City of San Jose, CA Police and Fire Department Retirement Board, 1 Aug 2019

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From YouTube: AUG 1, 2019 | Police & Fire Department Retirement Board

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San José Police & Fire Department Retirement Board
View Agenda at https://sjrs.legistar.com/View.ashx?M=A&ID=712076&GUID=D5FDAB01-78B3-4B84-A26E-D5034902083B

A

I'm gonna call the meeting to order good morning. Everyone I hope you had a nice break during July and we're back at it. So we have president myself Benson, sorry Vice, Chair, Andrew Guarnere will not be here. For this meeting. We have trustee VRT trustee Lanza trustee menon trustee Miglia will not be present.

A

Trustee Oswald is present, trustee Santos is present. Trustee Bato will not be present. So just noting that three of our trustees that are also members of the plan are not here. So it's unfortunate, we might miss some of their input. I tried to reach out to.

A

B

A

I did ask for some of their input on some of the agenda items which I'll share as we go along. We also have our CEO or Berto Pena, our CIO Prabhu, Palani and general counsel, jeff reader. So we're going to jump into closed session. We've got a couple items to cover there. We hope to come out by 9:30 for those of you and the audience sit tight, we'll do our best to the adhere to that time. Schedule right.

A

Let me cover the orders of the day.

A

One is that item 3a under old business. This item will be deferred, as the city auditor is not available today and then on sunshine. To item to be discussion. Action on asset allocation by Makita I need motion on that. Okay, do I, have a second okay motion by trustee Santos, second by trustee Oswald, all in favor any opposed. Okay, great! So let's go to the consent. Calendar.

A

Any items there that need to be pulled or discussed.

B

C

Chair we're just gonna. If you allow me, I was going to ask to pull items: 1.4 d e and F okay,.

A

Process, do we approve it or do we pull those cover them and then approve it? So we.

C

You approve the consent, ID and then those have pool, and then they are proof in the second motion got.

A

It yes, okay, I, have a motion to approve consent, as is having those removed. Yes, okay. Second, by trustee, all all all in favor, all right.

D

A

Opposed and before we go on to that, I just want to bring your attention to item 1.4, see if you didn't have a chance. It's really literally only about a one-page article trustee men and brought this to my attention and I asked that this to be put on the consent calendar under communication really interesting article.

A

You would find it valuable take a moment to read it. Please 1.4 D, yes,.

C

I know I just wanted to come to your attention, so they that this document is that revised schedule for the bore and standing committee meetings less for the year and I just wanted to make a note that the the disability committee meeting on September 9, it stated in these documents at ember night, but right now that day has not been finalized, there's a good chance. Obviously the chair, trustee Santos is not available and and the other member dru still on site is available different days, so we're trying to coordinate first number one.

C

If we're going to have a meeting assuming that we have applications, and if we have a meeting, then we have to decide what the actual day is going to be so I just want to make that point in terms of 1.44 II. Oh I wanted to call to your attention. Is that usually the first meeting of the new meetings always the first Thursday of the month but I wanted to?

C

We will certainly follow up in December, but wanted to let you know to know that the first meeting in general is not gonna, be on January 2nd. It will be generally nine, so I just want you to be a pay attention to that again, even though your usual first meeting is the first meeting of the first Thursday of the month, which happens to be January 2nd, your meeting would take place on January, 9th and lastly, on item 1 point 4, F I just wanted to the easter letter.

C

It's a memo explaining some changes that are happening relatively retiree, medical and, in a nutshell, it's a communications. Letting retirees know that there's going to be a switch from blue shield and solder to anthem- and you know that brings some challenges in terms of having to keep retirees posted and we're going to be sending emails and postcards from ORS, but that that process took place with the city and and the the group that work on that process.

C

This change was actually approved by the City Council one of the meetings in June and that committee actually included retirees and both of the retirees associations for federated and for police and fire are already reaching out today to the constituent to let them know the changes that are happening and, of course, as the memo indicates.

C

Always our office is going to be sending emails and postcards to the members and help them through the through this process when they have to make changes going from Blue, Shield and sorter to hunt and do any open enrollment in October.

C

It's not frequent I mean they don't usually change. I think these particular situations came about because well, I I mean now sure is here. Suddenly she has any comments, but I believe that Blue Shield PPO is no longer a viable option due to the cost of the plan and Sauder health does not offer Medicare plans. So that's what the two many reasons why they were transitioning to another provider, but they this doesn't really happen every year. So.

A

Knowing that this doesn't happen every year, is there any advance communication to members that this could be pending, so their first communication isn't by the way we've just changed plans they.

C

Have been well I, don't want to speak for the city, but I believe that, because the the group that was working on this change included the retirees Association, the retirees have been kept apprised as to what's going on in the meantime, even though we're gonna be reaching now our office you're gonna be reaching out by emails and postcards to the members. We have have information in our website about it, so it's nothing new. It's just that.

C

We're gonna provide more information that then goes along, but they I believe there was an understanding that these changes were forthcoming. I know Cheryl sat down and she can speak more about it from the city standpoint.

E

I just wanted to confirm what Roberto just said. The both retiree associations are actually very integral to the RFP process for health care solutions, so they were well informed and I think that our retirements benefit staff is good about communicating that stuff out to the retirees. So we believe that they have been informed throughout this process that it might change. Okay, perfect.

A

Thank you. Thank you, sir. Any other questions so I'm, then, looking for a motion to approve one point for de and F.

F

A

Wow I'm getting a theme here motion by trustee Santos, second trustee Oswalt, all in favor aye, any opposed okay motion carries. Thank you. Moving on to item 2, a oral update from our CIO.

G

Thank You, mr. chairman, welcome back hope.

G

You all had a great July I want to start off by saying that you know our fiscal year-end results are in and we are at about four point: two percent for police and fire I think it was four point four percent for fed and you may have seen some of our peer returns, which were actually significantly higher, especially the two large california plans came in at about preliminary numbers with six and a half percent, or so we are actually working on the attribution and will actually submit a detailed attribution to the board and, of course, to the investment committee, but real quick.

G

It was a. It was a year of two halves, the first half of the fiscal year. The plan was down four point: nine percent and from January to June.

G

This plan was actually up 8.3%, so we had the worst fourth quarter when the plan actually did extremely well relative to peers, and then we had the best first quarter ever since the Great Depression, and we lag our peers and by design we've set up our plan in such a way that in a bull market this year today, as of yesterday, the S&P was up 16% phenomenal return.

G

We are not designed to do well in those environments, and this may tie in well with our asset allocation decision discussion, which is going to follow, but I just wanted to give you those numbers and more detail. Attribution will follow I'm happy to take any questions on that or anything else. If not I'd like to actually I'm hoping for a robust discussion on asset allocation and just by way of background, this was discussed at the investment committee staff and Makeda had actually shown day.

G

I see eight or nine different options and the IC discussed, and we came back with three options and I've actually added a fourth option which I'll talk about when we actually go through the options and I just want to know. Let let everyone know that you know I mean there's there's many ways we can go about this. We don't need to make a decision, we can stay where we are, we can choose one of those options or the board can tell staff and Makeda to go back and do additional work.

G

So we are open to all of those options, so I'm happy to take any questions. If not, we can.

F

Does the staff and Makita have a a recommendation for one of them.

G

Can we actually, when we can, can I hold off answering that till we get to the actual options.

G

Yes, we have Danny Sullivan. The board is familiar with as well as max Gio Liddy, okay, okay, I, didn't butcher his last name. So max is the chief risk officer for varus and very happy to have him here. As the board knows, hopefully, I did inform the board. Ed Hoffman actually has moved on from varus. Yesterday was this last day and we now have Eileen Neal who's. A veteran of the industry is going to be our primary relationship manager going forward.

G

She could not be here today, but we are happy to have max here, who's, an expert on risk and I'm actually going to have max come up and.

G

Risk and Danny as well so without further ado, maybe Laura can start. Thank you.

C

H

So I know that we've talked about asset allocation in the past with the board and that you've seen our framework, so I won't spend too much time on every slide, but we did talk over a period of a couple of the last investment committee meetings with the investment committee and have now narrowed down the asset allocation options that we're presenting and analyzing further. So as an introduction, these options are updated from what the investment committee has seen and they were formed in collaboration with San Jose staff and we're looking at a variety of risk levels.

H

In our document on page three I know you've seen this chart before you know, page three and again on page five, it is necessary to take more risk in the current market environment to achieve the same return relative to all of recent history where you could have invested and pretty much. You know any combination of stocks and bonds in say you know 1990 and achieved over an 8% expected return. It's now more difficult to get there. We base our asset allocation on mean-variance, optimization to start out. However, that's not the only thing we look at.

H

We also look at scenario analysis, how portfolios would have actually performed in different historical market environments and also stress test portfolios based on different, forward-looking and environments that we think might take place, because there are some are actually many drawbacks to mean variance, optimization the meet of go.

B

B

Just inflation expectations of real.

H

Return expectations have also decreased over time. Yes, and if you take a look at page six of this document, this is sort of the the most important page in the review. So here we look at the current asset allocation policy and compare it to four different portfolios at different risk levels. So you can see that these other portfolios are named at the top of the page with their risk level and then for purposes of comparison.

H

You'll also see a 60-40 allocation on the far right, so increasing risk would require shifting some assets from low beta, which is primarily cash and short-term bonds to growth assets, which is, as the name implies. You know things like equity and most private markets, so we've included at the bottom of this page. You can see makita's expected return, an average annual return over the next 20 years, Nikita's 10-year expected return, and then we've surveyed a group of other firms.

H

I know that in our prior analysis, you've seen some of the ones that we look at at the very last page of the document, Blackrock Goldman Sachs, Morgan, Stanley GMO. We try to collect other capital market expectations. Just as a point of comparison, then you see the standard deviation. So standard deviation is how you get that that name of each portfolio at the top, the different risk levels I'm currently in the portfolio. We estimate an 11 percent standard deviation, so we're looking at a range from 11 point 9 to 13 percent.

H

For these alternative potential options, then we also wanted to include viruses. Standard deviation because your risk reporting your risk policy is based on viruses, numbers not makitas expectations. So the investment policy statement that you've adopted has a risk limit of 12% of the board level. So you can see the various standard deviations here. The very highest one is 10.1%, so all of these allocations have a risk level.

H

That's well within the the risk policy limits in your investment policy statement, then at the very bottom we have the probability of each asset allocation, achieving a 6.75% return over the next 20 years and, as you would expect, the more risk that you take the higher. We think the probability is of reaching that assumed rate of return.

B

B

H

Our primary expectations, our 20-year expectations and various, looks at a shorter time period, so they have lower returns and also slightly lower risk. Another difference between our processes and Danny and maximum can correct me if I'm wrong here, but Makita tends to take a more conservative view of say private market assets. So if you look at an asset like private equity, that's only valued every three months and you put it in Excel spreadsheet and you take the standard deviation.

H

It's gonna give you a pretty low standard deviation and we think that masks the fact that it's only valued every three run. Three months really masks its true standard deviation. So we will sort of inflate that standard deviation up when we do our expectations and then I'm sure there are many other. You know we have our own models. You know, I, think Vera, Simon, kita and either of us manage assets.

H

So I don't think we have an incentive to make anything, look more or less attractive, but we each have developed our own models over our firms. Histories.

I

This has very standard deviation, but this is MSE. I borrow one RISC systems, no creation, so these aren't based on our capital market assumptions,.

B

I

The strategy in MSE is borrow one system.

A

And just to clarify, when the board adopted a standard deviation for the plan, we use the bar numbers. That's correct,.

H

So we now have, throughout the rest of the document, a variety of different types of analysis. Looking at these alternative portfolios, one a couple differences, I'd point out just looking still at this slide. Six is that in general, we're just shifting assets from low beta to growth in order to get a higher return and also a risk level. The thirteen percent risk alternative option on the far right does also shift out of commodities and and and moves foreign bonds down.

H

One percent to also shift those assets to to growth as well to get that higher expected return. Also, three out of the four of these alternative policies take hedge funds down from 7% to 5%, and this is something that we collaborated with staff on and and believe that a more optimal level of hedge funds in the portfolio is is closer to 5%.

H

um In terms of the additional pages, we do have a peer comparison on page eight. These peer comparisons are sort of notoriously unreliable because they're based on self-reported data. So whereas we might report private debt as alternatives, someone else might report. Private debt is fixed income.

H

So one thing you'll notice, is that the median percentages do not add to a hundred percent, so if we sort of gross them up based on what they add to, we see a trend that that your plan and the police and fire plan is below median when it comes to US equity relative to peers I'm pretty far above median when it comes to fixed income or those low beta assets, and also a bit above median when it comes to alternatives, but not it's a quite the same degree.

H

So those are sort of just the observations that we'd make relative to peers, and this public defined benefit greater than a billion dollar universe.

H

Looking at more mean variance, optimization based analysis on page nine, you can see the worst case scenario returns and also the probability of experiencing negative returns. So there's sort of a commensurate balance here. In that the the higher risk options, do you have a higher probability of experiencing a negative return? They also have worse worst case scenario returns and in crash environments, but the higher risk options also have a higher probability of achieving the assumed rate of return, which is not a huge difference.

H

If you look at the one year, the current allocation has about a 52% chance, but the highest risk that we're looking at has a 50 4.5% chance of achieving the assumed rate. But if you look over a 20 year period that compounds so you can see that the 20-year current portfolio has about a 61 percent chance of achieving the expected rate of return, whereas it goes up to sixty nine point.

