next slide benji now there was the question earlier by chair uh horowitz about the 50 and in this particular case I just wanted to share with you that personal expenses are actually 50 50 with uh federated for most of the staff is set for the investment staff staff does not keep track of how much time they on discharging duties for federal plan, vis-a-vis, police and fire plan, and we have found that and we believe that having a 50-50 split is reasonable enough, but sometime back um it was agreed that the investment staff work will be split based on the actual asset side.

N

If you look at the total assets that we manage about, 60 of them are related to police and fire and 40 so federated, and so for the investment staff. We actually split. The personnel cost 60 40., the rest of the expenses, non-personnel equipment, professional service and medical services. Non-Personal equipment is administrative overhead costs such as rent supplies and equipment, and excluding professional services, thus actually split analysis, particularly to a plan we split at 5050 but, as we explained before professional services, that's not.

N

The case is very uh particular to the plan and the same for medical services and medical services uh include contracts with the board medical advisor, the the new administrative workhead solutions that we are on boarding and independent medical examiners.

N

The administrative budget does not include again, as I mentioned before, any investment professional services consultant and investment managers fees. The only fees that are included in this budget that are investment related are the fees associated with the personnel costs for the investment staff. Any questions so far.

N

Okay, so if we can go to the next slide, um this is just the sources of funds. uh I'm going to skip this other than to show that it kind of give you an idea as to what the actual numbers have been in the past versus uh the forecasted and the proposed.

N

For example, um I can tell you that the actual investment income for 2021 uh was considerably more as you well know, because you were close to a 30 market rate return than the actual than they uh originally forecast. An estimated based on assumption of return. Just like it appears that the forecast investment income for 2122 of about 168 million dollars may unless the market make some sort of a increase, uh the last quarter. We may be sure of that number.

N

So again, it just speak to the challenge of having the city council on the concept by the city auditor, of approving uh these sources and uses of funds, because we really have no idea how the the market is going to behave and the market is going to dictate not only how much investment equal we may have, but also how many investment expenses in terms of manager expenses.

N

So if we can go to the next slide same concept with the users of funds, unless it's a question I'll just keep this one and go to the next slide so that in a nutshell, it's just giving you a first of all some historical background on how we got to the process today and now. This is the actual proposal by staff for your board to consider for an administrative budget. um As I mentioned before, this budget is comprised of four main buckets.

N

The total amount that we are proposing is five million seven hundred seventy nine thousand. The bulk of that uh and is, I should be expected, is actually personal services. That is just shy of four million dollars.

N

The personal services actually includes all the positions that we have uh approved, plus uh those positions that we are recommending to be added in this budget. Non-Personal equipment is 798, 000, professional services, the proposes 850 000 medical services, 145 000 for a total of almost 5.8 million dollars. It's actually a five percent increase from what we um adopted uh your board, approved for 2122 and about a 14 increase from what we are forecasting.

N

The total expenses are going to be for the current fiscal year. um Again, I will continue the presentation and then the presentation is actually going to have the detail for the proposed amounts. If we can go to the next slide, so the the personnel services. Actually we until this this year we have 40 positions. The new budget is actually increasing uh almost by 10 to 43 positions. We requested uh three positions in the benefits area.

N

The three new positions are a senior analyst, a senior supervisor of administration and a benefit analyst, and that is to to uh it's a long time coming. um We have a brand new benefits manager who done a very good job of reviewing the staff work and the needs going forward.

N

Again, we really haven't increased that area positions in a long time, yet the the the the challenges and the work associated with actually doing the work is uh actually have duplicated over the years, not only because there have been an increase on members, but also because um there is, the actual plan has become more challenging. When I first started um back in 2012 2013, there was only one tier. There are now two tiers, or maybe tier you know, 2a 2a and 2c 2b and 2c so has become more complicated.

N

Yet the position has not increased over the years, so we do have a backlog in some areas, and I think this um this increase requires some positions um is looking to to actually be able to help staff and and become more nimble and also make sure that we become more efficient as a staff in the benefits area. So.

E

Can I say something um so the three positions two of them are managers? One of them is an analyst, so the senior supervisor of admin. um I understand the senior analyst like you- have a retiree kind of doing that. So this fills that void. What is the senior supervisor of admin? I looked at the org chart, but I'm you know just how. How do I pull that, together with an increased workload.

N

So so yeah, that's a good question. Let me go to the next slide benji, which is the the old chart.

N

So maybe I should have just made my comments when I was here, so you can see the the three positions that are, I think, that's great, uh so the supervisor actually is to be in charge of the work performed by by our staff specialists that are really administrative in nature, and so that's where that particular position is um hopefully that answered your question. uh I know we have.

A

What did they do.

E

What are the maybe sandra can talk to this, but what is this I mean I I just I'm trying to understand increased workload and then the positions we're putting in are management versus, analysts, okay and so.

N

On this, dude go ahead.

A

Yeah, I sure do it yeah. Actually, the senior supervisor administration is an mef job. It's a non-management supervisor that typically super yeah, typically supervises uh staff specialists. So this will be the person that really oversees our customer service function and all of our administrative functions.

A

You know the scanning the data entry of address changes, demographic changes, those kind of things that right now are being supervised by a senior analyst and there's just not the day-to-day attention that that team needs.

E

Okay, so it's putting all the administrative aspect under one person who I assume, since it's mef, is still going to be doing the work too right.

A

Yes, absolutely absolutely I'm hoping that team's also.

E

Like an accounting clinic or something or I just don't know that job class.

A

Yeah, it's a very rare job class yeah, it's probably it's probably between um a tech and an analyst. I would say.

E

Okay, because I guess it's over staffs specialists, so they're doing all the paperwork aspect or scanning or whatever.

A

And I'm hoping the education so um they're they're going to be, you know doing presentations, so I think that level of person is needs.

L

F

A

Of policies we have so many detailed, you know tiers and policies that they'll need to advise people on that that that will be the lead person for that.

E

Okay and then the senior analyst proposed, as that kind of filling the void for um melanie, that you know, has been a retiree or not or.

