[3:20] Good morning, everyone. The San Diego County Employees Retirement Association Board of Retirement Meeting will please come to order. And could we please have a roll call? Certainly. Mr. Vartman.

[3:50] I would please stand.

[3:50] We'll begin then with the Pledge of Allegiance.

[3:54] A Pledge of Allegiance to the flag of the United States and America.

[3:59] And to the Republic for which stands one nation under God, indivisible, with liberty and justice for all.

[4:12] Public communication?

[4:14] Lane, are there any individuals that wish to speak under public communications?

[4:18] We have no non-agenda items.

[4:19] Thank you.

[4:21] Item number four is approval of the April 20th, 2017 board meeting minutes, changes, corrections.

[4:29] Motion to approve.

[4:30] So motion to approve the minutes is stated.

[4:33] There are two or three seconds.

[4:35] Please vote.

[4:46] Motion carries unanimously unanimously with all members present.

[4:51] Moving right on to introductory remarks, David.

[4:54] Good morning, everybody.

[4:55] But as the role call indicated, Trustee Myers has traveled today and unable to make

[4:59] the meeting.

[5:00] So Trustee Tim Hancock is sitting in his place.

[5:03] Like last month, the meeting is really mostly twofold.

[5:08] Disability consent calendar at the start, bookended by the Steve Secks Hour and the investment

[5:13] team with a number of really excellent agenda items, sandwiched between staff reports and

[5:20] a couple of ministerial policy matters.

[5:23] So the meeting should move much as last month.

[5:27] Thank you.

[5:29] We'll move on to the consent calendar.

[5:34] 6A.

[5:36] Elaine, are there items public we just have pulled?

[5:41] Yes, we are staff as pulled item number 6A next

[5:47] month.

[5:50] 6, 8, 6, 8, 6, 8, 10.

[5:55] We have speaker slips on the motion, so they will be pulled for the speakers.

[6:00] Again, 6, 3, 6 and 10.

[6:03] 6 and 10.

[6:04] Thank you.

[6:05] Mr. Divine, Ms. Guadalupe and Mr. San Vicente.

[6:08] Item 9 is off the agenda for today.

[6:11] Correct.

[6:12] So you're voting on items 6.

[6:16] 1, 2, 4, 5, 7, 8, 11.

[6:19] Correct.

[6:20] And 8.

[6:21] And 8.

[6:21] Thank you.

[6:22] Motion.

[6:23] Second.

[6:23] The motion is second to approve items.

[6:25] 1, 2, 4, 5, 7, 8, 11 and B.

[6:31] Please vote.

[6:32] Oh.

[6:33] You've got David.

[6:35] How do we get your name up here?

[6:37] You're not David and Iris.

[6:38] Can we?

[6:39] Tim?

[6:41] I worked for years with Curtis Gillis, item number five.

[6:48] I never directly supervise them, but I just want to let you know that we have worked

[6:53] together.

[6:54] It doesn't affect my ability to vote on the issue, but I also want to just commend, he's

[7:00] a 25 plus year employee for the county.

[7:04] He worked at our camps, working with a lot of troubled youth in the county of San Diego.

[7:08] I want to commend his service for the county's endiego, so.

[7:13] Thank you, Tim.

[7:15] With that, there is a motion in a second for the consent agenda, please vote.

[7:26] Motion carries unanimously with all members present.

[7:30] Move on to A3.

[7:34] Yes, and we have a speaker slip from Patrick Devon.

[7:38] Can we please have staff report, please?

[7:40] First, and then we'll go to applicant.

[7:47] Good morning, Madam Chair, Trustee's, Mario Carrasis, and Chief Legal Officer for SD Sarah.

[7:52] Mr. Patrick Devine is a deputy sheriff who's applied for a service-connected disability retirement to a low-back condition.

[8:01] That Mr. Devine tributes to Kimaliv trauma as well as a injury that occurred in February of 2014.

[8:07] There is no question regarding his permanent incapacity.

[8:11] All evaluating physicians agree that Mr. Divine is permanently incapacitated and unable

[8:18] to return to work as a deputy sheriff.

[8:21] The issue relies in causation, so there's a conflict in the evidence in regards to causation.

[8:28] Now he was evaluated by Dr. Tyab, S.D. Saras expert, and S.D. Saras expert attributes Mr.

[8:36] to advise injury to the generative disease, not to the February 2014 injury.

[8:44] Mr. Devine was also evaluated by two workers' compensation doctors who both apine that it

[8:50] was work-related.

[8:51] So, that's where we have the conflict.

[8:54] We have S.C. Sanders expert that says it's a generative condition and then we have two workers'

[8:58] compensation doctors who say that it is work-related.

[9:02] Because of this conflict, staff is compelled to recommend denying the service connection,

[9:08] but granting a non-service connected disability retirement.

[9:12] Of course, if the board votes to deny the service connection, Mr. Devine would be afforded

[9:17] the opportunity to request a hearing denoval, provides for intestine money, provide additional

[9:22] medical evidence, and bring any witnesses that he would like to have.

[9:26] Then the board would be able to revisit their decision after considering the hearing officer's findings and recommendations.

[9:33] Standing by for any other questions you might have.

[9:35] Thank you. Any questions at this point?

[9:38] We'll move on to the speaker.

[9:41] Welcome to the mail on behalf of Mr. Devine.

[9:43] Thank you.

[9:46] Good morning.

[9:48] Good morning, members of the board.

[9:50] Again, I would like to introduce Julia Domell of O'Marren Hampton on behalf of Patrick Devine.

[9:54] We're asking the Board to grant Mr. Devine a service-connected disability retirement based

[9:59] on substantial evidence which meets the standard for causation under the government code,

[10:04] and that's Section 31720.

[10:07] As has been noted, there's total agreement, all positions agree Mr. Devine is permanently

[10:13] incapacitated for a performance of his duties as a deputy sheriff and detention's court

[10:18] services.

[10:19] On the issue of causation, two reputable credible doctors, Dr. Larry Dodge and Dr. Charles

[10:27] Roland, provide the greater weight of substantial medical evidence supporting industrial causation.

[10:32] I think it's important to have an understanding of the legal standard and why there really

[10:38] is no reason to send this to a hearing.

[10:41] The California Supreme Court and Bowen V. Board of Retirement of the County of Los Angeles

[10:45] was interpreted, this is a substantial contribution test of 31720 as requiring, and I quote,

[10:53] substantial medical evidence of a real and measurable connection between the disability

[10:57] and employment."

[11:01] The Bowen Court, relying in part on prior case law, and that case law was depue the Board

[11:07] of Retirement, defined the appropriate test for industrial causation under the Government

[11:12] government code related to county retirements, and I'm going to quote from the Bowen case,

[11:19] while the causal connection between the job stress and the disability may be a small part

[11:25] of the causal factors, it must nevertheless be real and measurable. There must be substantial

[11:30] evidence of some connection between disability and the job. And this is important because

[11:36] because this is the legal test a hearing officer would have to consider.

[11:41] Bowen expressly rejected the argument that the substantial contribution test of Section

[11:47] 31720, the interpreted to mean more than 50% industrial causation, noting pension legislation

[11:55] must be liberally construed.

[11:57] Here the Bowen test is met based on the reporting of both Dr. Stodge and Dr. Rowlan.

[12:03] Neither Dr. Dodge nor Dr. Roland ignore the fact that the MRI and that was in 2015 shows evidence of degenerative changes.

[12:14] That was pre-exist the injury, the initial injury of February 2014.

[12:20] However, again, for workers' compensation purposes, both Dr. Dodge and Dr. Roland clearly acknowledging the evidence of pre-existing degenerative changes,

[12:32] They apportion only a small percentage of the disability to the non-industrial cause.

[12:38] And it recognizes Mr. Devine's 17 years of employment as a deputy with no back complaints

[12:46] until February 2014, when he experienced a specific incident triggering severe back pain.

[12:54] Dr. Rowland, Dr. Dodge's report, it's noted on page 4, it's his November 30, 2016 report.

[13:03] He apportions 5% of Mr. Devine's undisputed in capacity to the pre-existing degenerative

[13:11] process.

[13:12] Dr. Rowland, who is the qualified medical examiner for workers' compensation purposes in his

[13:19] This report in its dated January 14, 2017, page 17, notes that there's pre-existing degenerative

[13:27] arthritis and therefore he apportions only 10 percent of Mr. Devine's, again, and there's

[13:35] no dispute on his incapacity to non-industrial causes.

[13:40] Significantly, both doctors Dodge and Dr. Roland, as well as Dr. Taya, by the way, acknowledge

[13:47] that there was an MRI done in June of 2015 and it demonstrates a bulging disc.

[13:55] Dr. Taya acknowledges this in his findings.

[13:59] Dr. Taya downplays the significance of the February 2014 event.

[14:06] But he ignores entirely the contribution of Mr. Divine's work duties going forward

[14:12] from February 2014 through May of 2015, which is the cumulative trauma period.

[14:19] His job duties changed.

[14:20] He was engaged in prolonged standing, which just lit up his back problems.

[14:27] I think most significantly, Dr. Tab, he offers no explanation as to why any pre-existing

[14:34] degenerative changes are the sole cause of incapacity in an individual who's worked for 17 years

[14:40] without complaints prior to February 2014.

[14:44] Additionally, Dr. Taya describes the degenerative changes as, quote, minimal, and, quote, not

[14:53] atypical for a man of his age when he's 42 years old.

[14:58] And the end.

[15:00] It has, with the history of obesity, and Mr. Divine may be carrying up a few extra pounds

[15:06] by lay standards. I don't believe we'd identify him as obese. That aside, again, and it's acknowledged

[15:15] by Dr. Tyab, Mr. Divine had no back complaints prior to February 14. It simply isn't credible

[15:22] from a medical standpoint or from a lay standpoint to attribute his, again, undisputed permanent

[15:30] in capacity to the degenerative changes, which are, again, a Dr. Tyab's words, quote,

[15:36] not atypical for a 42-year-old. I don't think any of us would consider normal degenerative

[15:45] process in a 42-year-old should render somebody permanently incapacitated from work. There

[15:51] has to be another reason, and the other reason seems to be that 17 years of employment,

[15:59] the events of February 2014, the continuing work duties through May of 2015, and the fact

[16:08] that there were no complaints prior to 2014, the MRI evidence of the bulging disk, all

[16:17] All of that points to, there's something other than simply at 42-year-old with normal

[16:25] age-related degenerative processes being unable to work.

[16:29] The evidence is substantial.

[16:33] It meets the Bowen test and I don't know if the board is completely familiar with the Bowen

[16:39] test.

[16:40] It's as I've described, and it doesn't require a total that the sole cause of incapacity, the identified as work related.

[16:52] You have two credible doctors who find otherwise. Dr. Tyad is the outlier. His evidence is not credible.

[17:00] And it's not substantial evidence on which to deny the service-connected disability retirement.

[17:07] Thank you. Thank you. Is there some indication somewhere on the speakers of of the time when their time is up?

[17:20] Indication when when someone is speaking yeah and the amount of time is

[17:30] Three minutes yes and at the discretion the chair can provide more. Okay so we'll

[17:38] I just we want to make sure that we get all the information in front of us, but I also want to make sure that you're not repeating.

[17:46] You know, we're a couple of things that were repetitious in your testimony, but thank you for that. Are there any questions?

[17:55] Mr. Devines here is saying no questions. What's your pleasure?

[18:01] Thank you. Were you offering Mr. Devine? Where is that where you're saying?