H

Four percent, with the higher risk option, I'm gonna skip over some of these charts that just show the same things that we just talked about to page 13. So here we get into non-me and variance optimization based analysis. So these numbers are not based on makita's expectations but are based on actual asset class returns in different market environments. Of course, they're not using your actual managers in your portfolio.

H

We'd hope that some of your active managers in particular, would be more defensive than the broad asset class would be, but these are based on broad asset class returns for these different allocations in different stress market environments. One thing that I think is interesting is that the 13% risk or the highest risk option that you're looking at has a global financial crisis return or would have had a return of down 26% exactly the same as the 60/40 allocation.

H

A lot of market environments, sort of a really plain, vanilla, 60/40, looks better in different stress market environments, but really even the highest risk option that we're considering right now would be expected to have the same negative return. A lot of that is because your portfolio would be more diversified at this 13% risk level having private assets that don't but aren't as volatile would help protect relative to a purely public markets allocation.

H

We also look at positive market scenarios when we first started putting together asset allocation reviews.

H

We only showed the negative side, and some of us who are talking to clients regularly said: can we can we maybe also balance that with some you know, recovery scenarios because, as we know, the most important thing, if we do take on more risk, is to stick with that risk level, or even you know, raise it if we do have a huge so that the portfolio is actually able to recover over time- and you can see these positive market scenarios on page 14 and the results are, as we would expect that a higher risk level would be expected to recover better or have a higher return in a positive market environment.

H

We do look at stress, testing on pages, 15 and 16, and so these are various forward-looking scenarios that are not based on our mean-variance expectations. So when we look at scenarios like rates rising, you can see that the higher risk option actually with the better than a rising rate environment and mainly as this is because it would have less fixed income and sort of the higher risk levels. I mean you're. Still, your primary risk factors are still going to be a huge equity market decline and a commensurate.

H

You know, Y widening of credit spreads, so you can see in an environment where US equities decline. 40% we'd estimate that the current portfolio would be down about 22% I'm at 13% risk portfolio would be down 26% with the other portfolios falling in between mr.

F

John can ask question when you assume the US equities decline about 40%. What's the corresponding assumption for non-us equities I.

H

Can tell you exactly: we've got the assumptions in the back, so when US equities are down 40%, we would expect that global equities would be down 43% and that developed market equities would be down also 43% emerging down 49. So you have obviously many other very negative asset classes along with us. That would be declining. Thank.

G

H

All right, then, we have economic regime management which I think we've discussed before with the board. That starts on page 17. So what we've found is that the actual level of inflation rates doesn't make all that much of an impact on your portfolio.

H

What matters is how much of that was expected and sort of already built into the market environment and how much of that was unexpected, and so we look at surprises on things like interest rates, inflation, a growth surprise, which would be a good thing or a systemic surprise, which would be sort of like a global financial crisis like environment. You can see here that the you know the higher risk portfolios are more exposed to these different surprises that would take place in the market environment.

H

So in summary, I I, don't believe that we are recommending any any particular change. I think we wouldn't have included an asset allocation in here. If we didn't think you could make a case for it in general, we just wanted to show you how we would construct portfolios at different risk levels, since that's a topic of a conversation for the board.

G

Thank you Laura, mr. chairman. If we can go back to slide, 6 I have a few comments.

G

So one of the things that I have struggled with throughout this process and I'm not going to avoid answering trustee, Oswald, Smith and I am going to give an answer in my own way is what is the right level of risk right and that really dictates what the asset allocation should be and- and this is something the risk analysis predated me by a little bit so I've been trying to get an answer on. How did we come up with this risk number? What is twelve percent risk mean?

G

What are these ranges mean and I was fortunate to.

J

Have a conversation.

G

With Edie before he left, there's and, of course, just had a conversation with Max and Danny and I'm gonna, ask them to chime in here as well and and Max is very looking about risk and you can see that it's his passion talking about risk numbers, but we've always thought of risk. As you know, what is the shock to the system, especially on the downside, the drawdown to the system?

G

What can our sponsor take right and we have a very broad range here, so let us came up with this 8 to 12 percent number between if I'm not mistaken, 8 to 10 is still within the CIOs purview and 10 to 11, or so is the IC and if 10 to 12 and anything over, the 12 should be discussed at the board level. So even at the 12% level and I'm gonna have max talk about this left. It's not that 12% is a bad number, there's, no there's no right or wrong answer here right.

G

We have to look at this along with you, know, Chiron's analysis and shock to the system, and if there's a drawdown, how much can we can? We stop up this, and what should that mean? Is that a 1 in 20 probability that we lose 300 million? Is there a 1 in 51 and hundred and so on? So the answer to trustee Oswald's question is goes back to how much risk can we take and how much risk can be stomach and the asset allocation will then be based on that risk.

G

Number and I'm gonna actually have max and Danny talk a little bit about those numbers. Then I'm gonna come back and make some comments, and then you know I'm hoping for a good discussion on this and.

A

Before you do it, since we're on this particular page, one thing I want to point out to the trustees from our investment policy is that if you were to take a piece of paper and cover up the top half of this page, that's truly what we're supposed to be doing and, in essence, kind of a blind look at risk and expected returns without looking at what the asset allocation is. What the underlying asset class is, would you mind commenting on? Why we're taking it this step versus that approach? Yeah.

G

H

Just mentioned I know that the formal asset allocation review is is designed to look at risk. First, I I think this is sort of an update. You know you, you did it a very large intensive asset allocation review last year to get to where we are now. um However, we do want to look at asset allocation every year and sort of either reaffirm where we are or look at other options.

H

So I would say that if, when we start a brand new, you know every few years of really taking a fresh look and thinking about making very large changes. I do think it makes sense to start with risk. I would look at this as more of an update of potentially tweaking around where we already are perfect.

A

Thank you. Okay,.

G

Danny max you are talking about the ranges and those numbers yeah.

I

So, just as a reminder of how we got to the this 12 number of the risk limit for the board, so we had the the board retreat, which was I believe over a year ago now, and we tried to work with the board to come up with their risk, tolerance right and so we sat down- and we said what's important to the board and we went through a list of all these different types of metrics and the board said. Funding ratios are kind of the number one priority contributions sponsor contributions are very important.

I

Interest cost on UAL is important. Volatility of the investment portfolio is important, and so we we continued going down and listed by pro, which ones were important, and then we went through different scenarios of what. If we saw a 15% drawdown in the investment portfolio, what would happen to your funding ratio? What if we saw a 20% drawdown? What if we saw a 25% drawdown? And so we looked at all these different scenarios and what we saw was at the twenty five percent level.

I

We started to see quite a bit of discomfort from from the board and from others, and so we said, okay, what sort of investment portfolio would cause you to potentially incur a 25% drawdown. Any investment portfolio can cause you to get that drawdown. If you have a bad enough scenario, but how likely would it be if we had a 12% volatility or 12% risk portfolio? How likely would it be to have a 25% Rhonda? We ran some some analysis.

I

We said there's basically a one in a hundred years, ance of something like this happening, and then we thought about a 1 in 20 years, ance a 1 in 10 year Jantsch and basically, what we said is the risk limits which define the kind of the board's risk tolerance. We, the board, did not want to exceed certain levels of funding ratios and sponsor contributions at such a level that the one in a hundred year probability is what we set the tolerance at and and that's always open for discussion right.

I

If the board wants to change that or change their risk tolerance, we can always have that discussion. But that's how that was initially set, that 12% number goes back to a risk limit of a 60% potential funding ratio. So you do not want the plan to drop below that. We do not want sponsor contributions to exceed 335 million a year. So those are the hard numbers that are associated with that tolerance.

I

F

Want to ask one question: I have this the limits from last year's study in front of me and I just want to clarify something. You said that I think the limit that I see here is 370 million dollars in total contributions, not 335 million. That.

I

Was the total contributions yeah, so I think you're looking at like a board retreat? This is the recap.

A

I

Retreat and so what we decided, what we presented at the retreat was total contributions and then what we decided to put in the risk policy was the sponsored contribution amount. Okay, just.

C

Wanting to make sure that we were clear on your statement when you refer to that limit, you just strictly referring to the police and fire plan that.

I

C

Okay, I just wanted to make that point clear for the public and obviously for the council member. The dynamic was just about police on fire when I said that number I'm, referring to the contribution by a sponsor.

K

Comments on you know what I've heard on the risk right and then wait until you know the actual numbers are discussed, so I don't give a whole speech now. You know on the on the difference between you know: a provider, a and provider B risk models. It is very common to have you know. Respectable providers have different risk models, so the fact that one is different from the other.

K

It's not necessarily you know an issue, they usually trend together, so you see that they go up in the same direction and they go down in the same direction. Most of the time, the difference comes to the look-back period, rights of individuals a very long time period. You get a different number from a very short time period. So so that's something to you know to keep in mind. You know the other. The other thing that stands out to me and I think you know it's it's the most important consideration.

K

My opinion is that it is important to develop an intuition for these numbers right. The last thing I want is, for you know, board members to think that you know you need to have a secret room with specialized people, computing numbers that only they understand I think it's actually the complete opposite. So when you look at that, you know page six, you know this. You know this page six.

K

You know this is you know this is, has a lot of information here right and it's very hard to digest and it looks like there's a million levers to pull right and you only have two hands really so you know a useful intuition tool that I find is to just look at just say: equities and cash from 5050 or zero hundred to one hundred zero and then develop an intuition as to what happens there, because I think that that is a big driver of all the other answers right, and so once you have that, then you can start.

K

You know making refinements around that, but it is important to develop that intuition right. Otherwise, you know an asset by asset analysis is going to be clouded in correlations and this and that and- and so that's that's how I would look at it, and so you know, I would make my decision on on the asset allocation based on that now whether it has to be higher or lower. Well, you know there is this thing called peer risk right and you know we all hate of us of thinking.

K

Well, you know I'm gonna worry about what my neighbor does when I do my decisions, but it is a very real risk. It's a risk that you know has, you know, kills really right.

K

Last thing you want is to have somebody start mentioning all the other plans around you that are doing better, just because they're taking more risk, which has happened to be a good strategy in retrospect right, so I'm, not here to tell you whether you should take more risk or less risk I want to make sure that you have a good way to calibrate what you're doing and so I think the process you've been going through, and so on is a very good.

K

It's very good background for that, and so you know something that that stands out is that there is this 60/40 portfolio out there. That's everybody's benchmark in some and so taking risk relative to that is, you know, is one way to take risk and you can be have less risk than that portfolio and you're actually making an active bet. You're saying you know, everybody has the 60/40 roughly, but I'm gonna take less risk than that, because I think you know I'm going to I'll perform it right.

K

So there's there is a risk you're taking, so you can take risk by not taking risk, and so, if anything, you know I would say you know, let's recognize, that the peer portfolio matters right, whether you hear you're in the 90, something or in the 20 something percentile right.

K

If that matters that keep that in consideration and also keep in mind that there is a free risk so to speak, which is going closer to the 6040 right, because you'll reduce your peer risk by doing that, and so it's been a tricky 10 years for risk managers because everybody you know said all the world is going to end ten years ago and a lot of the a lot of the entities that were very prudent about risk. You know ended up, underperforming right and you know so you can be.

K

You can pick any random day from the last ten years and say: are these people doing the right thing and you could think yes, they are, but in the end they underperform right. So there's a little bit of luck here too. So it's not very easy to do, and so my suggestion is develop that intuition, right and.

K

Things arise well, I'll be happy to take questions. Let.

D

Me piggyback on that I, don't know that all of you can tie that back to stuff. We said for the last three or four years, but what was just said is really prescient and really brilliant. Let me rephrase it if you'll allow me- and we said this before. We have many ways to commit things from two directions: oh I, do it top down and do it bottom up all great on a curve ball great absolute, oh I'll!

D

Look at it at 100,000, feet, I'll, look at it at 0 feet and what we just heard was something we've talked about off and on. There is a way to get at risk in an absolute sense. We can say well, what's going to happen in a downturn and San Jose says: oh, my god, that'll kill us.

D

Okay, let's not touch that third rail, but, as gentleman just pointed out, there's another way to come at risk that we've talked about and that's using the wisdom of crowds and that's by looking at our peer group- and we talked about that just earliest morning. Pens right, we dialed down our risk to be less risky than just about any other plan that may turn out. That was the wrong thing to do, because we've been quite factor in the San Jose as a strong City.

D

Only that our actuary had told us that we're very sensitive to risk. Why is the wisdom of crowds important, because, if you're listening carefully what the gentleman just said, the way we are forecasting risk in an absolute sense is based on historical data. God, never said the future would be like the past. Man says the future will be like the past. It is believed- and we have a hypothesis in place here at this board- that the crowd can see the future right.

D

If you, if you are familiar with a theory of the wisdom of crowds, the pension plans across California meet the five key criteria to be considered a wise crowd. You can look it up on Wikipedia. If you know I just looked up again to make sure I had it right, I believe the pension plans in California can predict the future I believe people collectively can predict the future. I.

D

Will give you a concrete example of this when we go to model inflation, we model it based on history, I think that's incorrect, I think the advent of computers and the advent of larger government systems has fundamentally altered the way inflation works and I do not believe that inflation in the future will match inflation. The way it worked at least not say from the Great Depression through to 2010 or save it 2000 I.