A

She has, I know, I know we have a lot of voids. um I think no, I think it does fill a void with um melanie. It's also right now, if you you know, we have one senior analyst. If you take away that's overseeing 10 people, so it just creates teams of a senior analyst and three analysts who have a little more redundancy so that it's not just one person who knows all about reciprocity. Now, you've got a senior analyst. A little more engaged has time to be more engaged in some of these day-to-day functions.

E

Well, okay, so the only thing that what I'm not seeing there is on the our chart is kind of like I assume a senior analyst is being responsible for something like in parks and rec. We split up fiscal and one is um just doing fiscal and the other one is just doing budget, you know. So I just don't you know how is david different than the proposed versus connie? What are they doing right.

A

So yeah david's team is the health team, so they're the ones doing open enrollment doing the health benefits working with all the health vendors working with the hr benefits groups, so they are pretty distinct group. The others. Two senior analysts are the ones dealing with all the pension payroll issues, setting up all the pension benefits which actually take a lot of detailed um analysis and not only data entry but actual analysis setting up working with the legal team on droves.

A

When there's divorces, how do you split split that up um working with reciprocity and reciprocity has gone up tremendously in the last couple years, working with other agencies to figure out that I mean I could go on on.

E

A

Leave, disability and all these things is it.

E

Going to be segmented, like is one senior analyst responsible for this, and the other senior analyst is responsible for that or is it? You know.

A

Hopefully I mean right now: we have analysts that are just in in silos about a half a fte doing something specific like reciprocity and then a half of their time is spent with setups and death processing.

E

A

So we have kind of a siloed approach, so this is starting to get us in the direction of creating some teams with a senior analyst. That's mandible, where the senior analyst will also will be responsible for a workload for sure and then the senior I mean we do review of everything with the senior analyst level and me a division manager level for quality review, so that senior analyst is going to be focused on quality review of the work of their analysts. Also.

E

N

E

I was trying to understand.

N

All right, thank you sandra and let me just say a couple of things. Thank you for the questions. So the first one is and santa can do a much better job at this than I can. But um I is extremely hard. I mean the the the benefits function has become more complicated because of the enhancements or the changes to the to the benefit structure.

N

But I cannot emphasize enough how challenging it is to try to um hire new personnel that had the first exposure to to public benefits, retirement uh against, losing I'm just gonna, say about 80 or 100 years, combined experience in retirement, which is what happened to us in the last two or three years.

N

We we lost employees that combined the fs experience every time. It was close to 100 years over the last three years from the deputy director to prior senior to benefit analysts to healthcare analysts.

N

Now we've been thankful that some of them have been willing to provide us a few hours to help us sort of try to bore some of these members uh new staff, but obviously uh it would take a lot of work and and effort and experience for this staff to come at the speed to at least to the point that we had uh the prior employees, the second one. I just want to take this opportunity. I try to do that often because I think they deserve it.

N

uh I just want to do a shout out to the whole staff right because listen we wouldn't be here today if it wasn't for the hard work and dedication and engagement and commitment of our staff everywhere from the left side of the of the workshop to the right hand, side from investment to benefits, to administration, to accounting and information technology.

N

They are the ones that actually work every day day in and day out and keep us going and over the last two years that we have been working remotely. Allow us to continue doing our court duties so a big shadow and a big. Thank you on behalf of senior staff to to our staff at the office for the work that you do every day um so with that um are the any of the questions about the the personal requests uh or the orchard in particular, if not I'll. If we can go to the next slide.

N

Thank you benji. This is not personal equipment uh again. The increase here is about ten percent from the adopted from last year. It's close to a hundred thousand and uh non-personal agreement increased from per year by 74, 000 and, and so the three main reasons for the increase. There was an increase in financial insurance by 27 000.

N

uh There was also an increase in postage and printing budget increased by 25 000, and then some of these costs is associated with cpi and, as you know, cpi has been increasing.

N

So when you combine all that that actually sort of uh explain the the difference of about 74 000, but in the next slide, there's a list of the the main um there you go. So these are, in a nutshell, the 798 000. What makes of that amount? The bulk of that is actually featuring commercial liability, insurance, um benji correct me.

N

If I'm mistaken, um the increase from last year to this year is going to be below the five percent threshold, so I can approve the increase, we'll just bring it to the boards at the next month on the consent so that they know what was in what was approved. But you know they haven't seen it yet, but it will be coming in the future. Is that correct.

A

That is correct. It will.

N

A

Under five percent.

N

uh The next bigger uh big item, which actually those two combined for about half of the total amount, is rent um we have. We approved the rent about a month before the pandemic. Of course, have we known that we probably would agree to a different kind of deal? But nevertheless, here we are it's about 222, 000 and then the rest of it is I.t hardware software.

N

Some of them include the social media projects and hosting services for the military system, postage and printing. We do have annual maintenance fee with lrs our provider for the administrative system. We do have some training and travel which obviously the last couple of years have been. The trouble calls have been decreased, but you know I think I just I just mentioned. We had an in-person general assembly last week, and so we have training and travel uh um estimates here for the coming year and and then another 67 000 other non-personnel equipment.

N

Oh mr chair, if we can go to the next slide, if I come, unless there are questions, if I can pause in here, staff is reminding me that we have the one o'clock break at the city level, and so I'd rather not have to stop in the middle. So if we want to take the break and then come back about 105, okay,.

C

That makes sense we're coming up to that hour, so we need to break for the uh broadcast system, so we will return at 105 and we are temporarily adjourned.

A

C

Looks like roberto is still on pause.

C

When you're ready, mr pena, yes.

N

Thank you, mr chair. So the next bucket, which is a professional service analysis, is the bucket that you just increased and the current fiscal year by 200 000. That's what you see under the 21 22, an adopted figure of 815 000 and modify of a million 15 000 compared to the 850 000 for the proposed, and I think the first question will be roughly so well. If we just increase the, why did you just go back to 150?