[18:04] I know I'm just alerting he is present if the board would have any questions for him.

[18:08] Thank you.

[18:09] We'll see if anyone has any questions.

[18:12] I mean, I mean, seeing none,

[18:16] Samantha, Council, I believe that you do have compelling evidence

[18:20] on behalf of your client, however, it's been at least my practice where we have these conflicts

[18:25] of evidence to refer it, or think it's best suited before hearing for the hearing officer

[18:31] to decide the evidence.

[18:33] And so with that information, that's why I would pursue or move to deny the service

[18:39] connected and have you pursue a denobo hearing, so that's your client's pleasure.

[18:44] So it would be the administrative recommendation?

[18:47] Yes.

[18:48] Is there a second?

[18:49] Yes.

[18:52] There's a second.

[18:55] Skip?

[18:57] It's under discussion.

[19:00] I have a bit of a concern about the way the injury occurred.

[19:04] But, you know, sort of having been there, I can understand how the injury occurred.

[19:12] I also have a concern about Dr. Tai of saying one thing and then making a conclusion that

[19:23] this minimal impact of the generative changes is the main cause of why it should be denied

[19:32] as far as the causation. I'm inclined to go along with the Dr. Dodge and Dr.

[19:40] Rowland. I believe that everything else that's on the table is in agreement

[19:48] except for that one small issue. I don't think there's going to be a lot of

[19:53] differences should it go to hearing and I'll be voting no on the motion.

[20:00] Any other comments under discussion?

[20:04] Just to keep in mind, this is an administrative recommendation.

[20:07] It doesn't mean ultimately the service-connected disability retirement would be denied, that

[20:13] it will, you have the opportunity to go to hearing officer, as you know.

[20:17] So please vote on the motion.

[20:27] Motion carries with Mr. Murphy and Mr. Hancock voting, no.

[20:32] Moving on to item 6,

[20:38] staff report, first please.

[20:46] Madam Chair, Trustee Smith-Gwadalupe is a sheriff's detention nurse who filed for a service

[20:52] connected disability retirement due to a neck, right of rickstermity and a back condition.

[20:58] Staff recommends denying this application for service connected disability retirement.

[21:04] There is a agreement amongst the evaluating physicians that she was injured and that injury

[21:11] was work related.

[21:12] So no dispute in regards to causation.

[21:15] The dispute lies in the permanent incapacity.

[21:19] In regards to permanent incapacity, the evaluating physicians disagree whether her right or

[21:26] for extremity condition is permanent.

[21:29] There's no question that in her current state, she's unable to go to work, however, the

[21:34] good news is that there's treatment available, there's treatment available that would allow

[21:39] Ms. Waldo-Lupin to return back to work.

[21:42] She was evaluated by three physicians, two S.T. Sarah experts, an orthopedic surgeon, as

[21:49] well as a neurologist, both S.T. Sarah experts opined that there was treatment with a minimal

[21:54] risk that would allow Ms. Wallerlupitt to return back to work.

[21:58] Now the workers' compensation doctor, the treating physician,

[22:02] opined that she was permanent, did not address this potential treatment.

[22:07] So the bottom line, again, is that we have this conflict in the evidence and staff is recommending

[22:12] denying the application.

[22:15] If Ms. Wallerlupitt would request a hearing to know of him, she would be afforded that

[22:20] opportunity, present additional evidence, maybe seek treatment, and then come back.

[22:24] with additional medical evidence.

[22:27] But at this point, the staff is compelled to recommend denying it.

[22:31] Thank you.

[22:32] Any questions or staff?

[22:34] We have a speaker on this item also.

[22:36] We do.

[22:37] The speaker is Alan Guadalupe.

[22:40] Ms. Guadalupe?

[22:56] Good morning.

[22:57] Good morning, everybody.

[23:08] I would like to thank everybody for the chance

[23:11] to be able to attend this meeting.

[23:14] Could you speak a little closer to the microphone, and before you begin, would you please give

[23:21] your name to the record?

[23:23] My name is Ellen Guadalupe.

[23:28] What amazes me the most, reading through the packet of doctor visits, documentations,

[23:34] and treatments provided me for review?

[23:37] I have a number of years I work through despite my discomfort, just to be able to hold onto

[23:43] my job.

[23:45] I worked my best without question, accepted whatever task that fell into my lap when nobody

[23:51] else didn't have the time to do it just because my work ethics told me that that's what

[23:56] a nurse or good employee should do.

[23:59] The hope that the next day would be better kept me going will be the effect of my worsening

[24:04] condition.

[24:06] And fortunately it took me years to realize the problem now I'm paying for it.

[24:13] Under the recommended findings that says burden-proof, I have the latest notes from Dr.

[24:22] Provide.

[24:23] I saw him last April 19.

[24:26] I don't believe that this is in your record.

[24:28] And in here he reiterated 100% causation to the injury as 100% related to my job.

[24:45] And also I have a supplemental report here from Dr. Holland as requested by Workers

[24:53] com. Again, citing with Dr. Previde, that my condition is permanent and stationary. Also,

[25:04] I have a note here from Dr. Lane. He is the doctor that my attorney Tali requested

[25:16] it for me to see through workers' compensation.

[25:20] And all of these people, all of these doctors, they agree that I am permanent and stationary

[25:27] and, like I said, doctor provides saying that it is 100% of work related injury.

[25:40] The other thing is the only profession I'm confident, the same I'm good at.

[25:44] But I went through a difficult education just to be able to finish it, I trained and got

[25:49] experience for it.

[25:51] But if medical services could no longer accommodate my restrictions, who will, where do I go?

[25:58] I think it's obvious that my nursing career is done.

[26:03] I respected the professionals who treated me and the findings they have diligently worked

[26:08] on however this could not accurately define the struggles and effort I have just to be able

[26:14] to accomplish simple activities that in the past I took for granted to accomplish.

[26:20] My problem started with my hand so

[26:25] my issue is not just my shoulder, my neck and my back.

[26:33] These are all just secondary and this is just a long-term injury I got because of the problem

[26:40] with my hand, the functioning of my hand.

[26:43] And I have to, when I use my right hand, I have to accommodate and all the other muscles

[26:49] in my back, my neck, you know, that's why they get through years of working through it.

[27:03] And I believe that the problem when my hands start was exacerbated by poor economic

[27:09] center for my workplace and the rigorous need for prolonged data entry and computer use.

[27:15] Let me know if I need to submit pictures of those workstations, you know, just to show

[27:21] you that it's not all the time that we have an ideal setting where to, you know, to

[27:26] work on.

[27:28] My question is what other job can I do and how much longer can I maintain function and

[27:34] use my right hand without causing more damage?

[27:38] The stress of uncertainty was going to happen to my job, it's killing me every day.

[27:45] You mentioned something about Kaiser giving me that treatment option.

[27:51] At the time when I went to Kaiser I was so desperate because I wasn't too much pain

[27:56] and I was thinking that it could probably be neurologic.

[28:01] And then they did a series of tests, MRIs, they did, you know, and then they told me that

[28:08] actually there was nothing wrong and that I might have dysphocalistonia.

[28:13] At the time, it was not even mentioned to me or it was not really explained to me that

[28:19] the botox injection that they are recommending right now was the right treatment for my condition.

[28:27] But it was just a trial of medication that would help.

[28:31] So there was not even a guarantee that it would help.

[28:35] And for right now I already have a lot of medical issues taking medication and adding one

[28:43] more medication that I'm not even sure would work for me was not an option at that time.

[28:51] So, for this reason, I rest my case into your hands, and again, I would like.

[29:01] And for one thing, I've heard I'm reading through the packet.

[29:07] We're putting too much weight on the notes from Kaiser.

[29:11] But unfortunately at a time when I was put on leave without pay, I have bills to pay.

[29:17] I went to Kaiser for them to sign, to sign that disability form and they would not even sign it because they didn't do the whole treatment for me and now this is what is causing the conflict with my situation here.

[29:39] Thank you very much. Thank you. Don't go away. Let me see if there are any questions from board members of you.

[29:48] I just you indicated you named two other reports that you had and I'm sorry I don't remember the names right now, but I don't recall.

[30:00] Seeing those names as I read the material, are those new reports that you've obtained? New

[30:08] or reports? Yes, I was seen by Dr.

[30:14] Previte, just like April 19. I could give you a copy of

[30:19] that. No, I have the ones from Dr. Previte. Yeah, Dr. Previte, this is the latest visit I have

[30:25] with him it was on that was in April 19. I think the last records that you have was like before

[30:36] this date. Okay. And then also I have a note from Dr. Lane. I saw him like April 21st and then

[30:56] Sarah's Council. Were those documents in the packet? I just don't recall reading those

[31:02] names. Maybe I did. Trustee Murphy, those documents have were not presented to us, so we just

[31:09] learned of these documents today. Okay. We did not consider these. Thank you.

[31:14] I'm sorry, the one Dr. Privat, I just received it last Friday. Okay, that answers my question.

[31:21] That was the exact same question that I had that Trustee Murphy just brought up about these.

[31:25] You referenced in your opening comments the two supplemental pieces of information and also the the note or the letter and

[31:33] Trustee Murphy has addressed it. So thank you

[31:36] So Elaine, what would be our options in this case?

[31:38] I mean there's some information that was

[31:42] Presented verbally today that had not been considered by staff

[31:46] Is there an option to refer this back to staff for further administrative review or just move it on to hearing with a denial

[31:55] you do have both of those options. She can present this new evidence at

[31:59] hearing and deal with it there in front of the hearing officer. I will say that

[32:04] if staff refuse that new evidence and comes to a different conclusion,

[32:09] we would bring it back to you with a different recommendation before going to

[32:13] the hearing.

[32:15] Okay. What's your pleasure? Madam Chairman, I would move that we

[32:19] refer this matter back to staff and ask the applicant to provide all

[32:23] All information that she has in her possession to staff for consideration.

[32:28] It's a motion and a second, Tim.

[32:33] I would have the opposite recommendation that we deny.

[32:37] I don't know that any of this information that she's describing here is going to have any, in fact, I get that.

[32:50] But I do think it's spending more of her time.

[32:56] I think a hearing officer is going to go to hearing officer.

[33:00] OK.

[33:01] Mr. and the other comments?

[33:03] Yeah, Elaine.

[33:04] Yes, I would make a comment and response

[33:07] to Mr. Hancock, which is referring it directly

[33:10] to the hearing officer who will avoid further delay

[33:13] on the part of finally wrapping this up

[33:18] because it can be dealt with by the hearing officer or if staff looks at it and does decide

[33:24] that it changes their recommendation into a grant, we can always bring it back.

[33:29] But sending it back for to staff again just delays it by another month or so.

[33:35] So even if we voted the staff recommendation and she requested a hearing officer of staff

[33:42] found the additional information, change their position, you'd bring it back to us?

[33:47] Correct. We wouldn't go through a hearing unnecessarily.

[33:53] Okay, so the motion then could be the staff recommendation pending staff review of the

[34:01] additional information and if staff recommendation changes, it would come back to us.

[34:06] Correct.

[34:12] What I heard Council say is that if the board approves the staff recommendation,

[34:20] which is to deny the application for a service-connected disability, if we did that, and then the applicant

[34:34] requested a hearing and then as a part of the motion we ask staff to review the

[34:42] additional information that was provided to us today and if staff

[34:46] recommendation changes as a result of that staff would bring it back it would

[34:50] not go to a hearing. It would yes it would expedite the process and it would

[34:58] would save her time.