D

Believe people see that I believe the wisdom of the crowds the pension fund see that, and so it's very very important and I. Think gentleman just said this to look at an absolute sense to use mechanics in math and so on in history to calibrate ourselves. It is also very very important to look across our peer group and say what are they doing?

D

Unfortunately, we seem to be the only people doing this, and so we knocked our discount rate back and everybody followed us.

D

It is true if you've read the book, the wisdom of crowds, that that is often the case that the crowd kinda knows it needs to do something, but it doesn't move until there's a first mover and then everybody kind of says, yeah. We kind of knew that we kind of followed. So our hope has been that bottoms up tops down historical look at it mechanically right and in bottoms up, sir.

D

What is the crowd saying as we go to the conferences and talk to other pension plans that those two things would meet somewhere in the middle and they would both sort of calibrate to more or less the same thing, maybe with the wisdom of crowd, saying dial it down a little bit, because inflation is not going to be what it was historically so I things out ahead, probe to remind ourselves, as the gentleman said, he's absolutely right.

D

We can do all the mechanics in the world right, but that is based on our belief that the future will resemble the past I, don't believe it well. I think the crowd doesn't believe it will, and we should also listen to the crowd as unruly and noisy as it might be.

G

May I, mr. chairman, sure something a lot.

A

G

Interesting than what trustee Lanza said, but I think it's important for the discussion.

G

Said you know done this analysis and said we can operate within this eight to twelve percent range. It's a pretty broad range. Why are the options presented today are still within nine to ten they're about eight point, six to ten point one and not 12%, and that's an important question.

G

The reason we haven't done 12 is that we are in a low-volatility environment right and Wall has been very low for the last few years. Will it continue that way? Maybe it will don't know, but, as you all know, it can jump drastically higher right in a moment's notice or without notice, actually, and particularly on the downside. So if there is a drawdown and we are operating at the percent number, which is will be the high end- we could see that wall is jumped to 14% and it's all negative, so something to keep in mind.

G

You will also notice.

D

G

Absolutely and you'll notice back to chair sons, arias point: why are we looking at not just the risk but also the allocation?

G

If you look at even at the 10% they're a standard deviation, the risk level the equity allocation is as high as 68% it's much higher than a 60-40, so you can only imagine what a 12% allocation would do to equity allocation. So, having said that, now, I'm gonna go back to answering trustee Oswald's question at least indirectly and in some part I would say at a minimum.

G

So when we ran this analysis last year and we came up with the current allocation, the projected risk was higher than it was today and it's now dropped to eight below 9%, eight point six percent, or so said a minimum. One of the alternatives I had urged the board to consider is at least going back to that nine, nine and a half range, which is here column two, which is the eleven point: nine percent.

G

This number, which marginally increases your equity allocation and drops the low beta allocation I, would certainly suggest that at a minimum, there's of course, other options that you can consider. I would also keep in mind and.

G

The valuation of the current market right markets are not cheap, they're, not 1999, when the P was obvious and he was close to 40. But we've all said this for three four years: that markets are expensive and whether it's by engineering, whether it's by monetary policy tools, I mean you can come up with any number of explanations.

G

The market rally has continued now, it simply seems like margin, expansion at this point to me than anything else and using monetary policy, but we are entering an election year and you know I think the current administration will use every tool in the book to try to continue to keep this market up, and you know- and people can disagree with me- and maybe the bull market will continue. There's, certainly that possibility exists right. So that's something to keep in mind as we think about risk. There are times when you should dramatically increase risk.

G

There are times when you should marginally increase risk, or you can give yourself the option of increasing risk in stages tied with market valuation. So these are some of the options that I would urge the board to consider.

B

Predicted risk was realized, risk for our portfolio historically, I would.

G

Actually have let I let Max answer that question and then I'll go back to our portfolio an.

K

G

K

Asperity funds that have a target the ten ball and are all realizing or some of them are realizing less than that. So it's a general phenomenon that the forward-looking ball these days is higher than the than they realize fall. Then you've been following the portfolio more closely: yeah.

I

So I guess two comments there. One would be. We could actually run an analysis to see what we said in terms of.

B

I

Versus what he.

J

Does report actually.

I

Shows in terms.

L

Of their lives.

I

I think that would be useful if we could run that the other thing we had it, we had a chart in our deck that just showed what's happened to volatility through time and there's just been a consistent lowering.

B

I

Through time just over the last couple of years, but it's been over an entire.

G

I

I would add that it's.

G

A very hard number to predict, but if you just look at the last two years the realised risk has been lower than forecasters and.

K

Then you find design to run a certain risk level that they're not boosted all the way up. You know they're still kept lower, even.

M

K

They're realizes measuring less than day because it's supposed to be a forward looking at unit right versus you know what actually happened.

L

I know: we've had these discussions and investment committee I. Think the question is: what are you proposing at this point, whether it's a process or whether it's a very distinct recommendation to select something or to tweak one of these columns but I? Think an investment committee there's been some agreement that we need to consider some of these yeah.

G

I, don't have a dist concrete recommendation. Like I said earlier, I would say we should at least go back to the risk level that we had when we did this exercise last year, which would mean column two going back to the risk level at. If you use the.

A

G

It's 12%, the various model is nine point four percent, which will marginally increase the equity exposure, but again I would tie this back and the reason I am cautious is because of my view on valuation, but you can all disagree with me on that, but I would go back to once again. Valuation is important, but also what is our sponsor strength? How much risk can we take? Are we taking within this range of eight to twelve?

G

Are we taking to less to two less, as opposed to too much within that range, and that should really dictate the column that we picked.

A

Danny, go back and and talk about that risk number over timeframe, as we had talked about a short-term risk number and intermediate and longer term, and it seems like we're getting hung up on what this risk number is today versus the duration of time frame that we are looking at, that risk.

I

So it is that it's intended to be an 8 to 10-year time frame. So while it may look, you know it may be down 50 or 60 basis points from where it was last year. All that's doing really is is implying that or seeing lower volatility in markets today. Does that kind of answer the question.

A

But in any single year and I think what I was hearing from you probably earlier is that we could dial up the risk volatility could pick up and now we're beyond the risk limit. That's on a single year basis. Alright, that's not over a 10 or 20 year basis, yeah.

I

So the longer-term model, which is the one that we proposed using and it's the one we're presenting here, is intended to react slowly. It's.

G

I

Environment, so if the VIX right, which is the short-term volatility that they use for option pricing if that spikes tomorrow, the volatility, the expected volatility of your portfolio- is not going to spike like that, it's gonna, it's gonna, be much more slower moving. So if it spikes volatility in markets spike and it's sustained for like several months or years, then we'll start seeing up ticks. But it's intended to be slow moving. You don't want to be hit. You don't want to react to month to month or week to week movements in volatility.

I

You know you want to be a long-term. You know the board is set a strategy to be a very long-term investment portfolio, and so decisions should be made over the long term and so.

A

When I look at our forecasts over the eight plus years, I've been on this board, I've had the benefit of having seen not just one, but two consultants show us expected returns over a three to five over a ten-year time frame expected risk and, as our former trustee of nine pointed out, there just forecast and we haven't achieved any of them.

A

So I don't want to say, I. Take this with a grain of salt, but I do want to say in the real world we haven't achieved any of those with following many of the asset allocation recommendations that have been presented to us. Then, when I look at comments that were made Prabhu regarding our performance in the fourth quarter and the first quarter, we're set up for a conundrum, as you pointed out fourth quarter, particularly December, one of the worst months that we've had since the Great Depression. And what did our plan?

A

Do we on a pure basis, we moved to the top 10% immediately followed by a q1 which was very strong, which we didn't participate in as much, and we moved to the bottom of our peer group. I.

A

Think the desire was to reduce risk because we understand the leverage ratio, our plan from an actuarial perspective, but I don't think the intention was for us to either be in the top 10% to the bottom 90, and what I want to know is how do we get near the middle? How do we structure a portfolio and which of these asset allocation, helps us take less risk than our peers and immediately having less than 60 percent in equity?

A

Is one way of doing that, but doesn't put us in the bottom 90 percentile, we've all been holding our breath for four or five years now and probably I know you've only been here for a year, Brian you've been an investment officer in the audience I mean here. You've been on staff for at least three years we've been hearing. This we've been holding our breath. The market valuations rich, a pullback is coming.

A

We have a Fed, that's manipulating this economy significantly and holding this at bay, and maybe when it comes, it's gonna be a doozy as they say, but we're missing a lot of opportunity while we're waiting for that and so I guess back to my my pointed question is: where do we drift that gives us closer to that middle-of-the-road approach where we're taking less risk, but we're not the worst performing plan out there, but.

G

The only thing I can say, mr. chairman, is that trustee Lanza pointed out the wisdom of the crowds right and California pension plans have done better than us, and maybe there's some it's married to that too. Looking at some of the plants and their allocations, keeping in mind that we are an outlier in terms of the impact on the sponsor the the the one other thing I would add. Just for the long run, we are a long-term plan.

G

There's. Certainly the risk, as Max pointed out and trustee Lanza pointed out, is the pure.

D

G

Are in the bottom, the side of our peers longer the other thing to keep in mind. We are very sensitive to our sponsor we have been, but we also have to think about our beneficiaries and if we think our beneficiaries are our most important constituent, then we have to say longer-term. If we do increase risk. Yes, it's going to impact our sponsor and there's a one in hundred chance, as Danny pointed out that you know there could be some pain inflicted on the sponsor.

G

But are we willing to take the chance to inflict a little bit of pain which may or may not happen but longer term, which will serve our beneficiaries better, and if we really think that our beneficiaries are a number one constituent sake most important stakeholder out there then longer term, we should probably be taking a little bit more risk because that's the only way we're going to generate better returns in the long run. So I would also keep that in mind as we discuss these options so.

A

If we can move to slide 9, this is what's so interesting to me when we start to think about risk and if we simply look at the worst case scenario one year, that's on this chart, the current allocation shows a negative return of 15.3 and if we had the highest risk of 13, it's negative seventeen point. Nine.

A

We would have had two point: six percent under performance in that one worst case scenario- and you just pointed out to us earlier when you gave us our preliminary numbers that we may have underperformed our peers by over two percent in a decent environment. So how far do we go to protect downside yeah when year by year, by year we're having very weak performance?

A

The one thing I'm, sorry I didn't really so you know obviously I've been an advocate of reducing risk in our plan, predominantly because of the fact that we are very leveraged because we want to have a plan that is continuing to grow in funding status for our members, but I still fear that we've taken it too far. Mr.

N

Chernau, the.

A

Dilemma continues to be okay. Well, let's move back, but we're waiting for that opportunity to move back and for four or five years. We haven't gotten that so first councilmember folia, then I'd.

J

Actually, just like to weigh in as the sponsor representative and the risk-averse philosophy and the grand jury report, which I know we're going to be talking about later on, but every time if we take a greater risk and the risk doesn't pay off, the spent sponsor then must pull more funds out of the general funds. We all know that, but I'm saying that to emphasize the point every time having just passed the budget every time we have to pull more funds out of the general fund.

J

That means less funds to hire police and fire to keep our city safe and our staff and pay staff what we need to to retain them. So it's while I appreciate the arguments about risk and changing the level of risk. I would caution the from the sponsors point of view that the city cannot sustain much more in unfunded liability. So we need to figure that part out I just wanted to emphasize that. Okay, so.

A

But but let me continue with that threat of thinking, because what I'm hearing from our meetings with city council from the mayor's budget message from the grand jury report is this plan, is underperforming its peers and should have higher returns right.

G

A

Their peers, it's due to our decision to de-risk the plan, so I guess I'm, not clear on which is it? Is it okay? We don't want you to take risk because we can't have a greater unfunded liability, but we need better returns. They're tied to one another, I hear.

J

You and I don't disagree with you either. There's other recommendations in the grand jury report that need to be addressed that could offset the liability or the cost. The two pension boards I know we're going to get into to a lot more discussion about that and I look forward to that. But I I don't disagree with you how you balance it it's a catch-22: it really is I'm gonna, look up the crowd.

J

F

I have a few thoughts on what councilman Foley said, but wait on those for a few minutes. I have just a few specific things to say and about how we got the predicament that you outlined. You know you took less a little less risk, but you ended up in the bottom of the pile.

F

You know, as we know, as you know, we produce a dashboard, that's included in this package. That dashboard shows that our risk, the portfolio risk, is eight point. One percent and the peers, assuming the peers, are correctly specified. It's ten point two. So we've taken 25 percent less risk, and if we, you know, do some simple math. If you take two percent less risk and you run the portfolio I'd say a Sharpe ratio of 0.4, it's a that's. A full 80 basis points it's a little bit.

F

You know, which is a big number for a portfolio of three and a half billion dollars. So I think that explains much of it. The other thing, I would say in terms of asking max for his input. I think you mentioned some peer risk as well.

F

What, where are we relative to peers in terms of the risk of the current portfolio.

K

What the peer is, look at the 60/40 right, I would say: that's always that's always a peer and risk right, and so what I?

K

What my point earlier was that, just because you are you're taking less risks doesn't mean you know, taking more risk, you're taking less market risk, but you're increasing your key risk and the peer risk is not usually measured in this reports right, but it is real out there, and so you are, you know you are under that level right now from hearing you know the comment just made right: there is a certain push in the other direction to of saying. Well, you know we can take so much risk.