N

um So again? As a reminder, we look back five years uh and look at an average. Also, we take a look when we go back. It has been a normal year because of some situations just like this year. We take that into account and then we look forward. We also reach out to uh our general and visionary council and asked them for comments on the litigation. They were working on. uh How many of those may be completed this year?

N

How many of those will continue next year and based on all that information, uh we are presenting a proposal 850 000.

N

So again, professional services is an increase of about 35 000 from last year adopted, and I just wanted to make sure that it's understood this proposed does not include costs associated with the new pension minimization system right because we pay for that when the administration system was completed and then from an accounting standpoint, we capitalize those costs every year, but that's not part of this uh process.

N

This is just sort of like a cash basis kind of uh proposed budget, if you can bring it up within a little revenge, the slide just okay uh and so.

A

N

Following slide is actually uh a detail of what comprised the 850 000. you can see. The bulk of that is is legal.

N

uh Rhys smith, is you general uh a fiduciary counsel, but it also includes costs associated with salesman, which is your disability, council and johnson, a nice miller, which is your tax counsel again key point here. You also have an investment council which again is not included here, because we do not include investment related expenses in the proposed administrative budget. um It does include actuarial work, regardless of what you may think about chiron and bill.

N

In particular, they enjoy their work very much and the challenges, but they still, they still send us the bills for those to pay. So we have to include it so those two actually accounts for more than half of the 850 000., um I'm happy to address any specific questions about the other ones, but if not, we can go to the next slide.

N

Last bucket is medical services. This is the work associated with the disability applications. You may be called that last spring. You approve, there was an rfp that we issue and you approve the work work. Health solution, which includes a board medical advisor, which actually happens to be the prior.

N

Doctor for the city and prior board medical advisor that worked with you board prior to the last five years by dr truman, and so this proposal, which is considerably higher 81 uh more than not only the adductor but also considerably higher than the actual, is because we are on boarding, workhead solutions and we have a plan to bring down the backlog of disabilities.

N

So this proposed amount, which includes mostly the costs associated with the board medical advisor and independent medical examiners, assume a particular number of cases per month, so three cases per month um and 24 cases annually for all the independent medical examiners. So we do expect to be quite busy next fiscal year. So that's what the proposed amount uh reporter. Can I ask the question? Yes, you may.

E

On the medical piece of it um is so the medical vendor is is that the person who left.

N

No, so um you used to have a medical advisor, but that's right. Dr tillman you're correct she left last june in 20 yeah, and then we ensure in the in the rfp and uh work health solutions was selected and working solutions.

N

The the main uh responsibility is going to be led by dr das, who is going to be uh oh.

E

N

E

N

E

N

Guy was the one before the two minutes.

E

Yeah before her his.

N

Position was actually caught by the by the city, so.

E

N

No longer at the city, he does work with this uh administrative group and he's going to be providing the the the work as a board medical advisor we're also going to be. The contract also includes some costs associated by work, health solution that is strictly administrative as well, uh we're hoping that we can help staff with uh the the process and gathering information for the disabilities.

N

Does that answer your question? Thank you. um So if we can go to the next slide, beijing, okay, so in a nutshell, that is the proposed budget, um one of the things that we do uh just to provide. You bore some reasonable assurance that the the proposal that we put in before you is reasonable is that we compare um the cost of managing the plans and minister plans with our peers across the state.

N

So what you have before you is a personal services analysis, so we have two. We have one analysis between san jose and our peers for personal costs, and then the second one you're going to see is actually for the total administrative budget.

N

This one is just personal, and now I'm going to caution you something because when I made this presentation to police on fire, they're always happy and then when I make it federated they're, not as happy and the reason is, we are very different. We as an office are different than our peers in that you have a an office and a staff that actually provides services to two separate plans.

N

That is not the norm. It's not the norm in the state, because, usually what happens? Is you have one step and the plan is actually comprised of both sides of the question right: public safety and general members, and then you have just one plan and you have one staff. In our case we actually we do have the same members, public safety and federated or general members, but they are on the two separate plans and only that you have two separate boards, but we have one staff.

N

So I remember I mentioned before that we split the cost 50 50 um personnel, except for investment staff that we do 60 40 based on asset sites. When we do this comparison, federators need to look a little bit more expensive because you have a lower base on asset size than police and fire. So that's why we do two things we do by plan and then we do a combine.

N

So when you look at the combine for san jose plans uh for the actual 2020 2021 uh a basis points, you see us very similar to uh our peers right as a combined plan you we will fall under the average of five to ten billion, which is eight business points. uh Ideally, what that gives you is a sense that, in terms of personnel is, is actually a reasonable request, but I will actually venture to say that we do better than most of our peers, because again this is personnel.

N

I have I'm lucky enough. I guess I have experience working with different plants, two of them in the central valley and one in the bay area, and I can tell you that the bay area, personal cost, is a lot higher than the central valley. So the mere fact that we are in line with our peers is actually, I think, applause, but in every case, hopefully the 50th sense that the personnel related cause is a reasonable request.

N

Any questions about this particular slide and by the way our peers are our older public pension plans in california and and this information benji correctness are mistaken- is extracted by accounting staff from the coffers of the other plans that are available uh for the actual numbers of 2021. Did I get that correctly? uh Yes,.

A

Yes, you did it's their latest act, fair.

P

So either 6 30, 21 or 12 30 120.

N

Yeah, and if you see that no don't move it, you see that knowing below below that we got the information, it does exclude sacramento merced. They were not available at the time that this was completed. So those two are not included, but everybody else is so include 21 public pension plans. We can go to the next slide.

N

um Oh so before this slide, one is in basis point the other one is in dollars. Can we go to the oh? This is the dollar ones, personal services analysis so same comparison of personal costs, but now, in terms of basis, points compared to the asset. Size is dollar figure and again the.

N

If you look at the plans by itself federation and police and fire they're, both higher than plants in the zero to five billion pension plans as a site, and when you look at the combined san jose plan, a 6.9 is actually higher than the range of 5 to 10 billion or 5.5.