[35:00] By the same token, if it should be no difference,

[35:04] then she needs to go before the administrative law judge,

[35:08] and as council Reagan has pointed out,

[35:10] that would prolong the case.

[35:16] So they're...

[35:17] Well, if we took action today,

[35:19] as the staff is recommending, actually,

[35:22] as I understand it, it would expedite the process.

[35:26] Yes.

[35:27] It would expect, because it gives two options, it gives staff chance to take a look at the

[35:31] additional information, and to see if they change the recommendation at the same time

[35:35] doesn't have to come back to this board to go to hearing.

[35:39] If a hearing is deemed appropriate.

[35:41] We accept staff recommendation based on council's explanation and the chair's further explanation

[35:47] of a council's explanation.

[35:48] We do have a motion on the floor, so that, unless the maker of the motion.

[35:53] Yeah, I'll withdraw my motion in favor of Mr. Reformportman.

[35:59] Okay, so the first motion is withdrawn and, okay, Mr. Vortman's motion and Mark, I think Tim, you second.

[36:09] Okay, I just want to make a comment.

[36:11] Samantha, and if staff could revisit the weight that had did place on the Kaiser documentation, I think that that's something that should be reviewed.

[36:18] Thank you.

[36:20] Certainly, yes, we will revisit that and as Ms. Reagan stated, we're just trying to get to the right answer, certainly if she provides evidence that it would change staff's recommendation, we would bring that before the board and not necessarily go to a hearing.

[36:34] Thank you.

[36:36] And if this motion passes, would staff please explain to Ms. Guadalupe what we just did?

[36:43] Certainly, Madam Chair, we have a disability specialist standing by.

[36:45] All right.

[36:45] Thank you.

[36:46] Okay.

[36:47] With that, let's vote on the motion.

[36:49] Please vote.

[36:56] Motion carries unanimously with all members present.

[36:59] So we'll move on then to our last item that's pulled.

[37:02] And that would be item 10.

[37:05] Record of San Vicente.

[37:06] Could we have staff report, please?

[37:08] First.

[37:11] Madam Chair, Trustee Smith, Mr. San Vicente is a human service specialist who is filed for a service-connected

[37:17] disability retirement based on a neck and right shoulder condition.

[37:21] Evidence is clear in that Mr. Cervincent is permanently

[37:25] incapacitated, all evaluating physicians agree on that.

[37:29] The issue is again with causation.

[37:31] In the conflict in the evidence and causation is in regards

[37:35] to his neck and his shoulder injury.

[37:37] He was evaluated by two SD Sarah experts

[37:40] in orthopedic surgeon dealing specifically with a spine,

[37:43] a spine specialist, Dr. Taiyem, and Dr. Peterson,

[37:47] Dr. Peterson at orthopedic surgeon as well.

[37:49] for the shoulder. Both experts concluded that his injuries were not

[37:55] work related in regards to the shoulder. Dr. Peterson opined that the duties

[38:00] that a human service specialist is charged with would not have resulted in

[38:06] those shoulder injuries that he's exhibiting. Dr. Tyub also lifted all the

[38:11] objective evidence, the MRI, and Dr. Tyub opined that his spine condition is

[38:16] degenerative in nature. And in a specific, it's important to note that he specifically stated,

[38:22] absent his work with the county, he would still be permanently incapacitated. So regardless

[38:27] of what job he did, he would be permanently incapacitated according to Dr. Tyre. Now Dr.

[38:33] Thompson on the other side, the workers' compensation doctor, again, evaluated Mr. Samson's intake,

[38:39] and accordance with the worker's compensation law, different than our county disability law.

[38:44] He determined that it was work related.

[38:47] The bottom line here is that we have another conflict in the evidence between fore causation

[38:52] and staff is recommending denying the service connection, but granting a non-service connected

[38:58] disability retirement.

[38:59] Again, affording the applicant a right to request a hearing to no vote.

[39:03] Thank you.

[39:04] Any questions of staff before we go to the speaker?

[39:13] Okay.

[39:13] Good

[39:19] morning, sir.

[39:20] Good morning.

[39:21] My name is Ricardo Sambicente.

[39:23] I started working with the county on 1990.

[39:27] And back then, there was no computers, no ergonomic desk.

[39:33] We are required to do manual entries at the time.

[39:39] Review big caseloads, carry with us to the interview rooms,

[39:45] having our code books to make proper determination for families in need, which I love to do for 25 years.

[39:55] I've become having problems with my neck and shoulder back in 2011.

[40:04] I have one surgery which released pressure of two cervical C5 and C6.

[40:14] And I was getting a little bit better but not 100% I went back and I got a second surgery

[40:23] which pinched one of my nerves and that caused great pain and I've been suffering with

[40:32] that pain being out of work for 19 months and have a release of the pressure on my nerve

[40:38] on a third surgery seen by workmen's come doctor result in not able to perform the job

[40:48] that I love for 25 years. I was not ready to retire, but I was recommend to do so due

[40:56] to the fact that I have to take narcotics every day, and I have to deal with issues on my

[41:02] Islamic and all related limited my activities that I was able to do before. I have no experience

[41:12] on legal terms other than the ones that I do when I was a human service specialist

[41:22] doing everything with my heart for the people they need.

[41:28] Right now there is not much that

[41:30] But I ask, it's not going to be any increase on my retirement benefits.

[41:35] With my 25 or 24, 9 months and so, because I was a year and 9 months unable to work, there

[41:46] was no increase on my retirement benefit.

[41:50] It just the matter of, acknowledge that it was service-connect disability, that give me

[41:56] opportunity under that base to seek for better opportunities, having my income non-taxable

[42:06] in the 100%, which put me on the bracket to look for buying a house or doing something

[42:13] else. I'm grateful with the retirement that I received because it's a great opportunity

[42:21] and I'm very grateful to the board and San Diego Zera for the benefits that I'm getting actually.

[42:29] I'm just appeal to the board to consider that based on the San Diego experts,

[42:36] when they try to figure out the nature of my injury, based on today's days,

[42:42] it's not a clear picture of what's happening before when we start working with a lot of challenges

[42:49] just in our work stations, going to the interviews at their rooms with no

[42:56] paperwork around, we have to copy everything. Now we have smartphones and you

[43:02] guys don't need to bring much of the minutes of what happened, but not back

[43:08] then and I'm pretty sure that I see faces here, Mr. Jacob representing us for so

[43:14] along. And I'm appealing to that to grant my service

[43:21] connect disability retirement, which not impact in any way the benefits that I received,

[43:27] but allowing me to get a better opportunity in life. Thank you.

[43:32] Thank you. You understand, Mr. Sam Sinney, don't go away. There may be questions of board members of you,

[43:39] But even if we do act on the administrative recommendation before us, it doesn't necessarily mean the end result may be a denial.

[43:50] It just means that from what staff said, there's conflicting evidence in your case once again, and the hearing officer is the appropriate venue to resolve that conflict.

[44:02] Are there any questions?

[44:04] I want to thank you for your time and service to the County of San Diego.

[44:09] I think one of the statements that you made in your comments was, it's not a clear picture

[44:14] of the times of change and things that you did before you do differently now.

[44:19] And I think it's an accurate statement of, there is a conflict.

[44:23] There is a conflict in the evidence of what caused your injury.

[44:28] And it's exactly why it needs to go to a hearing officer and to hopefully resolve that conflict.

[44:37] So unfortunately in my eyes, I don't think that I could vote to resolve it today, although I think going to a hearing officer,

[44:46] hopefully it can come to a resolution at that level.

[44:50] But I do thank you. I think you've done a fantastic job for the county. I appreciate it.

[44:56] Thank you.

[44:57] That will be a motion for me to

[45:00] To support the staff's recommendation. Okay, there's a second.

[45:04] Mr. Hancock, point you're right on. Bob. Before we vote, I just wanted to also thank you for your service to the accounting San Diego. It should be noted. I work in the exact same job classification as Mr. San Vicente. I do not feel that that will hinder my decision in any way, but it should be noted. Were you there in 1990? I was not there in 1990 and I agree with Mr. Hancock.

[45:29] and Mr. San Vicente's assessment.

[45:32] Yeah, thanks for different back then.

[45:35] I remember that.

[45:35] I think Skip might do about others on this board,

[45:39] but yes, things have changed.

[45:40] So with that, I see no other speakers, please vote.

[45:56] All members voting aye.

[45:58] To support the staff recommendation

[46:00] and hopefully you will apply to have a hearing

[46:03] and the issue and the conflicts will be resolved there.

[46:07] So, thank you for your testimony.

[46:14] Moving on to staff reports, we will first go to our chief executive officer, Mr.

[46:25] Westcope.

[46:26] Thank you.

[46:28] The first paragraph in my board report talks about board election results.

[46:33] And before I talk about the winners, I just wanted to mention that I do a lot of speaking

[46:38] on corporate governance.

[46:40] And the bottom line is this, you can have all the policies, you can have all the procedures,

[46:44] you can have all the hoos.

[46:46] But the bottom line is that all resides with the personal integrity and intelligence of

[46:52] the people that are sitting in your chair.

[46:54] And we are extraordinarily fortunate to have the nine of you, Trustee Myers, who couldn't

[47:02] be here today.

[47:02] And of course, alternate Jim Feeley, whom we will recognize next month as he retires from

[47:08] the board.

[47:08] to really have, I think, about as collegial and intelligent

[47:13] and well-trained group of people that I've never worked for.

[47:17] I think we'd all agree with that.

[47:19] Yes, so we'll take a vote on that.

[47:21] Now, with respect to that, as you know, Samantha was elected

[47:28] in the second seat, pictures nice.

[47:30] Now, I don't know if any of you have read her form 700 or not.

[47:34] She does have outside income.

[47:36] She is Haley Dumpfey on Modern Family, so don't laugh yet, Skip.

[47:47] So Samantha, we appreciate your running and your election.

[47:53] No, and Skip has been board chair 12 terms served over 20 years starting in 1983 with the board.

[48:00] And he too occasionally has a cameo.

[48:04] And it's good, isn't it?

[48:06] Yes, no.

[48:07] Thank you, Tom Williams.

[48:08] Yes.

[48:09] Tom was sweating that.

[48:10] It was Tom's idea.

[48:12] And Susan?

[48:15] Yes.

[48:16] Oh, absolutely.

[48:17] Without question.

[48:19] The sign of a good leader.

[48:20] Tom did it.

[48:22] And then Susan, you can relax.

[48:24] Because I don't know you well enough yet.

[48:26] So anyway.

[48:27] And Susan Mallet was elected to replace Jim.

[48:31] feeling of course Jim has big shoes and a big chair to fill and we couldn't be luckier

[48:35] than to have Susan occupy that position starting until I first.

[48:39] So we look forward to working with her.

[48:41] She's been through orientation with the staff already and the reaction is just as it was

[48:47] when Bob Goodchild went through his orientation which is staff is so excited at the intelligence

[48:52] and at the grasp of the mission and the understanding of what we do and the eagerness to learn and

[48:57] develop the skills necessary to be a great trustee and Susan will be a great alternate trustee.

[49:02] So with respect to that's the board elections and those terms for those three individuals

[49:06] start on July 1st. With respect continuing the theme of talent we've added some talent

[49:12] in the last month at SD Serenow. I want to introduce two of the folks to you today. The first

[49:16] is Melissa Martinez, who joined our HR department replacing Theresa Wood Cowsky, who retired

[49:21] married after 35 years with the county, 12, 10 and a half with us.