K

So I can actually tell you if having less risk is, is you know, is the right thing for you, yeah right, I, just I'm, just I will be just a piece when I see that you know everybody says okay, this is what's really happening and that's our decision. Okay, and so that's, you know, but I would definitely say. Being you know it's it's. It shouldn't be a hard thing to measure right. The 60/40 is doing this and we're doing this, and, and so that's what all you that's, what everybody else is doing, roughly speaking right.

F

And I think I want to just open a little can of worms, and this requires a separate discussion, probably with us, with the mayor and and councilmember Foley and her colleagues, but I'm gonna, say something a little bit provocative and I'd say that the the as a group, you know we, we we wondered about the dissent in returns.

F

Sometimes the dissent returns doesn't just have a negative connotation. A continuously declining set of returns for asset classes also is an opportunity, a city that has a double-a rating as long as it has a borrowing capacity, could simply borrow the unfunded liability and save itself about three and a half percent between three and three and a half percent. That's the difference between what the city pays. The plan for the so-called interest cost because remember the unfunded liability. We charged the city a an interest cost which is charged at six point.

F

Seven five percent with a double-a rating, a taxable bond issued by the city, would sell for about three point: three percent: these are the market, so there's that that that silver lining in these declining rates- and if you, if you if you this, doesn't require any complicated math, doesn't require any any finance background.

F

So if you can save between three hundred three and a half percent on a unfunded liability, that is a couple of billion dollars in the hole about sixty million dollars and that's what this city has been persistently shortchanging the community at large by simply and I can see that the the the issues in a way we all, as as elected officials, don't want to burden quote the taxpayers with with with dead, but the rational thing. The smart thing would be actually to simply fund the liability.

F

Take they take the plan to fully fund it and save in the long run, at least sixty to seventy million dollars in in perpetuity.

F

And as from what I've read of the of the city charter, as long as the total obligations are under a certain percentage in terms of the the taxable real estate base and I'm, not an expert on on and on bond issuance, but to me it seems like we're and then, if we, if we get to a hundred percent funded, we would actually all of this discussion would be moot.

F

We could fire all the managers, we could fire all the consultants and we would be in balance and we would save 60 million seventy million dollars in perpetuity. Well.

D

I think that may be a very good way to go, but I think you and Vince are both dancing around the same core fundamental thing. So the city says to us and correctly here, as man volatility kills me, so we go out and say well we have to really give you a certain return, so we go out to the boy. What can you get certain return now, 1% 2%? What can you lock if I told you give me a return that escapes the guarantee with one to three percent? It's pretty low right, 2%.

G

D

And the see says well crap that'll bankrupt. You can't do that. So we start turning up the risk knob right to get it up to 5 6 7 % problem 5 6 7 % some years 10 some years right- and we have said I think correctly. Due to that leverage, we've got let's not quite turn that risk not about as high as everybody else.

D

There are only really two core questions right when we say 6.75 are we average entreat n years.

A

And if we are then.

D

I think we're done we're doing our job. God bless this day is done. Maybe then Vika says great: let's borrow some money, cuz we're getting 6.75 pretty consistently. That's a really smart thing: we save 70 million and we're gonna look pardon my french like pieces of crap, because everybody else who's a seven and a quarter is dialed in more risk and in the growth market. They're not getting 7.25 they're getting nine percent right and then pretty soon.

D

As you pointed out, Vincent the bottom falls out and maybe then we're getting two or three percent and they're getting negative five. Look. The core question is: can we dial in a discount rate that has proven level of risk and then hit over the long term, because if we can, then the city can plant of 6.75% there we go and the veikkaus can say: that's great I can borrow money because I'm gonna stick it back in right, because you're gonna borrow the money on cuts to get under your mattress.

D

You can't stick it back into the market right and try to get the 6.75%, so that's the core can Vince. Can we hit our numbers? Can.

A

We do that, have we done it historically. So let me answer the numbers of where we are yeah.

B

A

As of our end of our fiscal year, because we don't have those formal numbers, but we do have the numbers as the end of q1 and our three-year return is 6.5 yeah. We did not meet that hurdle yeah, our five-year return is 4 and our 10-year return is 8.1.

A

So of those three different time periods, one we've exceeded it, the other two. We have not met it. I'm, not gonna, do with our pair rankings or anything like that, and.

H

I think one thing that's very important is that when an asset allocation is adopted, that we generally stick with it, because I do think well, you're, never gonna hit forecasted risk levels and returns exactly we don't have the chart in here, but we did at the retreat last year. Just how many times the asset allocation has been changed over the past 10 years. You know it.

H

There hasn't been an opportunity to hit any of those forecasts and sort of I know that there's been we'd be very lucky to maintain consistency in the staff and in the board. You know there was a prior cio that took you, know hedge funds, up to a huge level. We've now started, you know, there's been so many, so many changes in the asset allocation.

H

You know Chris was meeting with our oldest client the past couple days, who's been there for 40 years, and you know there are over a hundred percent funded because they have sort of stuck with the same essential strategy made some changes at the margins over the years. But shifting you know a high risk level to a way low risk level to a way higher. You know, I do think it's important to talk about risk, but having a commitment to maintaining that general strategy going forward over.

H

You know at least some medium term I think is really important. So.

A

Can I ask the pointed question than both to you and Prabhu of what's presented on page six? What is your recommendation to our board? We know what our current allocation is and what the risk looks like. Would you recommend that we adopt any of the other risk metrics and move there today and.

H

I do think if you were to move closer to your peers, like we've all been talking about, given the various standard deviation. That would put you at the higher end of the allocation allocations shown here in terms of risk level. I think there's some other tweaks that we can talk about long term. You know I, think short-term bonds were a very good move based on where we were a year ago, but I know that you likely have the flexibility shift, some of those to slightly longer duration over the long term as well.

H

Even if you adopt any of these two.

A

Prabhu, do you have a recommendation for airport well at.

G

A minimum I would, as I said before, I would.

A

Go to column two, which would at.

G

Least, bring us back to the risk that we had last year right, but going back I. Think consistency is important, but I think there's nothing wrong with admitting to ourselves that we made a decision 1012 years ago and we may not have been right and maybe it's okay to dial up the risk. I, don't think, there's any harm in it, because we have to look forward and say what is in the best interest of our beneficiaries and that's not being inconsistent. So we're not dramatically going lower or higher what we're saying.

G

Maybe we ought to have taken a little bit more risk, and maybe that should be our stance and we should stay tuned. Mr.

F

Chairman I would say that, given that the the issuance of bond is a different tangent, another another, you know subject for another meeting, the only correction I've made but make before I make a recommendation myself to what drew said. We don't actually have to meet 6.75% or any return.

F

If you, if you, if you issue the bonds, the unfunded liability goes away, there is not any requirement to have any return other than an immunized bond portfolio, so if your needs 100 million dollars, ten years from now, you buy us with zero coupon bond and so on so forth that you know that would pay off exactly hundred million.

F

Oh so it'll be a portfolio bonds and that's how immunisation works in terms of the framework that we adopted last year, which the chair was kind enough to point out to me last last time we met we, we made a number of trade-offs.

F

These are sort of compromises that allow us to meet our obligations to the beneficiaries without putting the sponsor at inordinate risk and if I, look at all of the cases that are laid out, each of them still meet thought that framework, as you yourself pointed out, that, in even in a in a worst-case scenario, the highest risk portfolio only has about a 2% and change worse outcome than the portfolio, the lower end risk.

F

So I would say our given our given that the proposals that are in front of us, the options are in front of us as long as they all meet our.

F

Our framework of what is acceptable risk. We should try to choose a portfolio that will produce the highest possible return as long as it's consistent with a framework, because if it's consisted with a framework- and we still are.

F

Taking different risk than the one that will get us the highest return, then it's really a sort of a subjective override. If we have a framework, it's imperative on us to do the two things one is to remain consistent, because when the downturn comes, let us not do what was done 10 or 12 years ago to dial-in risk so remain consistent, but also consistent with our existing framework. Take the maximum possible risk and that I would say, argues for the portfolio and 13 percent risk.

F

It has a couple of other benefits that aren't laid out on this on this chart. One is I think it potentially could convenes.

F

Because it certainly is among the is among the options that takes H ones down from 7 to 5%, and so it also reduces commodities to 0 and I would say one of the one of the big proponents of a zero allegation in commodities is mr. Buffett, whose article we've we've got in that packet this morning, so I would say it has it has these unintended benefits, as well of probably on the margin, reducing fees, getting a higher return and being consistent with all of the risk frameworks limits that we laid out at last year's retreat.

A

Council and then.

O

I think everybody understands there's no right answer here and obviously a little bit earlier. We talked about the catch-22, and you know, even when you de-risk, you are actually kind of that- is a form of risk because you're risking not getting the upsides I. Think everybody understands that so.

O

But what I observed in that exchange about the catch-22 is: it seems to me that it might be helpful to receive, and- and maybe this already exists and I haven't seen it but to receive information from the city that goes into the kind of analyses you get from your consultants that goes into its worst case scenarios and its best case scenarios and what its real risk tolerances are because, for example, if the city says we don't like what's happening now, it's costing us a lot, but we can live with it.

O

That might be an argument it as long as it doesn't get worse. That might be an argument to stick with what you've got right, but if the city says what's happening right now isn't sustainable like we have to make more or we're in real trouble. That might be an argument for change, and so you know, like the grand jury report talks about the underperformance says, this is gonna, cost us a lot of money, everybody to agree, we're not happy with that, but it'd be nice to know shades of gray in between you know, stress tested.

O

When does the city really get in trouble? You know what can it live with you know, and and even in that context you the concept of pension obligation bonds. You know that might come up as well. I mean what one thing to remember about pension obligation, bonds is, you don't have to the system doesn't have to make its assumed rate of return for it to be a good bet. The system just has to beat your bond coupon right right. So you look at those numbers.

O

The chair Brad a few minutes ago, 4 5 10, and maybe you could add a 20-year well again. If you can borrow it, then less than those numbers. That's just arbitrage right.

A

So this has been going on for a while and I'll. Let you comment in a minute, probably but I want to make a motion that then can become either seconded or not, and then we can have further discussion. But from what I heard you say of the options that are laid out here from current to the second column is what you think makes the most sense.

A

Given what our current accepted risk tolerance is. It is in line with our risk tolerance for me, in particular, I have been greatly concerned of the large amount that we've had in cash that maybe had been a little bit more effectively utilized by having some of that shifted to short term investment grade bonds, not a huge Delta, but a little bit of a benefit to the plan and then.

A

Secondly, when we talked about our alternative investments, nearly every alternative investment asset class outperformed, its public asset class respectively, with the exception of hedge funds, was an area that we did not see strong performance in, and this also brings down modestly the allocation to that so I'm going to make a recommendation that we do a modest shift to the 11.9% risk portfolio, approve that any further decision or discussion to take the risk, even higher I'd like to have at a future meeting and I'd like that to be considered on more of a collide path basis, meaning that that could potentially happen over the course of 12 18 24 months instead of immediate, given the current canonic environment that we're in in the market valuations that we have so my recommendation.

A

My motion is to make the modest shift to that portfolio before you comment. Do I have a second, then we can have.

M

A

Thank you now, discussion Prabhu mr.

G

Chairman just to clarify I'm, not recommending column, two I'm saying at a minimum, we should go to column two, perhaps I so I'm gonna go back to what trustee LANs are saying right in the absence of pension obligation, bonds and if we get that great, that's a different discussion. What's the greatest probability of us hitting six and three-quarters, that's our bogey, and if you look at the options laid out, it would be the thirteen percent risk level because that's the highest probability of achieving the six point. Seven five.

G

Having said that, we should temper that, with current market valuation, how we do that it's more science than art, more art than science, because I don't know, maybe it's glide path. Maybe we can make a decision to go there. I leave that to the board to decide. I just want to make a comment on on hedge funds.

G

The investment team has been very conscious about fees and I know it's it. It concerns our stakeholders. It concerns the City. Council are free levels, so one of the things that we did with the asset allocation last year was we reduced our allocation to hedge funds and we are recommending, through these options a further reduction of 40% of hedge funds.

G

I do want to say that the hedge fund program that we had in place was actually very well thought out, and the managers in that pool of hedge funds that my predecessor selected actually excellent hedge funds.

G

Unfortunately, we were in a market environment that did not reward those hedge funds and there will come a market environment when those hedge funds will be rewarded. But having said that, my own personal view is that we don't need to pay 2 and 20 for those hedge funds, and my my use of hedge funds is very different. It was used as a risk dampener and for idiosyncratic uncorrelated alpha my view of hedge funds. Is that and that's the reason we have brought it down to 5% and going forward.

G

We may even make it make a recommendation to go even lower is that you can actually get alternative risk premia very cheaply, and so even the types of hedge funds that we will select, even for the 5% bucket will be very low. Increase, will have a different objective, so I just.

D

Wanted to add that actually.

D

I'm not looking for the highest probability that we will hit that number or do better because, as you know, that also corresponds to the probability that we get wiped out in San. Jose goes bankrupt. What I'm looking for is the height you know is a curve that, as opposed to right so know you can. You know exactly I'm saying so now, I'm not looking for the highest probability.

D

We do that or better I'm looking for the highest probability that we get close right because it's it's like the dartboard thing right, I might be hitting these 20s and 18, so I want to hit that bullseye as off. Second, you grief right understand.

G

Though that so.

D

Then then the question comes back to you so which of those do you think gives me sort of some good narrowness in the curve, but gives me a reasonable return and that's a judgment call. What do you think.