N

Although on the basis sides we still within our peers. Here we're higher and again, I will venture to say we're higher, because the cost of doing business from personal standpoint is in the in. In the.

O

N

It's just going to be more expensive than in many other areas in in the state, especially in the central valley.

N

If we go to the next slide is the same concept, but now not just looking at the personal cost bucket, but the total administrative budget that we are presenting um again um so federating looks considerably more expensive than uh other systems in the zero to five. But again, that's because you only have one staff that don't work for both plans, but you have a lower base of assets than your sister or brother, depending how you want to see it. But it's on fire.

N

When you look at the combined san jose plants is 14 basis, points that combine have to be compared with a living basis, point on the five to ten billion and again it is higher, but still it is uh reasonable. I would say- and in fact in fact I would venture to say uh my experience before I joined san jose was with what is also known in california. These 37 counties, which is based on the 1937 act 20 of the 58 counties, are under that particular requirement. A state requirement at this.

N

uh The state state law and in 1937 and when I started 25 years ago there was a limit of how much volume you could request and it was 18 basis points of. I think it was total assets and you may correct me harvey or maytag, because I I don't longer work in 37x, but I think that number was changed over time to 20 to 25 business points. At some point there was some thoughts about when the market went down to base it on liabilities rather than the asset size.

N

Okay, so my only point with that statement: thank you harvey for that detail is that still, the request from an administrative standpoint is reasonable. Not only these basis points are considerably lower than 21, but again these are based on asset size.

N

The 37 accounting is based on liability and, as you know, our plans are not fully funded, which means the liability base will be even higher. So if we, if we do this comparison from the liability standpoint, they will be considerably lower.

N

The next slide is the same information, but a dollar figure again on on a plan basis. We look higher uh on the combined. We look higher than our um five to ten billion, uh but again the days some of it had to do with the fact that conducting business in the bay area is today more expensive than other areas in the state.

N

uh But again the the punch line here is this is to provide you some reasonableness on the proposed budget, and hopefully you get the point that this request is reasonable uh for the charging the duties of our office. um That actually concludes the uh the project presentation. I'm happy to answer any specific questions.

C

Thank you. Thank you, mr pena. Any questions from trustees or from the public on our budget.

C

So hearing none I'll entertain a motion to accept the budget for the next fiscal year. Do I hear such a motion.

A

C

So we have a motion from trustee keller and was there a second second that was a second from trustee linder. Any discussion on the motion hearing. None we'll have a vote: uh trustee chandra hi voday trustee keller, aye vice chair, jennings aye, trustee linder, aye trustee avasti.

B

C

And I vote I, the budget is approved.

C

Now on to item 5e discussion and action regarding the board medical advisor, which you had just mentioned,.

N

Yes, thank you, mr chair. So um the reason deciding is before you and again I want to start by thanking staff for their work on providing this information. I apologize. I don't know if there's someone from staff that can actually bring up to the screen the memo, because I'm going to be referring to the table on the memo.

N

So if someone can do that, that will be helpful.

N

Thank you marty. So um a couple of things: if you can move up, okay, you, if you can keep it there for a second, so first I wanted to call your attention to the background on this item.

N

The beginning of the memo just takes you to the actual disability process for your reference and then the second half of it, which, if you can go to the next the table there you go so right there. So, um as I mentioned before dr truman last last june, and we just onboarded workhealth solutions and dr das.

N

So I wanted to bring this before you with the recommendation, um because um the question really is: we have some cases that are still yet to be decided for which we have a broad medical advisor report on file, and so what we would like to do is for those cases which is actually in this case scenario two um for which we have a broad medical advisory problem, five, by the detriment to move forward just based on the doctor on the report by dr truman at this point, obviously brand new cases that are anywhere from the beginning.

N

You know that just came in last week to a few months where some of the medical evidence have been put in together. Those are 42 cases. We have no question on that work.

N

Health solution is going to be on board in the next few months and we will be using dr das to provide the committee a you board with the board medical advisor, but uh by the same token, there are some cases that are still outstanding, for which we have prior uh board medical advisor report on fire and by your todaz, where we fully um expect- and we recommend to continue using dr das- going forward uh to provide further analysis if needed, for the board medical advisor report. That will be scenario three you.

N

You see that scenario two and three are both uh on the pipeline and they have already been scheduled for the disability committee, so they should be coming before you in the near future scenario. Four are applications that are currently deferred by the applicant for which there is dr truman reporting file.

N

This application is on hold and at this point is not going to be going to the committee anytime soon, and then we have 16 cases uh that actually includes a prior boy medical report by dr das. From many years ago, uh the application was put on hold by the member for many reasons, and it has not been reactivated.

N

I will speak to those issues in a second and then the last scenario, which is six is we have two cases uh for which there is no board medical report on file. um There is an independent medical examiner report and again that particular case is on whole. If you uh marty, I apologize for bothering you if you can go further down. I think that's where the options or recommendations are okay, so right there. So in a nutshell, uh these are the options and what we've recommended to your board for scenarios.

N

Two and four for which this dr tiemann report on board. We are recommending that we continue that approach and use the report that is on file for scenarios three and five for which there is a prior. Dr das, uh board medical advisor report.

N

We recommend to use the prior report and then the third, uh the third option of recommendation, which have to do with scenario six, for which there are no boring medical examiners report on file. um We are not recommending to answer to dash to getting both at this point um and just either use the ime report or again, uh if your preferences, that we use uh work resolution for medical board medical advisor report, we could certainly do that.

N

But before we do, um we answered any questions and and this emotion I wanted to touch uh two issues. So I speak to two interesting here. The first one is, um there are quite a few. You saw that in scenarios three and five and even six um that are cases that the member put on hold for many reasons, some of which have been outstanding for more than ten years.

N

That is not right. um In my prior jobs, uh there was a threshold and a time limit that a a an application can be put on hold. uh There are many valid reasons why an application can be can be put on hold my experience and I'm not suggesting that's the case in here, but sandra is listening to the presentation sandra.