[49:25] So Melissa is here.

[49:28] I hope you're working with Farucia, you can't be bashful, there's come up.

[49:32] And then I also want to introduce Angela Carrera, who joined Greg Baish's group as an accountant.

[49:38] Angela has a accounting degree, a study to be a CPA, and the thing that went up, Angela,

[49:44] the thing that sold Greg on her, it made me nervous, is that in her spare time she enjoys

[49:48] calculus.

[49:51] We have really, really talented staff people, and I'm not kidding when I say they've already

[49:57] made a positive impact in what we do, and so we appreciate having them here.

[50:01] They're going to make this place even better than it is today, and we appreciate

[50:05] them moving.

[50:06] So, introducing to them.

[50:08] Welcome.

[50:13] Now, continuing the talent, the Steve Sacks ours, you know, is in my opinion the best CIO

[50:20] in the country.

[50:21] I hope Liza Krasoffee is not watching the tape over at City, but Steve's had a great

[50:26] month and he's had obviously a great tenure here in a great career.

[50:30] But Steve has recently published, sorry,

[50:38] there we go, two articles in publications were published

[50:42] just in the last couple of weeks.

[50:44] One as you can see in the Journal of Portfolio Management and the other in the Journal of

[50:49] to incredibly prestigious journals that are so prestigious,

[50:53] none of us can afford to subscribe to them.

[50:56] So Steve's work will be read by few,

[50:59] but those who read it will really enjoy it.

[51:03] No, but Steve is at the pinnacle of his career,

[51:05] at the pinnacle of his intellectual talents,

[51:07] and his contributions to our system

[51:10] really cannot be overstated.

[51:14] Now that he's going down from the pinnacle.

[51:16] Now that he has reached the pinnacle,

[51:18] There's a search under where you're speaking of that.

[51:21] Steve recently attended the Organization of Economic

[51:25] Cooperation and Development, the OECD meeting in Paris.

[51:30] And that is by invitation only to attend.

[51:33] But it is also by invitation only to speak.

[51:36] And in addition to attending, Steve was a speaker.

[51:39] And the OECD was formed in 1961.

[51:43] But it's a form of countries describing themselves

[51:45] committed to democracy and market economy,

[51:47] providing a platform to compare policy experiences, seeking answers to common problems, identifying

[51:53] good practices, and coordinating domestic and international policies of its members.

[51:58] This is a place that no one else in this room could get in the door, and I was impressed

[52:03] when Steve sent me a picture of their meeting room.

[52:06] And very impressive, and Greg Baish has been on it ever since because next month, we too

[52:12] will be sitting in a room as elegant as Steve was in but I don't mean to be a little bit

[52:22] Steve is really one and a million and we're awfully lucky to have him here.

[52:29] Now in addition to talent I want to call out Skip Murphy because as I mentioned a year ago

[52:36] So Skip is the chair of the regional law enforcement foundation that puts on the law enforcement

[52:43] memorial ceremony every year, and we just celebrated this on May 3rd.

[52:48] Skip was the master of ceremonies and a driving force behind it, and his public service is

[52:53] unparalleled.

[52:54] And the event for those of you, many of you were there simply is just one of the most poignant

[52:59] days in the County of San Diego, and it wouldn't be as well run and well recognized if Skip

[53:04] it wasn't involved as the chair.

[53:06] So Skip, we really hats off to you

[53:08] and everything you do for these citizens of San Diego

[53:10] and for those in law enforcement who risk their lives for us.

[53:14] Yes, excellent.

[53:15] So anyway, I wanted to recognize that.

[53:18] Then moving on, I wanted to talk about Zach Sickles

[53:21] and Duarte Brown who run our active and retired unit.

[53:25] One of the most important sentences in this lengthy boardbook

[53:28] is Jim Larry will talk about it in a few minutes

[53:31] is that in Jim's experience at SD Sarah,

[53:33] the most recent processing of benefits, which included three times the normal benefit processing

[53:39] because of the application of the COLA and the increase in the spike in retirements,

[53:43] is due to people thinking about what they do and making it better.

[53:46] In Zack and DeWatt, we do a lot of scanning here, documents into our systems have been thinking

[53:51] about it and have come up with process improvements that will eliminate the need to scan over 70,000

[53:57] documents a year into the system.

[53:59] and they've only focused on two or three or four of their own processes and they have

[54:03] another dozen or so to look at.

[54:05] So it's not inconceivable that we will be talking about a reduction in hundreds of

[54:10] thousands of pages of documents that won't have to be scanned into systems for improvements

[54:14] and the like.

[54:14] So this is what goes on days other than board meetings is we have really smart people thinking

[54:19] really hard about how to make this system the NyQuist of all systems.

[54:26] Speaking also of talent, my colleague, Jerry Fawfel, many of you know, is really extraordinary

[54:31] and has the ability to talk to members in the like and his communication on outreach

[54:35] has continued to really pay dividends for us and expand the SD Sarah Brands, so to speak,

[54:42] to more and more of our members.

[54:44] And then, as I mentioned, one of our members was hospitalized recently and couldn't be here

[54:48] to sign a document they needed and Jerry got us car immediately, drove down, got the document

[54:52] sign and came right back.

[54:53] So, that's the dedication to member service that is really in the organization, and Jerry,

[54:59] Merma, Gummary, and others live and breathe it every day, and Yvonne, Sanders, and the team

[55:03] in the member service center, as you see when you come in, do that eight hours a day,

[55:07] five days a week, throughout the year.

[55:09] It's very impressive.

[55:12] Then, occasionally, we do have fun, Greg Baish's group, and the IT group, on a Cinco de Mayo

[55:17] fundraiser, we raise money during the year for our holiday party, and so this is Mario

[55:22] after his third Marguerite is in the front left of that picture and he has recovered, I think, quite well.

[55:32] So, Cinco de Mayo was a lot of fun, and then we started as you know, a book club several years ago, and Jerry also moderates that,

[55:39] and this month's book I recommend to you is a quartet about the transition from the articles of Confederation of the Constitution in the United States.

[55:47] It's an incredibly easy read, and it is very powerful about the issues that were being

[55:52] discussed in the late 1700s, and many of those issues carry over to some of the issues

[55:57] we have today.

[55:58] So I recommend the book to you, if you like, a copy, let us know.

[56:01] But we have the highest participation rate of any of the book clubs so far.

[56:05] We have almost 100% participation of all employees who have asked for the book or reading

[56:08] the book and will participate in the book club.

[56:11] So I am very excited about that.

[56:14] Then Jim Larry, to my right, was an employee of the month for the great work he has done

[56:20] with his team.

[56:21] I couldn't be prouder of Jim and in the retired benefit unit, I've already mentioned

[56:25] them and what a great job they did and Jim will follow up on that and the disability unit.

[56:31] They were also employees of the month for the great work they do with respect to disabilities.

[56:38] Employee anniversaries, I was going to think that May is not a great hiring month because

[56:42] We only have three anniversaries in May, and they're all short-termers.

[56:45] I'm not going to mention Tom Williams' name anymore, thanks Tom.

[56:50] And little cartoon.

[56:51] But I also wanted to mention something because a couple of meetings ago,

[56:54] you know, I mentioned Zoe occasionally.

[56:56] And Dick Tarte gave me some trouble saying, David, you've been talking about Zoe for 10 years.

[57:00] You know, she must be 22, 23.

[57:02] By now, so why don't, you know, she obviously can't.

[57:04] So I just wanted to show you last weekend, Zoe, and I went to Denver to meet her brother

[57:09] and her brother's girlfriend, and Zoe ran in a half marathon.

[57:11] on. She's the one on the right. And so this is after the race finish, I was very proud

[57:17] of her because it was run at high altitude and she did a really fine job and finished

[57:22] this was her 10th half marathon. But as we were going to Denver, she had trouble grasping

[57:27] the concept of the mile high city and she did not understand where the moniker mile high

[57:32] came from. So I said, Zoey, the reason it's called the mile high city is unlike San Diego

[57:37] go at sea level. It's 5,280 feet, which is a mile above sea level, so that's why they

[57:43] call it the Mile High City. And so she took that under advisement. And after we finished

[57:48] the race as we were leaving in the car driving back downtown, she has an Instagram account.

[57:53] And so she published the picture because she's very proud of running and she loves her

[57:58] dad. And so she publishes it on her Instagram account. And all of a sudden, she started

[58:03] saying boy you know she has usually four or five followers and all of a sudden there were four and then

[58:08] there was thirty and then there was a hundred and then there was a and she couldn't understand

[58:12] that so she handed the phone to her brother Max who was in the back seat of the car with it and he

[58:16] looked at her caption and he said well Zoe this is the problem you're captioned of this picture with

[58:21] the sixty two year old man assembly today I joined the mile high club

[58:31] So she didn't have a clue which she was talking about, but there was a police car behind

[58:39] me quickly and we were able to resolve that matter.

[58:43] So that's why occasionally I still enjoy talking about Zoe because she is a very unique person.

[58:48] So with that I'm out of jail and here I appreciate it and I'm going to turn the microphone over

[58:53] to Jim Larry, who was an employee of the month, was an employee of the year, and is a

[58:59] terrific chief benefits officer.

[59:01] Before we go to Jim, though, David, thank you so much for the great reports that you

[59:06] give today, is not disappointing at all, and very entertaining.

[59:11] And also for the great work that you do, your leadership role at S.D. Sarah, and for all

[59:15] the employees, it makes us all on the board very, very proud of the work that you're doing

[59:21] for our members.

[59:22] So thank you.

[59:23] Yeah. Good. Did you want to say something? Okay. Oh, thank you. That's first, huh?

[59:33] So we will go to the employer the month. Jim Larry. Your report is up next. All right. Thank you

[59:39] And I don't know if I should thank you, David. I don't know how to follow that

[59:44] You're always a tough one to go after

[59:46] There are two items. I want to discuss today that don't have nearly the levity of David's report

[59:51] The first is something that David touched upon and is actually an item that I have been

[59:56] and talking about the last couple of board meetings related to the pandemic.

[1:00:00] I'm excited to the March retirements and the increase volume of applications we receive. I really do just want to thank

[1:00:07] DeWater Brown and the entire retired benefit staff for the outstanding work they did in April and processing. They just did a fabulous job of getting all 192 retirements with a March retirement date processed by April payroll. In the five years that I've been here, I have never seen more efficient processing.

[1:00:29] and I'm just really proud of DeWatta and the retired benefits team.

[1:00:32] It's great, thank you.

[1:00:35] Something else that David touched upon was Zach Sickles and the work that he's doing in the active benefits units.

[1:00:40] He is our manager and active benefits.

[1:00:43] The next item is related to a monthly report we've been providing the board.

[1:00:47] I have a slide for what we have previously been providing is the membership count report.

[1:00:54] This is just a template of what we had been providing in the past to represent the members

[1:01:00] that we administer and calculate benefits for.

[1:01:04] If I can direct the board to tab 21 of the boardbook, we are replacing the membership

[1:01:12] count report with the SD Sarah Participants report.

[1:01:17] I want to commend Zach for continuing to ask the question of why and push us to improve and

[1:01:24] always do better. And I think this is a prime example of the impact, positive impact he's making.

[1:01:29] He took a look at the membership count report and said, I think we can better represent

[1:01:33] the SD Sarah population that we administer and calculate benefits for.

[1:01:39] Two significant improvements to the report are the separation of non-members and beneficiaries.