G

I still think it's the 13 percent, so I I'm, I sort of did not paraphrase what you said correct, but I think what gets us closest is still the 13 percent.

D

D

G

Close and within that you know without being huge spikes, the only I really tempered the only thing I used to temper. That is where the market is correctly. That valuations are rich and people can disagree with me and I. God knows I have been wrong in the last two years. So in my opinion, my valuations are rich but like plus seasons, they pointed out there's a lot of monetary policy tweaking and maybe it'll continue well.

D

I think I think look right now, we're gonna be doing angels dancing on the head of the pin. Look the reason why I think the reason why boom right now, it's because we're in the equivalent of the roaring 20s, the Model T Ford, created the roaring 20s in this little Bugaboo that we all helped develop is creating something similar. The problem with that is that the the leading indicator that saw the Great Depression coming was when that technology is fully absorbed.

D

Then the productivity increases fall off unexpectedly, very dramatically movie, we're still continuing to see the United States and the rest of the world absorb having huge productivity increases. As this technology is adopted by I mean half the people in the world, at four billion people at least the smartphone's. Now so I think it's gonna. It will boom for longer than expected. We're not in a typical cycle.

D

The problem is, you can't predict toward a quarter when it's gonna fall off, it will fall off when we've absorbed all the productivity gains from this, but you can't quite predict that it's too big, it's too multifactorial, so we're in a long boom cycle, but you can't predict when it will end. So how do you deal with that.

G

Agreed so we have to look at the long-term. You know so it's hard to predict quarter to quarter it's hard to predict even year to year, but longer-term going forward. What's the best interest of our beneficiaries and at the same time we don't bankrupt the city right. So.

C

G

It's a delicate mr.

C

Chair, if I can comment so a couple of things. First of all, let me say: I applaud you for having this kind of conversation.

C

You have heard me over the years say to you publicly to the City Council and all the stakeholders that one of the things that I appreciate about both boards is that you have very meaningful discussions and, and consultants can probably share this. It's not always that you were on a board discussion when you know you board, really understand the discussion and really understand the decision-making process and the final decision that is being made.

C

However, that does not translate into always making the best decision. I'm. Well aware that second elected board, you understand what you are discussing and that you will make a decision that is reasonable, given the data and information that is provided to you at this point. Unfortunately, we don't have a crystal ball, so we don't know what the market is. Gonna return in the next three five ten years, but starting from the comment by our CEO mr. Palani, we are a long-term investor.

C

So if you take that as a premise and you're considering investing in the long term, we are investing in the long term in the capital markets, because we expect them to. We have positive returns and if we are expecting it to have positive returns, that means he will follow that we are willing to take some risk. The question is which nobody has an answer. To is how much risk we don't know that, but we can tell that over the last 10 years we take in too little risk.

C

The last thing we want to avoid obviously say too much risk exactly the wrong time. Again, we don't know what that time is going to come, but I do think that we have heard enough. We have enough data points to understand that we should consider dining out that risk. The only thing I will caution. You is number one once you more. Your board makes a decision we're in this together and we are going to support each other and we are going to agree.

C

The decision that we made is the decision that was made based on the information at the time, and we have to live with that number two and really just for me and I'm. Assuming for some of you, I want to understand some clarification in the and the motion, bye-bye chairs and sorry.

C

Other allocations are made, presumably to live within for some time not to be. We don't want to be tactical. We don't want to be making decisions changing locations every three six months or 12 months, so I just want to make sure that the board's discuss the motion from the stamp that, if I understood correctly, is to move right away to the 11.9 rest or the 9.4 whisper that you're talking about Makeda or bearish. If it was me, I was split in half and it will be in the middle but or with the understanding.

C

Apparently, the more work can be done to determine whether, if the boy left to move higher, do it in some sort of a glide path approach. That's second part of it is a little more challenging and I.

C

Think it's one that you want to really talk about whether you're moving to the air now and then you may want to consider moving later, and what are the data points that you have to consider to determine whether you're going to be doing that or not I see that action is a little more challenging, but certainly is doable, and but the bottom line is once you make a decision. Today is the decision. That was the main it's not about to be second gas, it's not about. Of course we can be second-guess in the public.

C

That's not what I'm talking about I'm talking about us, we're going to live with it, we're gonna, move forward and I'm all for increasing the rest and just especially to councilmembers point understanding that even dialing of this rest, we are still taking less risks than our peers. So I don't want that concept to be confused, that we are just because we're dying in other ways a bit more than we have so far. It doesn't mean that we are taking as much risk as the peers have taken, so we still compared to our peers.

C

We still consider a lower risk and and I think to some of the questions and statements by council. We have been asking the city all those questions over the years and I think the city, and especially at the last meeting that we had the joint meeting here were very clear. That is a very difficult information to provide, because the City Council are 11 minds and at least that joint meeting you could tell that they were even in different areas of the spectrum on that.

C

So with that said again, I applaud you for the discussion, I think whatever you decide, we just want to make sure that we live with it and- and you know understand that we have to look forward to you- know the what's going to happen in the markets. Nobody knows what's going to happen, so we just have to keep that in mind.

C

As you have said, right now is the markets are rich, and so, but to that extent we have a new affair and we have a precedent that is unlike any other person in the past, and we don't really know what the future holds. So with that said, you know I'm hoping that, once the decision is made that we, we can live with it and we also pour how we gonna move forward together.

A

But I do just want to say that when we're talking about changing risk, we're actually talking more getting in line with where we thought we would be really important to clarify we're, not saying we're taking risk up from where we had planned to be all along chera.

J

That sounds like a spin to me: I'm just teasing you.

A

On risk and we're running below our risk targets, thank you.

L

I just wanted for for clarification that the asset allocation as per investment policy, is owned by the board, but we're taking a very strong recommendation by the investment staff, because you guys are going to be implementing that so we're doing this in lockstep right. So it's you should own it as well as the board and that, if anything goes awry there, couldn't there can't be finger-pointing that says what you guys, you know.

L

Did the asset allocation I think we're all in agreement now that we're doing this lockstep that we own both the successes, as well as the negatives like very.

G

Well put, and, as you know, mr. Pena should run for governor of Puerto. Rico I mean.

G

We are in this together.

M

The other issue is that if we have a consensus than if it gets good on the motion, we don't then wait for the other three board members. So we really all learn it together. Then the other thing there's this motion in this 11.9. Does it taking Vegas suggestion, then incorporating the bonds? No, no, oh, then so, then we should believe we should. That's. Then.

A

That to me my sense is and because you can clarify that was sort of separate from the asset allocation discussion, but more a point. You wanted to make I.

F

Want to leave my turn, I think you.

A

F

Me, let me just first say that I'm disinclined to vote for this. This motion so but I'd like to vote with the board together. That is possible and I want to elaborate why I didn't want to get this technical at this at this meeting. But one of the one of the ways to look at pension obligations is to look at the duration, and most of the board here is familiar with the number fourteen ish.

F

That's the duration of our liabilities and just for the benefit of the point, one percent that may not know it just simply says roughly on average, how far out to do our liabilities go out in the 14 years. That means that our as our asset allocation should have a duration of about fourteen years.

F

Having done this kind of work before I have an estimate for equity durations and that's about 25 one Mike one is those who live in the barn world. Think of directionally +22 Vons but actually applies to all Isis. It's just a matter of when cash flows are received with equities. A lot of cash flows come in the future, so the directions are longer.

F

Twenty five is a good number and even with a thirteen percent allocation, the duration would be close to about ten years so we'd be under shooting in terms of what duration we should, we should try to target roughly so we're under on that front.

F

If you look at the risk of the eleven on the first column on the far left worst of the eleven point, nine, where, where the proposal is to go to that's a move about eight percent and if our, if our, if the numbers in our packet are correct, we are about twenty five percent. We increase our risk by twenty five percent. We'd still be just under our peers.

F

So and again, if we, if we say that there's some information in wisdom and crowds, but even if we don't buy perfectly but there's some modest amount information there I mean say: let's get in that direction and we still be under and as to the valuations I. Think it's important to remember that and and I think, from what Nikita has presented before and and what we've heard from other consultants as well that when we talk about donations, the concern there's a large leap among US equities.

F

In fact, there are managers out there that consider emerging markets is undervalued, the most attractive asset class and so on. Developed markets have languished for about a decade the non-us large-cap markets and have very very low positive returns over the last ten years.

F

So, if we are concerned about valuations, let's be specific, it's the valuation of the US equity market that we're concerned about and in a sense if we can get to the higher end of the risk, which is still below peers and still meets our framework, as we laid out in terms of the stresses that would call to the city's budget in terms of our own risk, tolerance, I, would say: I don't need for maybe a modest underweight in US equities and still try to target for higher risk, which will take care of our concerns about the elevated US equity market.

F

Because I haven't heard any concern about emerging markets and developed markets. Now it is true that market is the markets, declined they will all go down, but that's probably a temporary thing in the long run, even though international markets may not have performed well, that's in the past. There's really no compelling reason why the markets in Switzerland and Australia, and so on should always underperform or the long run most developed markets, I, would say, roughly speaking, should perform in line with each other.

F

So one way to get to the higher higher end of the risk and yet be cognizant of our concerns about valuation, which would be to just keep the u.s. equity where it is so that we are also consistent with with with the the thoughtlessness around this table is to not mess with the numbers.

F

Just look at the risk numbers and and have turned a blind eye and will largely be still doing the blind eye with us with this, with a slight reduction or or staying constant in US equities, to address the valuations in services and yet we'd be moving the plan in the direction of getting the maximum possible return. That's really possible because.

A

I just want to point out that the 11.9 risk there keeps the US equity allocation the same and increases developed and emerging markets, so in effect accomplishes what you want if you move to the two higher wrist metrics you're increasing your exposure to us I'll also point out that in our reports, thing Clara had said that the US- or maybe it was Prabhu.

A

The u.s. allocation and our plan relative to our peers is one of the lowest that's out there below median it's not in the bottom quartile. So we're already very low.

A

F

Just want to clarify that that's that's a that is something I'd be comfortable. Living with I'm not recommending a lower allocation. I may be the only one around this table. That does not think that the US market is overvalued. I think it is roughly where it needs to be and I. Think again. If you buy the wisdom of the crowds more than twenty trillion dollars is being traded at these levels, and we can't all they can all not be fooled.

A

Do you want to respond ready to move on to s4 after.

G

Trustee minute may I, just okay.

B

A

The objective that we said and where markets are running they're below that- and so you know you could argue- we could go up- we did discuss at the IC and staff, also concurred and pointed out that well, we could very easily in and I think probably you pointed this out to have dislocations in the market that pushed volatility higher and above and move us beyond where we should be, and this is why my question was pointed to Danny about. Are we talking about ball for one year?

A

Are we talking about looking at a ball number over a long period of time? No, and he said this is a ball number over a long period of time.

B

Don't change it too much and for me to go from one end to the other. I should have a strong conviction. That was something that you're doing was completely wrong and, in my view, in looking at the markets, the markets have kind of gone up fivefold in the last ten years. Do I expect that to happen the next ten years, I, don't think so so I would advocate a slower change.

B

Like you said, eleven point nine and we can reevaluate it I mean so I would not be comfortable in making a big change in the asset allocation. You could be wrong twice, I! Guess it's worse than being wrong. Once it's.

A

Really not a significant move in our public allocation and even at that level, we're still considerably underweight our peers and traditional businesses. So.

G

Mr. chairman, the one thing I wanted to point out is going to eleven point: nine. We are not doing anything, we're not increasing risk. We're simply saying we agree to a risk level last year. Right, we're simply staying where we are correct. I would personally be very comfortable since trusted.

G

We already said you know, even though it's the Board's decision, we want to know what staff thinks and we're all in this together, I'm equally comfortable, going to 9.8 percent risk, which is very 8.6, we're going back to nine point four, which is where we we're last year. Now that 40 basis points which is column, 1, 2, 3, 4 12, and a half percent risk of makita 9.8 percent risk of errors and equally comfortable with that option.

G

H

I'd mentioned as well. You know my comments around shifting I. Think I don't want to give the impression that that means that I, don't think you should make a move now. I just think that the move that is agreed upon now is something that we should try to try to maintain. First for some time.

C

So that raises I apologize, sure I know you wanted to do get that. That raises the issue right, because I am nothing you are, and we know that, but I I lied that 12.5 in the nine point, a some deviation. How different is moving to that now versus the approach in the motion, which is, let's move to the nine point? Four eleven point: nine and that's why, in my comments, I made the comment about the glide path? How do you define that?

C

What are the data points I mean because I think if we decide that approach, it would be helpful to have those discussion so whether that part of the discussion is kicked off today, I see to come back with something. Is there a timing there specific events, I, don't know that so I mean that's. That's the question really. Do we go right to that number and then glide path to whatever eventually would take us at the nine point?

C

A or is there a strong conviction to just forget the glide path and just go the route to the nine point? A so.

G

B

Is much more of a question to for everyone.

C

B

C

Know just for you, but.

G

If I'm to answer the question, I'm equally comfortable, going by the way to either column two or four, but if we want to do a glide path, I'm, okay with that option, except that you know these decisions because they're consensus-driven and we have board meetings and I, see meetings. So if we are to go to a glide path, I prefer to have a very clear saying.

J

N

G

The time saying we should do this by this.

C

A

A

To the eleven point, nine risk profile with the glide path over the next twelve months to move to the twelve point: five, where.