N

If I misspeak correct me in many instances, the main reason for an application to be put on hold in many instances, I'm not saying is the only one by the member is when they get a whole or understanding that the medical evidence that is coming forward either by the independent medical examiner or the board medical advisor is, is contrary to the request they put in a hole so as to not to have a negative um decision by the committee and the board, um and obviously that's not right.

N

I'm not saying that is in all cases, but I do know from experience as in many cases.

N

So we are actually looking at this point working with the disability council to see how we can manage those um applications that are outstanding, uh and uh I think the goal here would be to clear those up from your pipeline and if a member either going to move forward with an application.

N

Let's move it forward if they have no decision at this point, uh we just assume they delete the application from the from the process and if they want to start all over again, they will have to start all over again and we will have to take a look at whether we can accept um that particular application at that point. But again nothing has been decided, but just want to let you know we're working with our disability council and anything.

N

We decide we're going to bring forward to you to you board for approval before we move forward the second action item not for today, but I wanted to remind you. Some of you, of course, are new to the board, but those of you that are lucky enough to be to have been a divorce from a year or two by now uh know that staff brought forward last year.

N

Some education on the stability process and one of the requests by staff was for you boy to start considering the possibility of putting together a disability committee of trustees.

N

Right now, the disability committee of federated is comprised of staff and it's really comprised of the benefits manager and the ceo and, and we think that the process will be better served by having uh a disability committee, a comprise of of your own peers trustees that then you can make recommendations to your board.

N

That is not for discussion of a decision today, but I just wanted you to remind you of that, especially because I know you have two new trustees on board today that were not privy to that discussion in the past, and I want you to I. I wanted to remind you of that, because we will be bringing that uh uh discussion item back to you boy in the future, so you can make a decision now with that said again, these are the um the options that we are recommending and I'm happy to answer any specific questions.

N

So staff is some more if you have any specific questions that I cannot answer. Thank you, mr chair.

C

Thank you, mr pena. Are there any questions from trustees or from the public.

E

um Okay, so on the last one, the ones that are really old, uh you're going to go to legal counsel to see, because I guess we don't have something that says it has expired or there's a.

N

Yeah we that's right, we we don't uh in my prior jobs, we had a timeline, you cannot just.

G

N

There's something lingering: for years we I actually received information from staff. I believe some of these may be 10 15 years old. Is that right, sandra.

A

Yes, I think there are some a couple from 2006 and 2007.

E

Well, that would seem appropriate, so I mean I think I mean as long as it's you know documented and it's illegal. um It seems that there should be kind of like a a date where you know yeah.

N

Disability council, whatever we recommend or decide to move forward, we'll bring it before you board for uh consideration and approval before we implement it.

C

And if we were to change the process, uh would that apply retroactively to these existing long-lasting applications or.

N

Yes, the idea is to be able to to sort of knock them down and either move forward come to the disability committee or you know, that's it.

C

Okay, certainly a a ten-year continuance seems like an abusive process. So, yes, we can do something there. uh We have a hand-raised uh member of the public brad.

G

Thank you, mr chair uh yeah, mr pena. I'm a little surprised and disappointed that uh hearing that the disability current disability committee is made up of yourself and the benefits manager I mean I I can recall where we we've uh always had at least one trustee on that committee, and I know as a if I was a disability applicant. I would be concerned that the committee was made up of the ceo of the federated retirement system and and the benefits manager without benefit of any of my peers.

G

uh So I hope the board would consider that and and correct that as soon as possible. Thank you.

N

Yeah, thank you for the comment uh uh brad. um So what you're correct? Obviously all the committee does is recommendations to the board. The cases do eventually come before the board, so the final decision on the disability case is up to the board trustees in any case, but your point is well taken and this is something we're going to be bringing forward to the to the board for consideration in the future. So we appreciate it.

E

Okay, so if I understand things, you're going sandra's put this together documenting how she would like to move forward and you're looking for us to approve it. Okay,.

N

I don't know barbara or sandra if you have any further comments or something that I left out feel free to join in.

J

Yeah, no, I think you covered it. Thank you.

E

Okay, so this is a way to kind of work through what is pending and what's there um I guess it seems appropriate to me. I don't. I don't see an issue with it and I think it's great that we're moving forward to get these processed.

C

So, uh council leaderman.

A

uh Thank you uh just for mr pena on on this page. That's on the screen with three options. Yeah. I think that the recommendation is for the board to adopt all three they're, not all yeah,.

N

That is correct. Yes, all three! Yes, thank you. Yes, that is correct. Yes, because it is each one of them deal with specific scenarios. Yes, except for scenario, one which is the 42 new and those are clear, they're going to be engaged by workflow solutions.

C

Okay, so is there a motion to adopt all three.

E

I some motion to adopt me. Oh sorry, I just want to make sure.

F

That it was clear scenario one in addition to all three is that correct, roberto.

N

No, we know I mean no, because the board, the board hire works on solutions and, of course, any new application which are 42 of them. We're going to be uh engaging workhead solutions to work on on those 42 new cases.

F

Okay, I was just clarifying because I was a little confused.

N

No, they I I yeah, I appreciate it, I mean I can imagine yeah, but thank you for the question. That's that's the answer.

E

Okay, this is for the backlog.

N

Yes, yeah for scenarios two through six, that's correct.

C

Okay with that clarified, then uh do you have a motion uh vice chair jennings.

E

Yes, I motion that we accept options, one through six scenarios as we're using proper language.

D

C

And that was it was a motion by vice chair jennings, a second by trustee chandra, any discussion by trustees or the public so hearing none. We will have a roll call vote, trustee, chandra, hi trustee kelleher hi vice chair jennings hi, trustee linder, all right, trustee, obasti.

B

C

And I vote, I, it passes.

A

Hi uh chair horowitz, just as.

D

A quick point of order. I I scheduled a work, call at 1 30, not expecting this meeting to go so long. I bought myself 15 minutes, so I I don't think there are any more voting matters though, so I just want to.