[1:01:45] So at the bottom of the report you'll see a section for non-members and beneficiaries,

[1:01:49] members, non-members, represent former spouses of our members who are eligible for an SD

[1:01:57] Sarah benefit as a result of a court issued domestic relation order.

[1:02:02] So we now have a separate line items for our non-member former spouses.

[1:02:09] In addition, we have beneficiaries, these are beneficiaries of our members who have passed

[1:02:15] away and that are receiving a monthly

[1:02:18] continuous benefit. Again, it just

[1:02:20] better depicts the overall population

[1:02:23] that we serve. The second improvement

[1:02:25] to the report in both the active

[1:02:27] section and the retired section, we

[1:02:30] now break out the membership by

[1:02:32] tier. Again, just to give more

[1:02:34] information to the board and provide a

[1:02:36] more detailed and thorough breakdown

[1:02:38] of our total land participants.

[1:02:41] That's it for me unless there are any

[1:02:43] questions. Thank you.

[1:02:44] that is extremely informative.

[1:02:47] I noticed Tier 1, any Tier 2s?

[1:02:50] Tier 2, so you will see in the retired section.

[1:02:56] We do have a category for Tier 2 retirees

[1:03:00] because the enhancements on March 8, 2002

[1:03:07] eliminated Tier 2 as an active plan.

[1:03:10] You don't see any active or deferred members

[1:03:12] in a Tier 2 status, just retirees.

[1:03:14] And just 23-2 or once.

[1:03:16] Correct.

[1:03:17] I also want to add my thank you to that because I've asked that question a couple of times.

[1:03:23] You know, who do we have?

[1:03:24] How many do we have?

[1:03:26] And this new report gives it to me every month or every month rather.

[1:03:31] And I thank you for that.

[1:03:33] Thanks, Zach.

[1:03:35] I would love to know.

[1:03:37] There's a theme at the Aeon conference where the expression echo chamber was brought up.

[1:03:43] And I don't want to have this comment be an echo chamber, but whether it's it's six sigma or

[1:03:51] In Japan it's catsin or good to great, you know that is an author book

[1:03:56] You probably read in a book club. There's a culture here. There's the theme. It's in the investment area

[1:04:01] It's in benefits. It's in it leadership, which is constant improvement and

[1:04:07] It Greg you're doing it with what you will see in the budget

[1:04:11] But this we have to continue, and it does come from the top, so a compliment to the management

[1:04:17] team here, that continuous improvement is your theme and the culture that you're building.

[1:04:24] Thank you, Mark.

[1:04:26] Ditto.

[1:04:27] Move on to Chief Financial Officer's report, Greg.

[1:04:31] Good morning.

[1:04:32] David has already introduced you to Angela Carrillo, our new accountant.

[1:04:37] We strategically sought her out as we've begun to work more and more with Jim's group and have determined that we need to be providing them more support on the finance side.

[1:04:47] So Angela is a great addition to our team to do that and she'll be working under the direction of Monica Ward.

[1:04:52] So we're making great strides and this is going to make us even stronger.

[1:04:56] As Mark just mentioned, we'll be giving the proposed FY 2018 operating budget to the Audit Finance and Budget Committee later today.

[1:05:03] And then in the IT arena, we have installed new voice recording systems for the Voice of

[1:05:09] SD Sarah.

[1:05:10] So if Felicia would please stand up, I want to introduce you to the new Voice of SD Sarah.

[1:05:23] So if you call in and you get the call center in the recordings, it was now Felicia's voice

[1:05:28] you'll hear.

[1:05:29] We're also working with AT&T to install their next gen of voice and telecom lines.

[1:05:35] And when we complete that in the coming months, we'll achieve their performance and lower costs in that ATT contract, so that's all good.

[1:05:43] And that concludes my report.

[1:05:45] Thank you, Greg.

[1:05:46] Chief Legal Officer's report, Elaine?

[1:05:48] Yes, thank you.

[1:05:50] So we have successfully completed another election for Board Trustees.

[1:05:54] And I would like to add my congratulations to Samantha to skip and to Susan for being elected or re-elected to the board.

[1:06:04] Ms. Mallett has completed the first session of her trustee orientation which included

[1:06:10] a session on fiduciary duties and we have session two of her orientation schedule for

[1:06:17] June the 12.

[1:06:17] So we got right on that and she should complete her training prior to the July meeting

[1:06:22] when she takes office.

[1:06:24] We have, we're right on target with the items assigned to legal on the 27-action plan.

[1:06:31] The document management item is pretty much complete with adoption of the records retention

[1:06:38] policy this month, and we're on target to complete review and optimization of our internal

[1:06:43] policies and processes.

[1:06:45] Thank you.

[1:06:47] Any questions or comments on any of the reports?

[1:06:51] Seeing none, we'll move on to item 9, which is tab 7.

[1:06:57] Great?

[1:06:58] Good morning again.

[1:07:00] The quick summary on this, you have the report in front of you.

[1:07:02] In April of 2014, the Board of Supervisors approved an elimination of the retirement offset contributions and in April 2017, they approved a wage and flexible benefit increase for county employees.

[1:07:14] To comply with the county compensation ordinance, the Board of Retirement approval is required for all SDCIR employees and must be submitted as the County Department of Human Resources by June 5th.

[1:07:25] So we're recommending approval of these changes for all S.T. Serum, please.

[1:07:29] Motion.

[1:07:30] Motion for staff recommendations.

[1:07:32] Is there a second?

[1:07:33] Second.

[1:07:33] There's a second.

[1:07:34] Please vote.

[1:07:42] Motion carried unanimously with all members present.

[1:07:46] We'll move on to item 10.

[1:07:48] I have a second.

[1:07:49] I have a second.

[1:07:49] The flex benefit.

[1:07:51] Is that a fixed dollar amount per employee or is it expressed as a percentage of the individual's employees' compensation?

[1:07:57] It's a no, it's part of the negotiations.

[1:08:00] It's a fixed dollar amount.

[1:08:01] Yes. Yes.

[1:08:06] Okay. Item 10, tab 8.

[1:08:13] You're late. Yes. You have in front of you the records retention policy.

[1:08:16] It's tab 8. This policy is in essence. The policy delegates to the CEO, the authority to create an altar

[1:08:24] as necessary a record retention schedule which we will bring back to you for your review

[1:08:29] and then staff can dispose of documents pursuant to the requirements in the record retention schedule without further authority of the board.

[1:08:39] Thank you. Any questions? Motion?

[1:08:46] Would somebody make a motion please?

[1:08:48] Please, may Samantha Emotion, by Samantha, second by Dan, several seconds.

[1:08:56] Question, Dick?

[1:09:01] The grantee of the CEO authority to override the policy.

[1:09:05] Is your mic on?

[1:09:06] Can't hear.

[1:09:06] The grantee of the CEO of the authority to override the policy, it seems to imply a quick

[1:09:11] reading that it would be granting an extension longer than the policy would allow.

[1:09:16] Does it also grant the CEO the ability to shorten the time and delete documents from the record earlier than the policy would dictate?

[1:09:27] I did not read it that way, but we can clarify that just to make sure that the intent.

[1:09:31] The intent was to allow us to keep the documents for a longer period of time only.

[1:09:35] We ought to make sure it's clear on that.

[1:09:39] What's the logic of it seems to me the policy implies that we purposely want to get rid of all emails at a certain point time.

[1:09:46] Yeah, that's distinct from retaining them, is there?

[1:09:50] We would set a period in the record retention schedule for retention of emails, but you

[1:09:57] can clog up your system with too many emails and you want to have the ability to get rid

[1:10:01] of them, especially ones that are not substantive in nature.

[1:10:07] There's all thousands of emails that come in on a weekly basis.

[1:10:13] Contemporary topics these days.

[1:10:15] Right.

[1:10:15] and argue the process of minuses of retaining them.

[1:10:18] Sometimes they're very excellent defense

[1:10:20] for issues and other times they're

[1:10:21] in committing evidence, but our policies

[1:10:23] to get rid of them regardless.

[1:10:25] Well, number one, the policy doesn't say get rid of them.

[1:10:28] Number two, many people, the issue with the policy is this.

[1:10:32] Many people have emails that come in,

[1:10:35] if I get 100 a day, 80 or promotional announcements

[1:10:39] get on a transfer list, 20 apply to substantive things

[1:10:43] that I may care about.

[1:10:44] I move those emails to a folder and those emails would not be deleted.

[1:10:48] We're talking about just unclogging that whatever, but we will come back with the schedule.

[1:10:54] So you could say keep emails for 10 years, keep emails for five years.

[1:10:59] We will pick a time we think appropriate and then we'll look at it.

[1:11:02] But the bottom line is we should not be in the permanent record retention business, which

[1:11:06] we are.

[1:11:07] We should not be keeping Iron Mountain in business because we have every document that's

[1:11:11] ever been produced here, you know, going back decades.

[1:11:13] We need to say, what are important documents to maintain and keep them and make sure we do because I often go back and look for a document that might be 20 years old and the policy will say we're going to keep that record forever but there are

[1:11:29] thousands of emails daily that whatever but we'll bring the one thing I want to make you clear about is this.

[1:11:35] I often talk to folks here about getting people in the boat with you where you don't want to be. I'm from Kansas and don't know how to sail.

[1:11:42] You don't want to be in a boat by yourself in the water.

[1:11:44] So if you make a decision, it's always nice when I say, well, who decided that?

[1:11:47] Someone says, well, I did, but I also checked with you, David and Elaine and Greg and Jim.

[1:11:52] Good.

[1:11:52] You got all of us in the boat with you.

[1:11:54] Believe me, not one document will ever be deleted here unless it's pursuant to a schedule

[1:11:59] you all know we discussed and we talked about.

[1:12:02] I do not want to be in any boat by myself saying, oh, yeah, toss that aside.

[1:12:06] Unless all of us know that document's going to be tossed for the right reason and will never

[1:12:11] come back to think boy we should kept that. So you all are going to be in the boat with me and

[1:12:15] when we get the schedule done I will bring it back to you so we can all agree on what the appropriate

[1:12:19] time limits are. Thank you for the clarification but if I could at the moment just at a total

[1:12:25] aside and you mention you get 100 or that 500 a day many of our advertisements do we have an act of

[1:12:31] education program here within staff to to understand what fishing is all about how to prevent.

[1:12:36] Okay. Any other questions? We have a motion and a second. Please vote.

[1:12:51] Dan Tim,

[1:12:55] thank you.

[1:12:58] Motion carries unanimously.

[1:13:00] All members present. I'm inclined where we've got our famous Chief Investment Officer to give his report a lot of good news here.

[1:13:12] I mean, applying to take a 10-minute break, and then we'll be all set, Steve, to have you on.

[1:13:21] Thank you.

[1:24:00] One minute break is up. Everyone would please take their seats. Meeting will come back to order and

[1:24:10] I'm going to turn it over to our internationally renowned chief investment officer, Steve, sex hour.

[1:24:18] Chair Jacob, good morning.

[1:24:21] Trust these, good morning.

[1:24:23] We have three topics.

[1:24:26] So let me go through the plan and do some introductions.

[1:24:29] And then we'll go through.

[1:24:30] So topic one, which is item 11 and tabs 9, 10, 11 is our standard report on the trust fund.

[1:24:40] And then topics 12 and 13 are really important because they are part of the input that you'll have

[1:24:48] when we come to you in June for the annual recommendation of the allocation.