B

F

Just fine with what you mean by the diet, path of the portion of it.

B

F

B

F

The difference between 11.2 94.5 Wow.

C

That's the that's. The challenge.

L

A

You Thank You Gia so with our CIO to come back to the board with how they will implement that glide path over the next 12 months. Mr.

G

Cherrick may I add to that and suggest that at the August 27th IC, which is only three.

B

G

That I come back with the plan perfect for consideration by.

F

There's no guarantees, but but all we have to go by is expectations and 8% gets us 60 basis points more than where we are, and so that's that's, roughly 20 million dollars a year if those expectations pan out. So that's a move in the right direction.

A

D

Yeah absolutely accepted the amendment yeah.

A

A

D

Have one just little thing at the tail end, so when you model inflation, use historical inflation data I'm. Looking to anybody can answer this question. We.

H

Use it as an input to the process. Yes,.

D

And do you use historical inflation data as.

H

The input as an input, but not the that doesn't determine the final product. It's weighted as well as some forward-looking expected and.

D

Our the forward-looking expectations based on past history, so.

H

Know the historical expectations are I can't tell you the exact percentage.

A

H

Weighted relative to our forward-looking expectations, but our expectations going forward are much lower. They.

D

Are, oh, so that's our bacon! That's what I want to know. So when I see that seven point seven number, then that's got a low. You.

H

You buy the theory.

D

That inflation isn't like it used to be exactly yeah. Okay, that's great, because the problem that fits is, if we really implement this, we gotta raise our discount rate, which is gonna, hurt like hell.

A

Okay, thank you very much. Let's move on to 2c.

B

N

Gonna pivot, here from public to private markets, knowing the presentation, titled city of San, Jose, police and fire department, retirement plan before.

C

I may apologize.

N

C

You continue, can staff hear his comments very well through the microphone and you? Okay, no can you get them heck up and thank you get it closer and speak louder. I apologize. Thank.

N

You we're going to pivot here from public to private markets. The report titled city of San, Jose, police and fire department, retirement plane, private markets program, as of December 31st 2018, would also like to note that this is the public version of this report and staff receives a more in-depth private version of the report. Page two outlines a table of contents: we're going to start on page three, which details the total private markets for the entire retirement plan.

N

The total alternatives account is detailed there on the top row again as of 12:00 31 2018, and it consists of just over 1.3 billion dollars in committed capital, a market value of 510 million dollars on total contributions of nine hundred and seventeen million dollars, which has received total distributions of six hundred and fifty three million dollars, which equates to a total value, multiple of 1.3 times a net IRR of 8.1 percent. The total alternatives account.

N

This consists of legacy private equity, the new burger fund of one private debt, real estate and real assets, I'm gonna start with asset class returns for private debt, which you'll find on page five. As a reminder, the private debt program for the retirement plan consists of eleven private debt partnerships, I committed capital just under five hundred million dollars.

N

The current market value equates to roughly 5.2 percent versus a four percent target in the fourth quarter of 2018 zero point, six million dollars was contributed to the private debt program, while fifteen point eight million dollars was received in distributions. There were no new commitments to the private debt program. You flip towards page eight you'll note. All eleven partnerships are details. This consists of ten of your more typical private debt partnerships and one separately managed Co investments that would be through your vintage year. 2017 investment, an arrow mark partners, separate account.

N

There are several columns on this report. We would like to draw your attention to I are, are, and investment multiple. Those are the two most meaningful measures of performance. Those are located in your far right hand, columns.

N

Just some quick I guess notes on private debt. Again we have touched base on markets here in the fourth quarter, the fourth quarter, it's very rough market environment, one of the worst quarters for performance in markets since the Great Depression- and this was consistent in your private debt program as well, while performance for the entire program decreased. Roughly fifty basis points from six percent to five and a half percent ask.

F

A question here sure the benchmark that's listed on the second column from the far right is that an investment in investable benchmark now.

N

So these are Cambridge associates benchmarks, not investable benchmarks made up of a peer group of similar funds from those.

F

Is it possible to approximate an investable benchmark? Would that be say a high-yield index of some sword or some other index that could give us an idea of what's doable if we didn't want to be in a private debt instrument in the future class, so.

N

One thing we do see from other clients to gauge an investable benchmark would be adding a expected return above public markets that you could expect. So you could take the high-yield benchmark roughly to 3% 4% as an alacrity premium and I would be a more investable benchmark that you could gauge performance on.

H

Past performance is difficult because these are drawdown structures, so it's very difficult to sort of you'd have to take every cash flow, every date that they called capital and sort of adjust. The public markets benchmark valuation on that date. So judging historical performance on that granular level is different, difficult but, like Chris said many people use dual benchmarks for their private programs. That one is a peer group and then one is a premium over public markets. Just you know as a rough estimate, so.

F

If we were to use a proxy of a premium, as you said, 2 or 3 percent- and you did some approximation for the cash flows so to compute- something that's close to an IRR, do you have a guesstimate of what that might be, at least for.

H

Yeah I, since you started investing in 2010, the program would have underperformed at that benchmark. I can't give you a number off the top of my head, I will say, since the current staff has been in place in the process that we've had working with them, the returns have been quite strong, so I would I would I believe that the returns for the program for say you know, funds since 2015 would have outperformed high yield, but for the program as a whole for its full history I, don't believe that would be the case.

F

The one row that I was looking at where one can say that this program has had time is, is the the vintage year 2010, which also was an exceptionally good year, if you'd think about starters, start starting point was only a year or so after they blow out in spread. So there was a great year to start and those returns to me look very, very tame completely.

H

Agree, those are direct lending funds and originally these funds were not in a private debt allocation. They were in something that was called opportunistic at the time they were then put in the private debt bucket, so the staff at the time was trying to take advantage of middle market lending being constrained. So these funds were not designed to have as high returns as traditional private debt that we're now investing in, and then they were stuck in this bucket later so completely agree with you. We would expect higher returns from private debt investments going forward.

F

N

There are no question no further questions on private debt, we'll continue on to real estate, located on page 12 real estate for the retirement plan consisted of 13 partnerships committed capital, just over two hundred and sixteen million dollars market value, consisting of roughly two and a half percent for the real estate portfolio versus a three percent target. In the fourth quarter of 2018, there were seven and a half million dollars in contributions. Nine point, eight million dollars in distributions and no new commitments to note in the real estate portfolio I feel flip to page 15.

N

That would hold the performance summary for the real estate portfolio. The this details, performance of the 13 closed-end real estate funds that you all are invested in I would like to note that the private real estate has fared very well in the retirement plans. Program returned with a net IRR for the total program of 14%, again, even in real estate. The fourth quarter.

N

It was the lowest returning order for a class in some time, in this case since 2010, due to a decrease in asset appreciation in the quarter on increased market uncertainty that we saw in that time frame will continue through two real assets. Real assets will be located on page 19 of this presentation. The real assets program consists of three partnerships on 46 million dollars. I've committed capital, fair market value, would place the program at 0.8 percent of the total retirement plan versus a 3 percent target in the fourth quarter of 18.

N

You've seen this program start to grow a bit with 1.8 million dollars in contributions, 0.3 million dollars in distributions and a new 6 million dollar commitment. If you'll flip to page 22.

N

That would detail your commitments here in the real assets program consisting of your three partnerships, two of which are infrastructure, one of which is an energy investment. And it's worth noting that in the fourth quarter we did see incredibly volatile energy markets.

N

You probably noticed that the gas pumps price of WTI fell from seventy five dollars to forty six dollars and was a notable performer for energy markets.

B

N

That is your global infrastructures partners, three, that is an infrastructure fund.

H

Our problem is that sometimes we can't discuss specific funds or specifically underlying investments. In public session there was a write down of a billion dollars on one investment just in this quarter, so it was a significant write down. We still do have conviction and the manager in fact made another recommendation to invest in their next fund. It's still a very strong manager, so we can get you some more information offline.

N

That kind of concludes our comments here on private markets report. Unless there are any further questions.

A

About managers in terms of numbers, one of the comments that has been raised or statements has been made about our plan is the large number of managers that we have and if you look at it it's predominantly in private markets, we don't have a large amount of public managers that we're using and so I'm, not sure how you tackle that solution. Unless you choose to go to single manager, sources that bundle everything together, but it appears that it's being presented as if San Jose is kind of this outlier with all these managers.

A

Can you give us a sense of your other clients and if, in fact, that's true or not, that's.

H

Definitely not the case, among other clients that we work with and that we know of in the marketplace. You work with other consultants, this roster of having dedicated allocations to private equity, private debt, private real estate and private natural resources or real assets.

H

I know that it's always been a goal of the boards historically to not have too many managers, and that's why you see that in general, the lowest allocation you've made is somewhere around 20 million dollars as an example in your real estate portfolio, we've always leaned towards the DRA s of the world, which are more diversified, private structures, because we know that there is a desire not to have a proliferation of managers so compared to other large institutional investors that invest in alternatives. The number of managers is quite low and.

A

It's the same thing as well right. We want to have your vintage years exposure your different strategies within private equity I just want it. I guess kind of hear this out publicly before we go to that part of our agenda, because I know this continues to be raised, and maybe the the comparison needs to be done separating out the alternative managers that we have in the universe and the public managers. So thank you for that.

L

There needs to be like a look through.

F

Now I realize is not a perfect answer for this, but given the fine performance in the private real estate market, what's your current view on valuations? Are they roughly right? Are they still attractive? Are they modesty or value no value? What would you what's your subjective view on valuations? We.

H

Think they're, expensive and highly valued relative to most other asset classes, I'm, sorry similar to most other asset classes, so we think, probably modestly overpriced, but perhaps US equities and other you know areas that you're investing in are also modestly overpriced. We don't think they're that real estate is a screaming, buy or screaming sell. At this point, yeah.

G

It's something so I I do speak to some real estate managers Denise. Does that all the time occasionally I get the opportunity to talk to some of them and I do question them on that, and what I hear from some real estate managers is that yeah in general markets are pricey, but there are specific areas within real estate where there are some good opportunities.

B

Interest rates are so low, I mean every part. The Swiss yield curve is negative right, I mean that's. Why and that's why it to me I think: what's driving the markets is its interest rates I, don't think it's growth, because global growth actually is cratering right now, in my view,.

A

Talked about earlier we're deferring item three aid, so we'll move to for a oral update from CEO Thank.

C

You, mr. chair, so you remember with bear with me for two or three minutes when you came into the meeting this morning, a few hours ago, you had the no known conflicts letter handed out to you. So when you get a chance, please review it.

C

Let us know or fiduciary counsel, if you have any questions and once you're ready to submit the the letter signed up by you, make sure that you either give it to us at a committee meeting and a board meeting or sending it to the of our office in attention to Linda Alexander.

C

We have five positions right now that are available in the office for which we're doing search, starting with him in information technology manager, the investment financial analyst account clerk office specialist, once senior benefit analyst and I just learned this morning that we are also losing another benefit analyst. So that would be six so we're working through that we'll keep you posted in June after the board meeting.

C

We actually issue a letter to the retirees I mention it through the meetings throughout the meetings last time, but we were making changes to the pay stubs, and so the letter went out to retirees I believe at the end of June, just indicating what changes were made to the pay stub so that they were aware there was some changes, be made instance in terms of the information provided.

C

The financial RA for June 30th is ongoing. The auditors spent two weeks or our offices in July and lastly, I want to let you know it appears that was yesterday that we actually had improvement improvement made to our offices and move everyone together into one floor. Well, the rental agreement I think as to five years is coming up early, 2020 I, don't know if it's February or March, and so just want to. Let you know we're going to be coming to you boy.

C

In October, we are doing some research as to what our options are, in fact, at Bernards fund investment staff.

C

It's actually taken upon himself to seek other options in the area to compare a known location but cost and an options for rental, because we need to make a decision about six months before whether we're going to sign up a new agreement or not and and the agreement that we have right now, it would include some increases, so we may be coming before you in October, with the results of that research and to find out whether we in fact on a stay, either gonna decide to stay in our building or whether we going to be constantly considering moving locations, probably very close to our area.

C

In fact, some of the buildings that we're looking at one of them is right. Next to us, the other one is in the front about 500 yards to the right, so they're not far, but we're looking at options which one to let you know. That concludes my comments. Mr. chair.

J

Councilmember Foley has been on vacation for the month of July council. Member Foley has no update.

J

It's it's very nice that council shuts down in the month of July, although my staff was busy at work, I was not and took advantage of it perfect.

J

A

Foresee discussion, action on cortex, consulting services, agreement.

C

Thank You mr. chair, so let me be quick. You have a memo before you and attach it the memo he says, suggested agreement signed by cortex already. We have been working with cortex now for a few years, and so there is some work related to board governance, not the Lisa wing of which is includes work on personal issues that we're going to be discussing with the jpc in the next few months, and so we are recommending to have a new agreement with cortex for the calendar year, 2019 2020 for an amount not to exceed $45,000.

C

You should know that when I sit down with cortex to go over some of the possible work that we may be needed, the amount suggested was actually lower than that request of 45,000, just to make sure that we have enough flexibility in the event, there's more work to be done, but I just I guess. My point to be is that the expectation is not to fully use for the $45,000, although of course, if we move I have with this agreement, we have the amount not to exceed to 45,000.

C

The agreement was reviewed by fiduciary counsel. He was provided to cortex. They sign off on it and I'm happy to answer any questions.