F

There's only one there's there's two um which are the ab361 and then the evaluation of the cio.

C

Well, let's certainly ask that you remain for ab361.

D

And that would be for uh this meeting right, because I I don't need okay got it. Yeah.

C

And we would still have quorum even if uh uh trusted children were to leave so.

D

Thank you. Thank you. Trustee.

E

I have a meeting at two, so I can push it out. Are we gonna go beyond to do you think.

N

E

N

Be closed because then, after this we have the special committee meetings trustee jenny that we need the the uh all that I will try to get 10 15 minutes. If you can just okay.

E

I'll push it out; okay, it's my staff, so they're, pretty flexible; okay,.

C

E

C

Was a big agenda and and for those who have just joined us, you landed in the thick of it. So.

N

Yeah and I just wanted to say for trustee avasti, um this is not the norm, so don't get scared. This is a new law meeting you're not going to be sitting in this meeting for six hours every day. Now sure I say that today, and maybe the next year gonna be this long. But that's not you know.

D

You're, taking up my minutes here, roberto sorry flip it away.

C

D

Count of seven.

C

A uh item five f is next and let's.

F

See chandra, I will be quick and brief here.

F

As you guys all know, under av 361, this board is entitled to make certain factual findings to elect uh abbreviated teleconferencing procedures, which are one. The continued state of emergency continues to exist issued by the governor and two that the san jose city council has continued to recommend social distance measures and city facilities, the back of materials. I provided support those two findings.

F

Now I will note that this legislature on the 15th considered trying to vote to lift the proclamation for the state of emergency, that senate measure a resolution failed, but it may be considered for future.

B

F

At a later date, um which is not currently specified, so I did want to let that um let you guys all know about that, and also for the investment committee. As you guys know, you guys are not meeting today um after this meeting for ab361, but we are meeting tomorrow at 8 15 to make our ab 361 um elections then. So, with that, I leave the floor open to adopt these two factual findings by a majority vote of this board.

C

Thank you so, based on the information presented under ab361, this board, as a legislative body, must make certain factual findings if it elects to continue meeting virtually within the next 30 days, based on the information presented by council and provided what, with our board back of materials, it appears that the following factual findings justify the continuation of virtual meetings under ab361-1.

C

The governor's proclamation of a state of emergency continues due to the ongoing covert 19 pandemic and two the san jose city council. Recent resolution continues to impose or recommend measures to promote social, distancing and city facilities.

C

Do I hear a motion to adopt these two factual findings for the election to use ab361s abbreviated, teleconferencing procedure for the next 32 days?.

F

30 days, 30 days.

C

Oh, how many days did I say, 33 32.

D

I'll second trustee lender's motion so.

C

We have a motion from trustee linda a second from trustee chandra any discussion, a roll call vote, trustee, chandra aye trustee kelleher aye vice chair jennings aye trustee linder, aye trustee avasti.

B

C

And I vote I it passes unanimously. Thank you guys. Thank you. Okay, now, on to.

N

If you want to go to the last item, first, that we have trustee uh chandra.

D

I'd rather, let's keep going, as is because I'm the chair of the investment committee and I'm going to drop off okay.

C

Okay, yeah, uh I'm not sure we have anybody to present for the jpc committee, though um I guess: okay, 6.1 investment committee.

D

Yeah, I mean yeah, so um most of what we did uh was uh represented today, because it was about asset allocation. But I do want to note that there's an excellent presentation from a senior professional at morgan stanley, either a global strategist or chief economist, that the cio had arranged for the joint investment committee and uh don't want to speak for trustee horowitz. But I found it quite illuminating and I really appreciate when the staff creates those kinds of opportunities for us on the committee.

C

Yes, it was very interesting.

D

Thank you. Thank you, everybody. Thank you.

C

Bye, thank you. We'll see you next time, terrific! Thank you all right that is, and no action required. 6.2. The governance committee um chair who's is that charity yeah.

E

That's governor right: oh we going through the.

C

Well, it looks like you just had a special meeting, so there is probably nothing to report. There's.

E

Nothing to report, it was just the wave sunshine.

C

Wave sunshine: okay, 6.3: the audit committee uh committee, chair kelleher, so nothing to report. Okay, uh it looks like we did. Have a number of presentations.

N

We did we have our senior auditor uh uh at the meeting. Of course, we're not going to go through all that, uh but we are happy to. We are here and happy to address any specific issues or questions that are asked from the various uh documents he is also available.

N

Again I want to, I finally got to meet him last tuesday at the office for the first time in person, and I do want to say we are excited to have you on board. He has an extensive extensive experience, he's doing great work.

N

It is a challenge to do this kind of work remotely, but he has plug along with the plan that we had on board and and if I can leave you with any thoughts- and I don't know who many of you have in the comments is, he did work on a survey uh that provides a you board with the sense of you know, engagement of the feeling of the of the staff in general on the animal bases.

N

I think you can. I feel in general that the results of the survey was actually more positive and better than the prior year, but I think you can see some sort of a fatigue of working the money for two years. Nevertheless, I think it's good it's good information to have.

N

He actually uses that survey to help him develop the audit plan and determine whether any particular areas that he needs to concentrate on going forward even looking at the plan, whether there's some areas that he needs to key more than others, so increase any kind of compliance testing. Anything like that, uh but it's also used. I think now you're going to see in the 6.4 during presidential committee. I think that survey I think it's going to be started using going forward also for the uh evaluation performance review of the ceo uh in general.

N

uh There are also some uh reports on prior audits and and management uh responses, uh but in a nutshell, I think you know he's doing a great job and I'm happy to address any particular questions. You may have about the specific reports that he provided suffice to say that we have work to do and we actually have to implement some uh digested by him.

N

Some controls in some areas, but that's the main reason why we establish this function right, so that we make sure that we limit mistakes and and and challenges going forward.

N

Hopefully, so we can avoid um situations such as the project that we engage a few years back that lasted a couple of years, so having to re-evaluate um benefits from step from retirees, because the the compensation data that we were getting from the city paper was not a was not correct from the standpoint that some pays that were incredible in final com were not included and vice versa.