[1:24:53] I just want to spend a minute on that here at the beginning

[1:24:56] and then introduce the people that are here and why everybody is sitting up here.

[1:25:00] So for items 12 and 13, our goal is that you have the breadth and depth

[1:25:08] of expert inputs to be prepared in June to go through and approve the annual

[1:25:13] in the last allocation update.

[1:25:15] I just want to spend a minute to connect that

[1:25:17] to our investment policy statement

[1:25:19] to kind of our responsibilities jointly under SIRL

[1:25:23] and then to think through the pieces

[1:25:24] that we're going to go through about 15 minutes.

[1:25:27] So if you remember in chapter two

[1:25:29] of the investment policy statement,

[1:25:31] the first paragraph says the board believes

[1:25:35] that establishing the appropriate asset allocation

[1:25:37] is the single most important determinant

[1:25:41] of our investment return.

[1:25:42] So we're going to talk about today in June is the most important thing, and we're going

[1:25:46] to try and be very organized about it.

[1:25:48] And because of that, you put particular emphasis on that.

[1:25:51] So the question is how are we going to do it?

[1:25:52] And if you remember at the Board Education Offsite, we talked about fiduciary responsibilities

[1:25:58] and how to do it, and there were two key things about that.

[1:26:01] One, you evaluate things in a regular basis, and two, you get expert input.

[1:26:09] And so I'm going to introduce the experts in a minute.

[1:26:11] I'm going to review other expert inputs in the boardbook.

[1:26:16] I think when we're done with that, you'll be in a position to have the expert input,

[1:26:21] to have information so we come back in June to review the ass allocation make a decision.

[1:26:26] So how we'll do this is I'm just going to go through who's here, then I'll do my standard

[1:26:31] part, and then we'll start to go through the private markets update because that's a

[1:26:35] key part of the ass allocation, and then we'll go through a lot of the work that was done

[1:26:39] on the risk and return of the trust fund.

[1:26:42] I use those terms, but if you think of SIRL,

[1:26:45] those are the two most important things,

[1:26:46] and that's where we spent our time being prepared

[1:26:50] for this meeting.

[1:26:51] So let me do introductions.

[1:26:51] You know our deputy CEO, Tom Williams,

[1:26:54] and to my right, you know, my comm suck and Steve Vos,

[1:26:58] they're here in a dual role today.

[1:27:00] They're here in their roles at General Consultant,

[1:27:02] but they're also here because A on Hewitt's expertise,

[1:27:05] companies.

[1:27:06] It risk and return in private markets is in the class of the best of the best, and

[1:27:12] their colleagues have worked for us providing the inputs I'm going to summarize from you

[1:27:16] in the talk about.

[1:27:17] So they're also here in that role to provide that input today, and to their right is Jim

[1:27:22] Moore from PIMCO.

[1:27:23] I'm going to go through Jim's background a minute, because again, in terms of experts, the

[1:27:27] best of the best, here's Jim's background.

[1:27:29] I do it somewhat chronologically, a PhD in University of Pennsylvania,

[1:27:37] Mercer, Actuario,

[1:27:39] as you know, I'll go back to Pennsylvania.

[1:27:41] When we do trustee training, the weeklong intense training, that's who we go.

[1:27:46] And Jim is taught. He worked in Actuario, worked at Mercer.

[1:27:52] He was at Morgan Stanley for a minor well, doing analysis of pensions, portfolios.

[1:28:00] He's now at PIMCO, and it's his team that has done all the detailed risk and return

[1:28:06] analysis of our portfolio that we got an input from PIMCO, and it's Jim and his team

[1:28:11] that provide input to us with staff level.

[1:28:13] So Jim's role today is to walk us through how they do it.

[1:28:17] So you have a context and feel for it, and then after he does that, Jim, after Jim does

[1:28:22] that, then we'll have Mike and Steve walk through how he undoes it.

[1:28:25] And so I think at the end of the day you'll say, yep, we're prepared and we're good to go for next month.

[1:28:32] Is there any questions on that plan?

[1:28:36] All right, we're ready.

[1:28:36] So I'm going to go to tab 9, which is the CIO staff report.

[1:28:44] And the one thing I'll call to your attention here is staff, Tom and I have spent a fair amount of time talking with,

[1:28:53] meeting with and reviewing underlying managers and we provided you a list of

[1:28:58] that. Part of it was in preparation for this meeting, the next meeting, part of it is just for our standard due diligence.

[1:29:07] Any questions?

[1:29:10] Okay, we will now go to tab 10, the standard risk return report.

[1:29:24] All

[1:29:29] right, thanks button.

[1:29:32] So page one, you can see the trust fund at the end of last month was $11.3 billion.

[1:29:41] You can see the allocations right on target.

[1:29:45] The little bit overweight equities just comes from the strong performance and the most important

[1:29:51] column is on the far right.

[1:29:53] Every one of these asset allocation levels is within our guidelines.

[1:30:00] Questions?

[1:30:02] Okay, probably the most important page is returns. It's the next page. I'm going

[1:30:07] to highlight the column, third column in, fiscal year to date, or a few weeks away to the

[1:30:14] end of the fiscal year, so I think that's the number to focus on. And there's nothing but

[1:30:18] good news. Let's start with the total trust fund. It's up 10%, a really strong return.

[1:30:24] If you look at our two reference points, the policy benchmark, it's up 10.5%, and if

[1:30:31] you look at our other benchmark, which is a simple 70% equity index fund, 30% fixed income

[1:30:39] index fund, it's up 10.7, I'll explain those differences in a minute, and then finally the

[1:30:44] accrual of the actual oil rate is set.

[1:30:47] So to trust fund level, really good.

[1:30:51] Now, as you know, we split talking about returns into two pieces, public markets, things

[1:30:56] we have more direct control over, things we have current returns on, that's the second

[1:31:02] block and we've highlighted in black, the numbers, they're all good, the public markets

[1:31:07] assets in our trust fund, we're up 11.5 percent fiscal year today, the policy benchmark is

[1:31:17] up 10.7, that's before fees or hours or after fees. And then if you look at the individual

[1:31:23] the two individual big pieces, equities, we're up 16.8 in the trust fund, really good.

[1:31:30] And the benchmark itself is up 16. Fixed income, similar story as we know this is not a

[1:31:38] good time to be in bonds, it has not been a good time to be in bonds. And we've had really

[1:31:42] really good performance from our fixed income managers at PIMCO, Ashkisson Wiley and Oak

[1:31:50] Tree.

[1:31:50] So we've got, we're in good position there.

[1:31:53] I'm going to skip down to the block that's highlighted in private assets.

[1:31:58] We've got pretty good private asset returns close to 11%, 10.9 for private equity, 10.7

[1:32:07] for real assets.

[1:32:08] That's the reference point which shows up in the SDCIRC policy benchmark calculation,

[1:32:14] where as soon as not only did we get the really high returns and equities, we got even more.

[1:32:20] That's how the benchmark works today.

[1:32:23] So that's the number that explains the difference between 10 for the trust fund

[1:32:26] and basically 10.5 for the policy benchmark, that plus fees.

[1:32:31] So just overall really good.

[1:32:33] then the final point I'll make on this page and stuff for questions we've

[1:32:36] reported to the sub asset classes and you can see again that in global

[1:32:42] equities where the portfolio is 100 percent indexed we're right next to the

[1:32:46] benchmark in US equities we're a little bit above it we do some active management

[1:32:51] there and in non-US which is EFA we're a little bit above same thing in

[1:32:57] emerging reference

[1:33:01] point here I think I've told you we've tried not to take a

[1:33:03] a lot of unnecessary risk to be short through what's happening in the world, so this is good.

[1:33:06] We're right near the benchmark, but we're a little ahead.

[1:33:09] Is that complete to my summary of our returns?

[1:33:12] Dan.

[1:33:13] Just a quick question.

[1:33:14] Yes, sir.

[1:33:15] applause.

[1:33:16] Noted, I guess.

[1:33:17] But it pertains to fixed income portfolio.

[1:33:21] Are we looking at just sort of holding pad at this point, or an anticipation of rising, there's

[1:33:29] that word interest rates again in the future.

[1:33:33] Where are we relative to our allocation?

[1:33:35] Are we happy?

[1:33:37] Or are we going to back off?

[1:33:39] You said that you were pleased with what we've seen

[1:33:42] in spite of what we're concerned about,

[1:33:45] but maybe in the future with rising interest rates

[1:33:48] are we going to be bolder, or are we backing off?

[1:33:52] What are we?

[1:33:53] So I'm going to take the standing at the podium position

[1:33:58] and privilege to break your question in the three pieces.

[1:34:01] Okay.

[1:34:02] One, are we comfortable with what we're at?

[1:34:04] Happy, yes.

[1:34:07] Two, do we think we, you know, given that we think interest rates

[1:34:11] would rise, we don't know what interest rates are going to do.

[1:34:15] In fact, that's one of our challenges.

[1:34:18] We know the short end has gone up, and we'll go on,

[1:34:21] and I'll go on that, but it's just so extraordinary

[1:34:23] difficult to, how will the curve move?

[1:34:25] So we position ourselves to be very close to the benchmark, and to be liquid.

[1:34:31] So the third thing is, the way I want to recognize Tom's work here,

[1:34:39] the long-term return

[1:34:40] of a portfolio like ours is a starting yield, so we're not going to fight that.

[1:34:45] But we do have liquidity and we have the ability to move if we have to, and we've been very

[1:34:51] careful about that.

[1:34:52] So we have plenty of liquidity to make the payroll for retirees, and if there's a surprise

[1:34:56] the market. We're not going to get caught off sides. There's no whoops part of the position.

[1:35:02] Okay. Thank you.

[1:35:06] Mark. Yeah. Thank you. You know, when you say rising interest rates,

[1:35:12] you always have to say, well, what rate do you mean? You know, there's short rates,

[1:35:16] intermediate rates, long term rates. And to Steve's point, you can't guess that right.

[1:35:25] and ever expect to get it right.

[1:35:27] I mean the market is saying it's 100%

[1:35:29] for the ability to move in June.

[1:35:31] It's probably going to happen.

[1:35:33] I mean, if it was right, then everybody would be doing.

[1:35:38] Yeah, but it's killed a win-word with the bond portfolio.

[1:35:41] That's the stabilizing force.

[1:35:45] So we shouldn't be doing a whole lot of tactical things with that.

[1:35:51] Dick and then skip.

[1:35:52] Yeah, I just have under your private ass dick and then skill. I yield the skips version. I apologize.

[1:36:01] I

[1:36:01] think I've heard you say in the past days that the benchmarks of the the index plus

[1:36:07] 200 was somewhat questionable or maybe not the best benchmark to be using. And I notice

[1:36:15] as a significant spread although we did good don't get me wrong. Are you and Tom and

[1:36:22] And A, on thinking about that benchmark, or is that what you really want to do?

[1:36:28] So the question is, the review of the benchmark for privates, and we have spent a lot of time

[1:36:33] with Stephen Mike, and here's where Rat will come to the next month.

[1:36:39] We're going to have, for the roll-up to the total trust fund, we're going to just use

[1:36:43] Acquate, which is, we can index that if we want to.