L

C

This side of a performance metric, but this also, you may recall, I, believe you were the chair of the Governance Committee some time back. We have a met in about nine months. There's team work to be done. In fact, the net, the next joint Governance Committee is scheduled for, excuse me, September 5th, which is the day after you board meeting in September, so they still work to be done in governance.

C

Work that that there were some bases and some work done about nine months ago, but we still need to actually perform more work, and so the reason for hiring was for that and the governance work and the jpc.

F

From what I've seen in the past, they've certainly done good work and the cost is not huge. But I just want to ask the general question if we did not continue the service, what what would go wrong.

C

Well, I, guess hypothetically, nothing will go wrong or that then the reason we are still requesting their services is because this is work to be done. But I guess to answer your question once all the work that is governance related is is completed. You absolutely right that there wouldn't be any need to be higher. Then older than any governance work that I've been doing in the past, about charters for different committees or positions or boards.

C

There's a requirement to be review every so many years to make sure that you know we are staying up with the times and we certainly does not have to have cortex or any other board governance firm at that point, but in situations where we are reviewing the kind of work it may be good idea to have someone available. But did you question once all the governance work is completed? You're right, nothing will go wrong.

A

Thank you for D discussion action on proposed annual member statement for reclassification, so.

C

Thank you, mister chair, so this memo actually comes to you from Jennifer Schembri director over here and also director Human Resources. Cheryl is here to speak to you in the matter, but before she does that, I just wanted to remind you. This is the situation of you, boys, caught this with karen for some time about members that are tier two that have the chance to move back to tier 1 and to pay for the cause of moving from the tier 2 benefit structure to tier 1. With that said, I'll turn it over to to sheriff.

C

E

You aperture, that was a good introduction, so right now we do have about 12 of your members who are repaying an extra contribution rate because they were reclassified from tier 2 to tier 1, and so the city's request today is that you authorize Chiron to provide these members with an annual statement. We believe this will help in two ways: one each member now know how much they have been contributing over the year on how much they have to pay back.

E

And secondly, if one of these members leaves the city, the board's actually does have to calculate their payback amounts. So Chiron will now be able to kind of just pick up from where the last annual summary left off and it'll be easier for them to provide the member with that with that number. So, just here to request that you do authorize Chiron to help prepare this annual statement for these twelve members and.

C

To add to that, I just want to share with the board our office and myself included. We are in complete support of that request. We reach out to Chiron and I just wanted to share with you. They would be in about a 1502 twin to $2,000 per plan, cost on just the initial design of the stamen and then after that about a thousand to two thousand dollars a year for the whole plan to issue the statements and so I'm in full support of it.

C

That cost will be bear by the retirement office, as these are retirement contributions, related statements and happy to address any questions.

A

F

Mostly because I'm not as informed on the details but canon what's what's required before I pay, an employee requests, reclassification from tier 2 to tier 1, can can can all.

O

This is left over from a measure F and measure B, and so initially there was the there was a change in tiers and then there was a change to that change. This is sort of a cleanup from that. It's not normal that you would have members moving frontier to tier, ok, Thank, You counsel. Thank you.

F

L

Don't need actuary to provide the statements. Why couldn't we do that internally in our finance.

B

That's a very good question: it's.

C

Really, if you recall online the regular every time contributions which is for the full plan for all the members, these you bore actually made decisions on some of the questions, as the chyron requested to be addressed that they could then prepare these these kind of cost. You know there are different costs. People come in at different ages. They have different timelines or timeframes to retirement. They had they made it. So they said a lot of complicated data that goes into requiring someone as bright, as perhaps an engineer like rusty Lanza, and actually, let mr.

C

hallmark to prepare those things. That's why we don't have the ability to do that.

A

Okay, any further discussion, all in favor, any opposed okay motion carries. Thank you.

E

Very much item.

A

4 e discussion and action on the appropriate response to the County of Santa Clara civil civil grand jury report.

A

Hopefully, you all have the opportunity to read through this report in that report 31 pages. There are specific recommendations and there is a request of myself as board. Chair and Matt. Loesch is board chair of the Federated Board, to respond within a specific time frame to the recommendations and it's on page 27 of the report on page 27.

A

They list the findings and the recommendations and they are looking for responses from us from findings. 1 2, 3, &, 4, B I, did have an opportunity to speak briefly with chair Loesch of the Federated Board I think it's important that when we respond, we respond together as our boards are really looking at the same challenges and issues.

A

Although there were different aspects that were brought up within the report, the differences of the two plans there's a lot of similarities as well, and what I'm going to propose is that we are granted the latitude to work with Council in drafting a response to meet that requirement. There are some things that we can respond to directly.

A

I can I'm happy to address some of those items here, but I think it's also important to point out that there are some items there asking us to respond to that are unrelated to our responsibilities as board members, for example, recommendation number three talks about the burden on the board and considering combining boards. I believe was one of the things that they were addressing.

A

That is a bargained agreement, something that is typically worked through with the city and the unions, not the board, so it wouldn't be appropriate for us to respond as to what our opinion is of that, however, recommendation number one, we could certainly respond to the fact that they would like us to review other strategies of other systems that have very similar characteristic to ours, but may have different investment performance and better investment performance certainly makes sense for us to be doing that type of work.

A

Much of that work, because some of it has been done at the last retreat that we had and some of that data was also presented to the City Council at the joint meeting, but there's more work that could be done there. So in essence, you know I think it's important that we respond to this there's a lot of salient points that they brought out. That's my recommendation but I'm curious on the input yeah.

D

I agree on a percent Vince I think we've been round around on this with the city, auditor I think we say: recommendations, 1, 2, &, 4 B are all good exercises. We should undertake them I think in general, with things like this, unless they do something egregious I see done angry I, don't necessarily agree, I, think greed just think about say. Thank you very much. We agree and we're on it. Yes, that's always worked well for us in the past.

D

As you say, it's a useful thing all through food, 1, 2, &, 4 B are all useful exercises. We've gotten around to sooner or later, doomed now, I agree and.

A

Then what we could do is come back to the next board meeting and point out where we would tackle that some of these items may be staff items. Some of these items, for example, for B on performance metrics we're already going to be discussing those things at the joint Personnel Committee I'm, chair of the joint Personnel Committee.

A

So it makes it easy for us to move those items forward, but so that way the board knows 1 what the memo was into, how we intend to do the work to provide the reports, because there are specific timelines that they have in mind. They're looking for responses by various states.

M

The other issue in terms of binding boards, we may look through the minutes. There may be some past discussions that you might be able to submit along with saying this, the City Council and bargaining responsibilities, but here's some notes that we're taking in discussions in the past might be good.

A

And I think that's important because, for example, on finding number 2 and recommendation number 2 is study, ways for us to reduce cost and investment managers and, as you saw by my question earlier, it's not unusual for institutional investors to have a lot of managers and their alternative investment plans. We can get data from our consultants and others to reflect how many managers in the private space other plans are utilizing and we're. Obviously, mindful of cost we're working on it. I know: we've done reports on our fees.

A

I think we need to do a much better job of explaining. We do a good job, but I think we can enhance the job or doing of explaining how much more thorough our processes and including fees that may be other systems are not including particularly performance related fees and then specifically, the actions that we're taking to continue reducing fees and addressing that where we can other thoughts around this.

J

And I agree with the separation of some of these are definitely city, council, city, city of San, Jose, responsibilities and bargaining, unit responsibilities and others are the pension boards, but I noticed one that is more, the pension board that wasn't mentioned and that's finding five regarding diversity of individuals who serve as trustees. That I would think would be something that this body would want to take a look at. How are we going to expand the quality of Representatives? We have sitting around the table here so.

A

That's an interesting one and yes, my initial thought was that is actually something the construction of the board was determined by the city and approved by the bargaining units. This board never had any input, nor did we have the ability to say what we thought. The board should look like so I'm, a little afraid of encroaching on that responsibility of the city and the unions.

J

Okay, I guess this I guess I need to dig into this a little bit. So are all the people who make up the trustees the board designated by the agreement with the bargaining units I, understand.

A

E

It's set by the Municipal Code and the Municipal Code is not specific to say that only investment professionals should be on the board is actually much broader than that. Okay, and so it's it's, and while it is up to kind of the bargaining of the city, it just so happens that there are a lot of investment professionals, particularly on on both boards. Now, so the city was going to respond to that, because the the civil grand jury has indicated it on this on its report, that's something that you know we should look into.

E

So we were not contemplating. You know a joint response on that. Okay, thank you. Let.

C

Me today, because I have actually raised that point here before about trustees and service, completed right that this is, it was created by meetings with the bargaining units and by the city and ultimately, the City Council is it's the the body that actually appoints the members and, as you indicated where cultural is very clear, that investment, just one of the areas of knowledge that is required, is a very program, is very business. General specific.

C

It just so happened that the majority of the members over the years that have been willing to apply for the positions are investment related, I suspect because of the sizes of the plans, and it just is interesting to investment investment professionals.

C

But we I don't know if you were one of the meetings we had discussions with the boards, because what I find interesting is that, even though it's a permitted by the City Council I guess it's left up to the department and the board to seek our applicants. So let me finish the turn and then you can address it. But the point being is that the boss gave staff direction so that we now make sure that we reach out to different organizations so that it's not just investment related right.

C

In the past, we didn't have any kind of reach. Our pros approach and people that really members of the public apply were investment. Is that miss professional, but now we're reaching out to hospitals, to educational to the unions, so that we're hoping to things we're hoping that we can actually reach out and have more applicants interested and letting them know this is available, so they can apply. But in addition to their having people for different back just right.

J

And I recall that coming up in our last meeting.

C

J

How you were going to reach out and.

C

We and we started doing that and.

A

Let me also expand on that too, having been through the interview process and the application process a couple times with City Council, it's very clear on the criteria they have.

A

We are independent, we're not members of the plan, but there's a criteria we have to meet in terms of having experience institutional experience with retirement plans or benefit plans. We had previously on this board some years ago, someone who had HR expertise so that applied when I reapplied for the board and went through the interview process with City Council. There was another individual who actually had been an actuary was not selected by City Council. So we do see those individuals come up: okay, they're, not just investment professionals. Thank.

J

C

One more I denied I know exactly what you were going to comment earlier, but to your point, I've been told and I seen it I know it's true. The application form actually sort of tilted towards investment questions and what a question that I have asked over year was who is in charge of the questions? Can they be changed a little bit so that they be more general because they are sort of gears to investment questions which lead you to believe that what what the city is looking is people with investment background.

C

So my point is somebody else that is looking to apply. They see the form I said I'm this question, so that's a question that we may work on is is a way to change the applications. So that is one broad, any questions so that it does key in on investments but also know the areas of expertise and I'll.

A

Also point out again in the letter and the responses are requesting from the city they're not requesting responses on items: 1, &, 2 for the police and fire board, the federated board they're, not requesting responses on item 5 for a or 6. So it's a bit of division of questioned responses. Okay, thank you sure. Jim.

L

Roberto actually asked the question that I was asked.

E

So I'm sorry to interrupt, but just to respond to that question. I think that that would be something we need to work with the city clerk on, believe it or not. We are actually doesn't handle one thing in the city and that's those particular elections or applications, so something that we can definitely work with the city clerk on. Thank.

C

You so much I apologize, because I just think that you guys getting everything.

C

I purposely I probably thought it was to you, but he may have been to the city, clerk and I had.

F

Just one thing and I mentioned this at a previous meeting- the the forum is long, so there's a way to shorten it and for for many jobs in most sectors, public and private. A resume is enough, so I'm wondering if we can shorten it to make it more likely that we'll get a large pool to draw from so.

C

Thank you, that's a very good point because I must add that federated insured to two seats and we started doing that, reach out that we discussed for federated and we actually have to see some already have three applicants and one person that was pursuing I, don't know if the the person ended up applying enough, but I did get to hear from a couple of those applicants and they say wow. This application is really long.

C

So again, I suspect that some people may look at the application and when they see it, they get discouraged from applying so I mean, as you say, maybe in a city clerk going to the City Council. But that may be another option.

A

The last thing I'll say before I ask for motion here, which is really interesting on page 28 of their reports. They actually showed trailing returns of the plans one year three year five year ten year, you may recall that I mentioned earlier. The ten-year return for our plan, as of March 31st was eight point. One percent. This shows four point. Six. The difference is six months in a ten-year period, the difference of six months.

A

The return four point, six versus eight point, one pretty fascinating I, just want to point that out, because what.

D

Gives the captor 2008 the crash.

A

Well, I think: that's what happened. Is your number, your tenure number that drops off the crash and picks up the recovery, and so statistics are a very interesting thing. Yes, and depending on what time period you select or utilize, they could look good or look really bad, and when we talk about evaluating success or failure, we typically talk about longer periods of time. But even that ten-year number you can see the dramatic swing because of the crash. So I just wanted to point that out.

A

But what I'm looking for is authorization or approval from the board for myself to work with counsel, Roberto and Sheryl OSHA on the Federated board to draft a response.

A

E

Think that one thing that I did want to bring up is because we have just recently had the July recesses not only for your boards, but for our city council. The city has requested an extent of the 90-day response time, so it was going to be September 17th, noting that you probably would want another board meeting and federated 1 1 another board meeting. In addition to the city needing to respond, we actually did request an extension on both the city and the boards of the half so well.

E

That may have been something, but we needed to come to the boards and ask we did ask for an extension on all of it so willing to to take any feedback on that.