N

Some payments that were supposed to be included that were not supposed to be included when included, providing us with the incorrect final average salary that impacted the the uh the final. um The final uh benefit. So with that again we're happy to entertain any questions. Human. I don't know if you have any further comments that you would like to make.

H

uh No thank you roberto, appreciate.

A

C

Okay, so we we don't need to take action on any of these items, but there was a lot of material to review so trustees. Are there any questions on these various audit materials or any questions from the public.

C

Right well, we certainly appreciate the assemblage of these of these reports and uh believe they're quite important, um and, and we look forward to reviewing them again in the future, updated versions that is so with that. Let's move forward to item 6.4.

C

The joint personnel committee, it looks like I'm the last man standing in terms of committee members, uh so I don't normally present on this uh subcommittee.

N

Let me try to help you spencer, so this is not it's not different to some extent right, because there's a different job between the cio and the ceo. Of course. We all know prabhu has the easy job, but you know I'm not going to say that in public. In any case, it is very similar to the to the to the documents that you approved previously for the ceo performance review.

N

In fact they are so similar. Then the only reason there was a discussion on the ceo uh performance review. Documents was because whatever changes was approved were just going to be implemented for the cio as well. But the committee wanted to specifically review the cio documents which they did. uh Changes are the same. For both um I mean.

N

If there are any particular questions we can try to address then, but cortex did a good job, presenting the the changes which were the same changes that were recommended for the ceo and there's no need for you both to approve it. This the committee actually have the ability and authorized to make these determinations and these uh approvals, but certainly when everything is finalized will be brought back to your board to keep you posted. uh It did require just like the ceo.

N

Some changes on the performance process that were raised by new members to the committee and those changes to the process were included in the first document performance evolution process, but suffice to say this is really going to be this.

N

As in the fiscal year ending on june 30th, 21 22 will be the first year that this review process will be implemented, and so I think what you should expect is that the boards are going to go through the process and, like anything else, is going to be an experience, and I think that you're bored may take a couple of years before you really feel comfortable and finalize a process that you really think it works.

N

So there's always a chance that, after this year, you come back with some of the recommendations to change the process and documents in the future. Although I wouldn't expect it to be.

N

Huge changes from what you have before you today with that I'll turn it over to to chair horowitz for any further comments or suggestions.

C

Yeah, this was essentially an exercise in making the cio performance evaluation process a mirror image of the ceo process. That was approved last time and I do believe we have under under item d action to adopt the new ceo, the cio evaluation process. So I do believe we we need a motion and vote. So, first of all, are there any questions on the newly proposed cio evaluation process.

F

And may may I interject just briefly so I just want to make sure that, for the record that we're clear we're talking about um attachment, 64c3, um cio performance valuation policy with track changes as well as item six attachment, I'm sorry attachment 6.4 c 5 procedures for cio track changes. Those are the two that were approved by the jpc. Is that correct.

C

That is correct.

F

Okay, so those would be the action item that for um 60 that we would be approving. Is that correct.

C

Yes to to improve the the the amended policies with track changes, so amended policies and procedures.

C

So are there any questions on these amended policies and procedures which were designed to mirror the policies and procedures for the ceo.

C

So hearing no questions is there a motion to adopt.

C

So moved so that is a motion from trustee linder. Trustee keller, that's a second from trustee keller, any discussion hearing, none uh roll call vote, uh trustee, kelleher aye vice chair, jennings hi, uh trustee linder, aye trustee avasti.

A

C

And I vote I, it is approved on to item seven education and training. We have, as usual, the cortex report and trustees can review that for any possible conferences or seminars that they may be interested in attending and one specific one is the calipers advanced principles of pension governance, which is coming up rather quickly in ucla.

C

Information about that specifically, uh are there any proposed agenda items.

E

Your next uh next time, even.

C

Or for next meeting, yes,.

E

I think we should add the one for um what they were talking about. The.

E

Blanking um for the disability committee, you know discuss that.

C

E

D

Adding a trustee to the disability committee.

E

C

Or or having a- and this is.

E

Not having a separate committee or something roberto, uh maybe you can help.

N

Yeah we we work, we, um we will try our best. If it's not for the april meeting, it would definitely be may, but it is in in the queue.

G

O

N

To bring it before you board, so we certainly are going to be working on that. The goal, I think, is to really have a committee of trustees, but we just recognize that that's a challenge, because we need to provide uh more education right, so we'll certainly we'll try to make that part of the april meeting with the chair. But if we know, if we don't complete our work, it will have to be done in the main meeting. If that's, if that's okay,.

C

That certainly seems acceptable to me. We've been operating without one for some time effectively. So it's not something that needs to be addressed in the very next meeting um I see. There's a member of public wishes to speak brad.

G

Thank you, mr chair. I'm going to make this brief in the interest of time and thank you all trustees and staff for hanging in there. Hopefully, mr payne is correct. These are atypical meetings and won't last this long, but if I can kind of segue also went to the public retiree comments, I think I made it made a suggestion in the beginning that the republican retiree comments be put at the front of the agenda.

G

This is a good example to where having to have a public member retiree have to wait the entire agenda until they get to speak. So I'm hoping when you get together with uh mr pena and your agenda review next month. You will consider putting this item on there and uh also a proposed item and a concern of mine. It's been about six years. I've been kind of patiently awaiting to see if the board would act. This has to do with the appointment of the retiree member onto the board.

G

My request is to have your legal counsel engage into an inquiry. I I hesitate to use the word investigation, because that sounds ominous. We'll put an inquiry into how that went about uh just a little history: real quick in 2016. There was an election that involved all the retirees they were allowed. They were allowed to elect their representative.

G

I was the one that was by far majority had got the majority vote. I subsequently was not appointed. The city council decided to politicize this whole process at that time and uh went ahead and appointed someone, and this is through a memo by richard doyle, who was a city attorney at the time. Unfortunately, he is now deceased, but he had indicated that the appointee that the retiree association wanted was a party to a lawsuit which is still ongoing.