[1:36:47] So at the trust fund level, when we report how the benchmark did, it'll just be all the

[1:36:51] stocks in the world for individual parts of the market will have a secondary

[1:36:56] benchmark to say how are we doing in the decisions like for example in real

[1:37:00] state or the decisions in private equity and typically there'll be two sub

[1:37:05] measures one is some index could be the average of all the problems and the

[1:37:10] the other the second one probably somewhat pure base so you have three

[1:37:14] reference points it could have been an equities if we did go illiquid into

[1:37:19] private is there some index even though you can't invest in it that just captures what all the

[1:37:25] other investors are doing and is there some pure group like us that we could look at. So we

[1:37:30] want to have those three. And we're going to recommend that in the June meeting. Okay.

[1:37:35] Yes, Steve, we had talked about this, but I think it might be useful for just share your thoughts

[1:37:40] as a prelude to our ultimate discussion on asset allocation, but our sport of our equity allocation

[1:37:46] between U.S., non-US developed and emerging markets, how does that compare to the actual

[1:37:52] split of the globalized equity markets between those three geographic regions?

[1:37:58] So trustee of Orban's question, we can use this slide answer on.

[1:38:02] We've got in pure liquid, you know, market-tradable equities, 47% of the trust fund, just to make

[1:38:12] the number is easy, 10% was 100%.

[1:38:14] The Acque Index Fund, if we just index,

[1:38:18] would be about 55% North America, 52 US, 3 Canada.

[1:38:23] So 55 here in North America, roughly 35 in Europe, Asia,

[1:38:28] and the Far East, and roughly 10% in emerging markets.

[1:38:33] So you take that ratio of 55, 35, 10, and say,

[1:38:36] oh, you've got 46%, 47%.

[1:38:39] You'd expect us to see us to be 5% in emerging markets.

[1:38:44] You can see we're 9% actually we've actually been overweight emerging markets and done

[1:38:51] very well because of that and it's measured by every month by Steve and Mike, it's measured

[1:38:56] in our risk calculations which I'll show you and it's part of when Jim and Steve and

[1:39:02] Mike go through the analytics they've done in the trust fund, it's actually in their

[1:39:06] measurement, too. So, we overweight emerging markets, we're overweight Europe and Asia,

[1:39:13] we're underweight the U.S. And that's a decision based on Tom's judgment in my judgment.

[1:39:21] Not saying it's good or bad, but it's a good reference point as we have the right-hand side

[1:39:25] on occasion that we are different than the split geographically and we're purposely different.

[1:39:30] Correct. The next month, when they do the review of the portfolio and they do the attributions,

[1:39:34] we can ask Stephen Mike to exactly show you what the effect was between those

[1:39:39] decisions versus the managers. Who did that? I had one more point on fixed

[1:39:47] income because I think Trustee McAllister's question of rising interest rates.

[1:39:52] Let me give you a frame of reference. I'm about to be two years working for you.

[1:39:58] So I went to the bond market and said what's happened in two years? Let me

[1:40:02] reduce some numbers. In the 30 year part of the bond market, the more volatile part, basically

[1:40:11] no change. Rates have fallen this much, a couple of basis points. If I go to the 6 month

[1:40:18] part of the bond market, rates are up 100 basis points. So we've already absorbed a really

[1:40:25] big move in the bond market. And over that period, our fixed income portfolio is up.

[1:40:32] It's

[1:40:32] We've not Tom or I haven't come to you with any oops stories, so I think we're trying

[1:40:37] to accomplish that.

[1:40:38] We're here a year from now and it's up another hundred.

[1:40:41] We'd love to say there was no oops and fix the income and rest the portfolio perform

[1:40:46] well.

[1:40:47] Did you just say long-term rates in the last six months were up a hundred visits?

[1:40:51] No, but what I said was over two years, but we'll give you a year today.

[1:40:55] Thirty-year rates have fallen just a little.

[1:40:58] Fall.

[1:40:59] Fall.

[1:40:59] It's probably going to.

[1:41:00] If the six-month part of the yield curve, those interest rates of six months are up 100

[1:41:06] basis months.

[1:41:07] You mean over the last six months?

[1:41:08] The last two years.

[1:41:09] I don't think so.

[1:41:10] Last two years.

[1:41:12] That was just two years.

[1:41:14] I could look at it.

[1:41:15] I don't know.

[1:41:15] I mean, isn't that indicative, Steve, of the public press talks about interest rates in

[1:41:21] the Fed's movements?

[1:41:22] I mean, it's all restricted to the short end of the curve.

[1:41:26] The long end that a curve is hard to we someone independent as such if they they have shown well the any short term is going up the long term hadn't done anything.

[1:41:34] Yes sir.

[1:41:35] Standard rule of bond markets, which Jim knows better than I do, is captured by the Fed controls the short end, the markets control the long end.

[1:41:44] And so half of bond investing is the shape of the curve.

[1:41:48] But the popular press only talks about one of those pieces with that.

[1:41:55] And I think just to repeat, we're blessed to have Tom with us because that's been Tom's expertise coming here is fixed income, both the large portfolio random and Arizona public employees and then in the church department for the city.

[1:42:08] And so I think that's what Tom's one of the reasons we've done well.

[1:42:13] Okay, any more questions on returns?

[1:42:15] So we can go to risk,

[1:42:22] everybody's favorite, everybody.

[1:42:27] I know some of the same questions.

[1:42:29] He understands it.

[1:42:32] Sorry, Brian.

[1:42:35] So we're going to talk later on about risk models and how much risk is in the portfolio

[1:42:41] and what the expected return could be and what the range is.

[1:42:46] And again, I need some important repeat.

[1:42:48] independent of the staff, there's 114 numbers on this page, and the experts at A-on have taken the data directly from B-N-Y and computed how much risk has been in our portfolio, and what we think the expected risk is going forward, we're defining risk-wide volatility.

[1:43:09] And I'm here to repeat to you, of those 114 numbers, everyone's work should be.

[1:43:14] And we've gone through them in A.A. on scale throne.

[1:43:17] And there's no surprises, we're in good shape.

[1:43:21] And I would entertain any questions, if you have them, on this report.

[1:43:25] It's the 115th number we worry about. 114.

[1:43:30] It's the 100th number.

[1:43:34] But just, I mean, it's a hundred and fourteen, but there's one trust fund and then there's

[1:43:37] four asset classes and, you know, it rapidly spits out.

[1:43:42] Okay, last thing is changes.

[1:43:45] We made some adjustments.

[1:43:48] One was to just increase operational cash to make sure that Greg's team had payroll cash

[1:43:56] they wanted.

[1:43:57] We had money to put in just from some cash flows that came in, so we index them in the

[1:44:03] U.S. because we're a little bit under way, as I said, with the BlackRock Index Fund.

[1:44:07] And it's part of the SL allocation work we've done with Steve and Mike and within the

[1:44:13] IPS governance, we're moving from having a convertible security portfolio, which has been

[1:44:19] positioned in the U.S. equity market to more of a global stock portfolio, and we'll go through

[1:44:25] that more next month, but that's the third thing is just raising the cash to do that.

[1:44:31] So that concludes my report.

[1:44:35] Any questions?

[1:44:40] I'm curious because it's been in the news in the last two days, and that is the downgrade

[1:44:45] by rating agencies in China.

[1:44:48] And what impact, if any, would that have on our investments, even though we're limited,

[1:44:54] I would assume at this point but in Asian investing and things of that

[1:45:00] So, what impacts does that have on the market? So, to receive me, how does this question is the downgrade of China's debt? And which brings up China? So, I'll answer it in Part A and Part B. Part A is, you know, China hit the gas about nine months ago. And it is just rippled through the world. That is why things are so strong. They're strong in Germany, they're strong in Europe, they've been strong here. And the way they hit the gas is creating debt. And that's been both in the real estate markets.

[1:45:29] in the commodity markets.

[1:45:32] It would be an entire off site to talk about how the Chinese economy

[1:45:36] works and how they're going to resolve these data issues. It is the topic of the day

[1:45:40] every day someplace. And there's a widespread of opinions. And then I can tell you the opinion

[1:45:46] range from they will collapse in the conflagration of problems to, are you kidding me? They just decide

[1:45:52] what to do and do it and they're a big growing rich country. So we don't know. It's your question.

[1:45:57] We don't have any big, active, specific bets in China.

[1:46:02] So we're going to feel China, which is why I did Part A.

[1:46:06] And China expands as fast as they did.

[1:46:08] So is the world.

[1:46:09] If China has a big hiccup, we'll all feel it.

[1:46:11] Which is a big country.

[1:46:14] Thanks.

[1:46:15] Okay.

[1:46:16] We're going to go to...

[1:46:17] That's one question.

[1:46:18] The government's issue.

[1:46:19] So at least I understand.

[1:46:21] The movement on your convertibles.

[1:46:24] This is authority that we, the board, have delegated to staff to move within, presumably

[1:46:29] the ranges we've set around the asset classes, and this would have been an example of doing

[1:46:33] that.

[1:46:35] And this was, was it a converged classified as a fixed or then the equity?

[1:46:38] They were equities.

[1:46:39] Okay, so you're just moving within subclasses within our ranges for equity, correct?

[1:46:45] Okay, so tab 11 is the standard CI market support for the sake of time because the experts

[1:46:52] are here, I'm going to make the points in one sentence with each point. I'm going to go through

[1:46:57] the graphs. If you want to come back and ask questions, I'll answer them. Okay. So, first thing,

[1:47:03] Fed stated its course last meeting, but it's pretty obvious when you look at the charts,

[1:47:07] they're going to keep raising short-term rates. This is the probability they do a Fed hike.

[1:47:12] Second thing, what is the Fed look at? An employment? Well, it's pretty low. Doesn't mean there aren't

[1:47:17] people still looking for jobs, but it's pretty low. And what do they want to see? People have jobs

[1:47:21] with wages doing what? Going up, wages are going up. So this is about as

[1:47:26] Goldilocks as you get if you're a Fed Chair. So as point one, point two, we had

[1:47:35] the French elections. It's a big deal. They stayed down the middle of the fairway

[1:47:40] and that has brought great relief to the markets in Europe. So the next one on

[1:47:46] the horizon is Italy. Markets tend to look three or four months ahead, anywhere

[1:47:51] from six to nine months out, keep you posted, but they're doing the

[1:47:55] negotiations now, the word on the street is they'll figure it out.

[1:47:58] It's doable.

[1:48:00] So anyway, Europe's in pretty good shape.

[1:48:02] Next point, international equities have done extraordinarily well.

[1:48:05] You saw that in this return report, we're overweight.

[1:48:08] A lot of it has to do with one China, and Europe is actually,

[1:48:12] I mean, the numbers, the fundamental numbers in Europe are strong,

[1:48:15] and they've avoided the self-impaling of trying to have some scenario

[1:48:20] where France leaves the Eurozone 30 days or something.

[1:48:23] I guess it would be the term.

[1:48:25] And then last point, we call this the trustee good child

[1:48:30] chart.

[1:48:32] This is the monthly small business optimism index.

[1:48:36] It's been put together since the 70s

[1:48:37] by the National Federation of Independent Business.

[1:48:40] You can see that leap that we showed you three months ago,

[1:48:43] post-Trump.

[1:48:45] And the question that trustee good child asks us

[1:48:47] is I'd like to see this in three months to see it.

[1:48:49] actually is sustainable and as you can see there's two more data points and it

[1:48:53] certainly has been so there's this high expectation that things are going to

[1:48:57] get better and it's still captured in this index. So that concludes the

[1:49:03] market's report question.

[1:49:05] Dan.

[1:49:06] On number four the retail trends with the trends what they are and the changes in

[1:49:11] latitudes and attitudes as far as these kinds of investments go how does that

[1:49:17] impact any of our real estate holdings.