O

A

Are you saying it was granted or we.

E

Actually do not know yet if it was granted. Ok well,.

A

We will work off of the understanding that we have a timeline to meet we'll work to meet that we began. I've already had a conversation with share. Loesch they've got a board meeting coming up, so they will be addressing the same thing and the hope is that they will also grant them the latitude in the event that his board does not grant the latitude. Then I think we look to see if we got that extension and and go from there absolutely.

O

This board is going to respond on its own, because if we, if we have disagreements with the city, it's impossible to resolve them, so our responses will be that's.

A

O

A

When I don't mean on our own, just the police and.

B

O

Like a response.

A

To be in coordination with federated I'm, sorry I was.

O

Just making a distinction with the city is that, even though the request for extension was requested together, that doesn't mean that the response is going to come together with the city. That's all I meant would.

C

You let us know if it was granted, so that I can share that with the board. Absolutely thank you. Okay,.

A

So we have motion second, any further discussion, all in favor aye any opposed. Okay. Thank you.

B

A

4M discussion, action on committee assignments.

A

Okay, so if you pull this up, that has a list of committees I'm, actually making a request here and have reached out to several individuals in advance regarding the investment committee and changes to the committee, I've spoken with our CEO or CIO, and the chair of the committee in advance of this, as well as the board vice chair I, think it's important to think about a couple things. One is that we have new trustees.

A

We didn't want those new trustees to, even though they have very strong investment background jump right on to the committee without having gotten their feet, wet and maybe staggering the terms a bit. So we have trustee. Oswald has been on that committee since he joined the board and my term on this board.

A

I still have another year and a half to go, but I think it's important to start thinking about succession planning I think it's important to be thinking about the fact that there was a tremendous amount of work done last year with staff cortex and the board to delegate a tremendous amount of thority responsibilities to staff and making many decisions and allowing them to run with those decisions. And so what I'd like to propose is that I actually come off of the investment committee and add trustee as we're menon on the committee. I think.

A

Another factor that's critical here is that we really need to do some heavy lifting on the joint Personnel, Committee and I'm chair of the joint Personnel Committee we've struggled to get meetings and it just needs to be a higher price already. We need to one respond to the grand jury's report and performance metrics and beat that up. So that will be one body of work. Another important body of work, I think for that committee, we'll be starting to look at incentive measures, ways to if we can tie compensation to plan performance.

A

We all want better planned performance, and one thing that might benefit us from retaining staff motivating staff is seeing how we can develop something like that. So I just see that being a really important responsibility.

A

What I hadn't thought about trusty men and when I reached out to you is that you're already on to other committees, so one consideration here is I, don't want to jump off investment committee and then jump on another committee because I again want to have my focus on both the board and the joint Personnel Committee. But we may want to consider trustee oswald, replacing you on governance right now.

A

Trusty men end is on audit. He is on governance, we'd be added into investment, that'd, be three committees: that's a heavy load, that's heavier than everyone else.

D

Community yeah.

A

Trustee Oswald is on the investment committee. He is alternate to disability, but he's the second alternate, so I just think if he, if both of you are open to it and I I did briefly talked to Oswald when I got here this morning as I realized that but I hadn't talked to you. That would be another suggestion. It's just make that one switch yeah.

D

You guys are on the automation, so that's great yeah and.

A

I think you also have you know strong ideas on things and I think that would be beneficial for governance mentioned. It's been a while, since we've actually had meetings there, we need to get our committees active and engaged. So that's what I am proposing.

A

Let's have some discussion around that first before it's actually a normal motion. Is anyone opposed to that or have any challenges with.

M

D

Percents amines few Kaufman's.

A

Trust agree Rd, who is chair of the investment committee and Prabhu, to make sure that they're comfortable with that one of the things I think that is can be valuable. Is that having been on the board for a long time? There is a lot of institutional knowledge. We don't want to lose that institutional knowledge. However, in between board meetings, I do meet monthly with Prabhu one-on-one, and that will continue so it still allows me the opportunity to impart that as things come up so I don't feel like we're going to lose that yeah.

A

That's good, I. Think the only question is timing. You know: do we do we make this effective now and, as I looked at the schedule, we are really at meetings every other month now for the investment committee. So there would be a meeting now and then two months from now I'm comfortable with the change being effective now, but if we want to delay it until after the August meeting, we could do that as well. Now he says goodness.

M

G

The record Vince you'll be missed on the AC.

A

No, you could still come and be in the audience.

C

A

Good also I think it helps Andrew out the vice-chair thinking about. Okay, you want stability. It gives a six-month runway with that change because he may need to come off the investment committee, possibly when he becomes hopefully the board chair. So anyway, that's the motion. I'm making. Let me just confirm it again: I will come off investment committee, trustee min and will come on trustee, Menon will come off governance and trustee Oswald will join the Governance Committee I.

D

Will second, that much okay, any.

A

Further discussion, all in favor any opposed. Thank you both for accepting good good call.

F

A

F

Will be missed on the IC.

B

Thank you. Okay,.

A

We have five retirements, read them off: Colin L, cooker police officer, Police, Department, effective August, 10, 2009 teen, with twenty two point: five: six years of service with reciprocity, Robert Finney police, sergeant, Police, Department, effective August, 24 2019, with twenty five point: zero: three years of service Erick Hernandez fire, captain Fire, Department, effective August, 10th, 2019, twenty five point: one: eight years of service, Christopher D, prompt police officer, Police, Department, effective June, 26, 2009, teen, twenty six point: five one years of service do I, have a motion to approve a second okay motion by trustee Santos, second, by trustee Oswald, all in favor and the opposed okay.

A

There is one fire, the rest are police and we don't have any police members here, but trustee sent us.

M

B

M

A

Right then, we have a deferred best Parker Arrow Hathaway, the third police officer police department, effective August, 31st 2019, with twenty six point. Five years of service motion to approve second, okay, again: motion by Santos. Second, by trustee Oswald, all in favor aye.

B

A

Opposed all right so now I'm going to read off the death and survivorship notifications and then I will ask for a moment of silence: notification of death of Russell Hanson police officer, retired June, 6 1998 died, June, 6, 2009, teen, no survivorship benefits, Franklin Jost fire, captain retired April, 29 1979 died, June, 10th, 2019, survivorship benefits to klaris, Jost spouse, Philip, Norton, police, lieutenant retired March, 2nd 1982 died, April, 22nd, 2019, survivorship benefits to Joyce, Norton spouse, Philip, Rice, firefighter retired February, 5th 1989 died, May, 22nd, 2019, no survivorship benefits, John Taylor fire, captain retired April, 1st 1993 died, May, 26, 2009, teen, no survivorship benefits the Leyland Wilson police officer, retired January, 7th 1999 died, April, 29th, 2019, survivorship benefits, Teresa Wilson spouse have a moment of silence.

A

Okay, thank you dick any of these individuals. You actually.

M

And the police officer, except when I worked with all of them. There were some characters and Frank Jost.

M

A

You, okay on to committee reports, note as we're going through this last meetings. We really need to get our committees engaged I know we did have a lot of work with our board retreats that we had preparing for our joint meeting with city council. So I give us some ass for that, but now I'd like us to get some effort and focus on this again. Let's start with the investment committee that does and has been meeting regularly, chair gree Artie.

L

You know we did discuss the asset allocation and that was quite a robust discussion, as it's overflowed here today still so that was one item members of discussion, the other was we were going to move the IC meetings every other month, so trustee menon, you came just in time, it'll be every other month from now on, starting this August, but we did say that, in order to maintain the transparency of what's going on in between the every other month meeting you know we would like to have some sort of monthly kind of update by email.

L

Is fine, I think right now we're doing flash reports and maybe enhanced.

L

Ic dashboard.

L

So I think that's it.

A

Any other comments, questions about I, see I just want to echo the comments and reiterate. I've, probably said this a few times before. I think it's important that as we delegate more authority responsibilities and reduce the frequency of meetings, that the transparency continues to be the same and so that communication on a monthly basis, I think, would be one good way to go in that direction. So I appreciate that.

M

You could talk about when you first got here we're at today and the changes that were made that something can be put in that scenario to the grand jury. I, really think it makes a difference because they only see what they see when they're here don't know how he got there, no matter this was that good or not. We made major change to get where we're at, and you also.

A

On at risk committee.

D

Point Vince, you know I I, first chaired this I think five or six years got chairman and there were three things on the plate: the administration system, thanks Barbara the risk which now I think it's fully incorporated at the investment creating board level and, of course, our traditional duty bought it. So if you want to assign something more of the Audit Committee and we've got banned, but because not good thanks, Barbara.

C

Let me add to that trustee lens. A couple of things I just want to that meeting is usually a joint meeting. Federated does not have quorum for that joint meeting, so we're gonna. Take the Audit Committee issues to the actual board meeting that day, so we're just going to suggest to keep the meeting after with police and fire to have our audit committee right after the the Fed bore me.

D

C

No, it's no. We are mad. Actually, as a same question man if you're listening, I was going to I was going to ask Council because it's that's a regular Fed board meeting, so I'm used to dealing with joint committee meetings, but I'm not really sure how you actually introduce some time in the meeting. Another community for another board to a regular bore me.

O

There actually are provisions in the Brown Act about attending a public meeting of another agency and I. Don't I can't quote them to you, but I think you can sit there, but your I don't think you can deliberate. Okay,.

C

C

So because of that, which is what I was thinking, but only from experience, I have no knowledge sitting, no legal known, which I have a lot of knowledge, but not legal I figured. It was better just to keep up our regular on a committee meeting yeah after the the Fed okay. The other thing is we're going to have an iodine atom meeting which I'm very excited about. We have a brand new internal audit Charter an internal audit plan. I am very impressed, so I think you're gonna be really happy with the earth.

C

As you know, we had a senior leader that we hired three years ago, but that position has been used or was used for the about three years of the project for the overpayment to members for the pensionable earnings project. So now we are finally able to kick off what we intended many years ago, which it was an actual internal audit and function so I'm looking forward to it. That's going to be discussed as your meeting as well.

A

Governance Committee is.

D

A

Governance Committee Chair Votto is not here noticing that it's been almost 10 months since this committee has met. I know that chair ERT, when you chaired that committee chair creer T trustee gree Artie when you chaired that committee had put together a work plan. Yeah and I would encourage at that September 5th meeting to have that on the agenda.

A

It it had laid out things to be done, sort of on a quarterly basis of reviews of policies and I'm, a little fearful that maybe we've fallen behind the curve on a review of that stuff.

A

So if we could make sure that we have an update out there next board meeting on how that is going, I'd appreciate that.

L

A

I, just don't want to rely upon the consultant to run the meeting for us. I want the chairs to be able to be responsible to.

L

A

Disability committee sure sent us.

A

A

Speaking of committees that haven't met a noel joint personnel, is one of them rely upon the fact that it's joint- it's not just police and fire, but nonetheless, I intend to move that committee forward with some important projects. I know that Roberto is very interested in us having meetings scheduled on a monthly basis between now and year, end to get through a lot of that body of work. So we will have an update for you coming up. Our next meeting is on Tuesday.

A

Proposed agenda items I actually have one I'm, just gonna mention it here doesn't need to be started immediately, but it's my understanding that federated is already going to be doing a bit of work on this. So maybe this time we ride their coattails and that has to do with tier 1 tier 2. We've talked about this for a while. It's got to become a priority.

A

Now it's less important for us, as opposed to federated, which has much larger numbers in there tier 2 plan, but I think it's important that we first start with looking at the actuarial side of things. What are the differences of the two tiers and looking at it from a membership perspective, those that are active or that in pay status? What are the leverage ratios of those plans? Verse? You know verses one another, and then we can move from understanding that to moving on to discount rate discussions asset allocation discussions.

A

It just seems to me that when we talk about how different San Jose is than other systems within San Jose, we have tiers that are very different and they should probably be managed in a different manner. We've been talking about this for a while and I think it starts. It needs to move up the priority list, so that will be a proposed future agenda. Item I believe federated has a retreat coming in September, if I'm not mistaken. So maybe this flows on our agenda after they've completed their retreat.

A

It might not end up in our board meeting in September, but maybe in October. We can follow up on some of network and initially look at that with Chiron. That's one of the items that I have any other proposed items.

A

C

But I do, as you recall, trusty Lance I mentioned that Matt say hello and he just texted me and I explained to him Matt. That council will look at what the dozen option to have the Audit Committee into wine at some point, with the regular board meeting. So once you find out, if that's a possibility, I will let the committee know too, so they can tell whether they should be here earlier or later.

O

You can actually notice it as the committee meeting that might be a way to get around any problems. Okay,.

C

So you just let me know what happened. The difference will be to be either to be here instead of 11:30 11 o'clock. That's.

G

C

D

C

Because we we do it at the end of the meeting and maybe Matt is listening again and maybe we can just push it forward earlier whatever. But we will cross that which we.

D

Saw I just have a check saying: okay,.

O

B

O

Been to a police and fire meeting where drew didn't, say the word beer.

A

Okay, public comment: I thought Matt would come running down.

B

E

Sorry, I didn't bring this up during the civil grand jury item, but I am hoping that the city and the board's can coordinate on responses, noting that they will be separate responses, but just so we can be on the same page about who is responding to what and you know what our responses are. You know what I think.

A

That's you know: reverse', okay, not a problem. Okay,.

E

Thank you. We didn't want to didn't want to bring that up. Yeah great, thank you.

D

A