G

Now and- and if I can give you an example, if you were an independent board, a public board like let's say you were sitting on the apple board, would you, as a board member, want to appoint another board member that was suing apple? I doubt that, but this board went ahead and did that so they went ahead and appointed a retiree uh representative who was a party to the lawsuit who is actually suing the federated retirement board.

G

uh So, let's fast forward again to to uh the end of the term, oh subsequently, after that the city, council and their infinite wisdom went ahead and took away the election from the retirees, and I want to emphasize again ad nauseum that the retiree association does not represent the majority of retirees and, if you didn't know, you have to pay a monthly fee which currently is 12 a month to be a member of the san jose retiree association. So I have no idea if this is a special interest organization.

G

They certainly don't represent the retirees and so now well fast forward to the next term of 2020.

G

The the past chair was reappointed uh again and abruptly last year, as you probably recall, he resigned in june of 2021, and so lo and behold after that, we find out that his spouse is now the benefits manager for the federated retirement system.

G

I I know you can probably do this because you're a board and you you think you can do anything you want, but that doesn't mean you should, and that doesn't mean it's right anyway, so again fast forward.

G

Apparently, there was an another ordinance that was agreed to by the city council and the retiree association that if the retiree representative were to resign in the middle of their term, that the retiree association was the sole authority to appoint that replacement again, bypassing the wishes of of the rest of the retirees they went ahead and appointed, who you have on the on the board right now and I question how that process went because I put in my application, I was never interviewed. I am a past trustee with 12 years experience.

G

How could that happen? How does that happen when you you're in dire straits? You need people with experience. You have a new trustee who was just introduced today. The learning curve, as you know and mr pena knows, is tremendous. So, rather than put a person with 12 years experience, you go ahead and put in another person who's. Also, maybe a subject probably is uh a party to that lawsuit.

G

How can this happen? This is happening again. So anyway, again, I appreciate you listening and appreciate uh you, mr chair, for your patience. You conducted a very good meeting today and I hope you consider engaging your legal counsel to look into this you're an independent board. You don't have to do what the city council tells you to do. You don't have to accept with who they tell you to accept.

G

So please, and also I'm a taxpayer. Please engage in your fiduciary responsibilities. Thank you.

C

All right, thank you. As you know, we cannot address any items that not previously agendized, but we will take these under advisement and discuss the possibility of agendizing in the future.

N

Mr chair, you are correct on that statement, but may I speak to those comments for a second please.

C

N

You will uh so a couple of things: um the first one, which I guess I take personal offense to it, because ultimately, the decision on who do we hire as a benefits manager is my decision.

N

um I just wanted to make it extremely clear not only to brad, which is a fair question, but to the public in general that the prior chair for this board resigned, because I raised the issue that we were going to engage in a process that we needed to make sure that was transparent and that there was no conflict of interest.

N

I can understand to the naked eye that it may look like that. Wasn't the case, but it was a very impartial process and- and I have to speak up because um again not only puts my professionalism into question, but the process and um the open process that we conducted by selecting what we felt by a launcher was the best candidate. We are very happy and excited to have sandra on board.

N

I think she has and is an excellent addition to the office, and- um and so I just wanted to to make that that point clear um and the second one I just wanted to share with brad and- and I trust me- I understand uh some of the concerns that he has and some of his comments, but um we do have to accept the process that the city puts together, because it's not really up to the board to decide which trustees are appointed to our board.

N

That's really a job of the either a job of the city or the city get to destinate the process by which this is appointed. We just have to work through the process, which is what we did.

N

So I just wanted to share with the board, uh in terms of of your request, bra, that the board again has no sign no design um to conduct the process by which a retired member is is selected. I mean they just appointed by the by the city. There are uh a few sections, uh I think in the municipal code that addresses some probations that addresses that process. As you well articulated. There are different kind of processes. Right there's the election.

N

There are other ones and the most recent one that was used where the retiree association had the ability to make a recommendation to our board. So what I respect your position on the matter, I really do, and I appreciate where you're coming from um I as a ceo, I wouldn't think that it's a reasonable expense of your board um to engage council to investigate uh either that particular process.

N

So some of the general process by which are designed by the by the city of san jose and of course you have the right to as a member of the public and a member of this plan, you have the right to speak to the board. um I certainly just a voice. Just like you are in essence, uh brad. The board can choose to take your position on the matter and push forward with your request, but as a ceo, I just don't see that being a cause. That is a reasonable expense of the plan.

N

um Certainly- and I know that I believe you have taken these issues with the city council- you certainly can do that if you haven't. I believe you have. If I understand that correctly, so that may be why you're bringing this in front of the board and again I just want to be really honest with the board.

N

You certainly can do that. If that's your choice, I'm just as the ceo I'm telling you my position on the matter. So with that, I appreciate again your comments, brad, and I appreciate mr chair allowing me to respond to uh to the comments and uh and brass requests. Thank you.

G

N

G

I can he has asked me if I can respond to him.

C

Well, this is, this is really not an agendized item. I think you've raised the issue and uh we will consider what our next steps are. With respect to that issue,.

G

You're, an independent board you're not subject to what the city council tells you what to do do not do not uh go with that that that is not true, absolutely not true, um you're an independent board and act like one.

C

Okay uh and not now, you've caused counsel chen to weigh in so.

F

I appreciate your comments um brad as a member of the public. um As chair horowitz said, this is not an agendaized item, so the board cannot make any directions or actions on this item. We will take it under consideration um for any further comment, but for now we uh do have two other members, two other items we do need to take action on. I do want to be mindful vice chair jennings time, um because she does have to leave for a meeting and we do need her for quorum for the next two. Thank.

G

You, mr chair, I respect your uh your uh your your position. Thank you.

C

The next two items I believe.

F

Well, we need to adjourn well. The meeting has not been addressed yet right.

C

And I believe I can do that on my own volition and therefore this meeting is adjourned.

F

F