[1:49:20] I did skip over that for the sake of efficiency.

[1:49:22] If you go to this chart, the last thing we want to own is real estate investment trust

[1:49:27] and malls.

[1:49:30] But the reason we put that in is, you know, this whole technology revolution is hitting

[1:49:36] every part of the economy, and it has really affected retail.

[1:49:40] And we put this in here, one, to make the point that it hasn't affected all retail, because

[1:49:46] industrial real estate investment trust because the economy is strong we're doing well but this is

[1:49:52] just one segment and we're just aware of it we're just it's a story we want to let you know we're

[1:49:56] on top of it and you know first rule is don't do anything dumb so it's good yeah I read a Bloomberg the

[1:50:05] other day that there was some kind of a hiccup in this whole Brexit negotiations thing can you comment

[1:50:13] And then on that and what impact you think that might have in the European market?

[1:50:18] So the question is the story was in Bloomberg and all the places about Brexit.

[1:50:25] We've taken the approach that it's going to be impossible to know how this plays out,

[1:50:31] and it'll be really impossible to forecast what the markets are going to do.

[1:50:35] So we're just kind of like diversifying the way that out.

[1:50:39] So far it's been pretty positive for the UK.

[1:50:42] So, we've just tried to ignore the world as ending, or the world couldn't be better type

[1:50:47] stories than acting on them, which is right down the middle of the fairway here until we

[1:50:51] figure it out.

[1:50:52] Thank you.

[1:50:54] Okay.

[1:50:55] All right.

[1:50:56] So, we're going to go to tabs 12 and 13, and again, let me just set the framework, because

[1:51:04] starting now, I'd like it to be as interactive as possible, and anybody who's up here, you're

[1:51:11] comfortable to just stop, just put your hand up stop, ask a question, because we have two

[1:51:16] kind of big topics.

[1:51:20] One is I want to go through the research we showed you last year on private markets.

[1:51:24] I want to go through an update and just talk about what we've learned and what it tells us

[1:51:29] we think we should do.

[1:51:31] But in place of having me, one person saying that, you've got Tom, you've got Mike, you've

[1:51:36] got Steve.

[1:51:36] The enormous depth, so I want you to, anything you want to ask somebody else, just on private

[1:51:42] markets as I go through it, just ask them, there's no kind of format here.

[1:51:48] Second part is, we did do a lot of rigorous work on the trust fund.

[1:51:52] How much risk is in there, what the returns could be, and because our job is to diversify

[1:51:57] not only the actual securities in the trust fund but information sources, I'm going to report

[1:52:03] to you input from seven sources to whom we're here, and then we just want to talk about

[1:52:08] these processes.

[1:52:09] So when we show you the results in June and say we think we should do this, you're like,

[1:52:13] okay, I've got the frame or reference and you've had a chance to ask the experts.

[1:52:17] Makes sense?

[1:52:18] Okay.

[1:52:19] So let's go to the private equity review that was presented to you on October 16, and I'm

[1:52:25] going to rapidly go through, everyone would close notes of the highlights from that.

[1:52:31] Highlight one is, you know, at the beginning of the century, there wasn't much money in private equity or hedge funds.

[1:52:39] And the source of this is from I conceive, you know, a little, you know, $600 billion.

[1:52:45] It's like pushing, it's more than this now, it's pushing five trillion.

[1:52:51] It's people like us saying, we need returns when you go get them for us, and we'll pay you lots of money and we'll wait seven to twelve years to find out.

[1:53:00] And this is worth repeating.

[1:53:01] We need returns, we'll pay you a lot of money,

[1:53:04] and we'll wait five or seven years to find out.

[1:53:07] Sometimes 12.

[1:53:09] So that's point one.

[1:53:10] Point two is, yeah, it really matters when you do this.

[1:53:15] So these are returns of buyouts from a very respected study

[1:53:19] in each point on the bottom.

[1:53:21] The year is when the money is put in the ground.

[1:53:24] Trustee Vortman asked me a great question.

[1:53:26] What happened in the 90s?

[1:53:27] And I, before I said, oh, I know the answer, I went and asked a group of people and the

[1:53:32] standard answer was, well, interest rates went up a lot in $94.95, that didn't help.

[1:53:36] And then everybody was getting into the tech bubble at the wrong time.

[1:53:39] Our takeaway is, you have to pay attention to when you put the money in the ground.

[1:53:44] It's the most dominant thing.

[1:53:46] And then the last two charts I want to highlight, because we went through these with you, these

[1:53:50] These are trust funds under the county employment

[1:53:55] retirement law in California, and what the staff did

[1:53:59] we presented to you is we said, how much of that

[1:54:03] trust fund is in private markets, and then what

[1:54:09] were the returns?

[1:54:10] And what you can see is you can have a lot in private

[1:54:13] markets, that's the far left, or you can have a

[1:54:16] little, but that dotted line which captures the

[1:54:18] average return?

[1:54:21] Didn't move much. We did that for three years. It was the same.

[1:54:25] Here's the actual fees. So here's the takeaway. Just because you're in private

[1:54:31] markets. Just because you say we're going to spend a lot of money doesn't mean

[1:54:34] you're going to get the returns. Doesn't mean you can't. If you want to be a

[1:54:37] little bit humble and think through, what are we doing? Why are we doing it?

[1:54:40] I'm going to kind of go through that thing. So now I'm going to give you an update on

[1:54:43] that. So if we go to the next tab,

[1:54:49] Martin's going to bring it up. Since we showed you

[1:54:52] this work we did going through all the counties, there's a large scale study on this done

[1:54:56] by the Pew Research Institute. And one of the tables in that study, I thought was helpful

[1:55:03] and it actually confirmed, independently confirmed, those California county charts. And here it

[1:55:11] These are 73 public pension plans in 2006 and 2015.

[1:55:18] Let me tell you what the red dots are first.

[1:55:20] It's the fees that that plan was paying.

[1:55:24] And by the way, in the appendix is the actual list.

[1:55:26] So you can see Arizona Public Safety Network time worked.

[1:55:30] It was paying 200 basis points.

[1:55:33] And they're the far left dot.

[1:55:35] You can see it on the 200.

[1:55:37] And all I did with that data was I just printed it in a chart that says high-feed loafing.

[1:55:43] And then the blue numbers are for each of those plans the returns they got.

[1:55:50] Now, Jim has a PhD, so I'm going to let him, like Steve's not doing that right, but I'm

[1:55:56] going to give you a bold statement about this chart.

[1:55:59] In a minimum, I can't make the case that because I have a lot of money and private equity,

[1:56:06] I get better returns.

[1:56:08] In a minimum, I can say that pretty confidently.

[1:56:10] I could probably say, there's no combination, there's just no connection.

[1:56:15] Like, you know, I get returns, I pay a lot, but I don't see any connection here.

[1:56:20] Maybe I can make a case that the less I have and feed is the higher my returns.

[1:56:24] That would be my, I passed the test if you were teaching.

[1:56:29] Yes,

[1:56:31] in general, the central tendency is right, but as you see, there's a wide variation around it.

[1:56:36] So picking your private equity managers, if you're going to be in private equity, is very important for the process.

[1:56:44] Second point.

[1:56:46] Yes, I always pause when I hear those responses.

[1:56:49] I mean, I think all of us, we really understand how picking the right manager is critical.

[1:56:53] But no one has yet been able to tell us how to pick the right manner.

[1:56:57] Everybody says so.

[1:56:58] We know prospectively this is the right manager, but an hindsight, it's a

[1:57:03] crap shoot.

[1:57:06] It's not a perfect science, there is no perfect way to do it.

[1:57:10] In my view, it comes down to the classic people process

[1:57:16] in past performance.

[1:57:17] Past performance indicates they've done something right in the past.

[1:57:21] people you can look at their resumes and their track records and what they've

[1:57:25] done gives you some indication of their knowledge base and the process

[1:57:31] indicates gives us some idea of do they have a repeatable process process to

[1:57:37] doing it so you know I as somebody who sees what we do and knows number people in

[1:57:42] private equity the question I ask is what is your edge is it a specific

[1:57:48] Do you have specific knowledge in a specific area that's an inefficient part of the market, or do you have something else that you bring to bear, but given how much money is out there right now chasing deals in private markets, you know, I generally want to get some comfort that they do have some specific area knowledge that's relatively neat and understand some inefficiency of the market.

[1:58:13] So, I would like to append something to a gymset, because I think it's going to be our theme.

[1:58:18] One, it's really hard to do.

[1:58:20] So, let's be careful and be humble and think how we're doing it.

[1:58:23] Because it's hard to do the first people, that's right.

[1:58:26] Any gymsist wants to spot on, you're going to see what we're going to talk about is,

[1:58:30] let's work with the right firms.

[1:58:32] Let's work to know those firms. Let's get the right people.

[1:58:35] And then I ask the question, how are you going to make money for us, and how much risk we're taking,

[1:58:39] and literally do it like that.

[1:58:41] the humble work hard, but ask these core questions.

[1:58:43] Do we want to work with this firm?

[1:58:45] Are these very competent good people?

[1:58:48] And how do we think we'll make money

[1:58:49] in this particular investment?

[1:58:51] And not only the staff, but our consultants,

[1:58:53] and other experts, and really walk through it?

[1:58:55] But that is a good question.

[1:58:57] So I want to go through a couple more pieces of research.

[1:59:00] Excuse me, before you leave the chart,

[1:59:01] what you're going to be able to do

[1:59:02] with the digital conversation?

[1:59:04] You're on.

[1:59:05] I mean, to me, that's the most profound chart

[1:59:07] that was in Steve's package. There's a very clear relationship between the lower the

[1:59:13] fees as a generalization and all the things being equal in the higher the return.

[1:59:17] Not the opposite. And it's like my eyeball and it would take some statistician to confirm whether my

[1:59:23] eyeball is accurate or not. One would expect that your return would be higher by the

[1:59:27] amount of fees you say. But my eyeball tells me those returns are even more

[1:59:31] higher than the amount of fees. There's another variable in there. And whether there's

[1:59:35] There's something that the lower fees indicate there's a simplicity of necessity, a simplicity

[1:59:39] or portfolio.

[1:59:40] Whether that generates a higher return in love itself than a more complicated portfolio,

[1:59:46] independent of fees.

[1:59:47] But the very intriguing chart, a very compelling one versus the philosophy that Steve has been

[1:59:51] advocating to us is simplicity is not the enemy of good returns.

[1:59:59] That's why I put the table.

[2:00:00] All the details in the back, because it's like they could city those $10,000 stories and you actually have to look at every story. Think about it. So, I'm going to tell you a story of this chart. These are private equity returns for energy investments in the all-born database. So, again, these are private equity returns for energy investments in the all-born database. And what I asked all-born to do was for each year that the money went in the ground. So, the first bars went to ground in 2000. The second bars went to ground in 2000.

[2:00:30] in 2002. I said, what are the high and low return? This is this point if you could pick

[2:00:35] good managers.

[2:00:38] And it's the pattern of, I don't care which bar you pick. If you get it

[2:00:43] wrong, and so people say, well, you should always be invested then because you can't time

[2:00:49] it. I'm like, well, that sounds like a good way to make me into an ATM machine for your,

[2:00:54] because it's really hard to know whether to do this. And I said, well, our job is not

[2:00:58] to avoid the hard questions. So part of this theme of underwriting is, is this a good

[2:01:02] time or not? So, Jim and the point, with all the money in chasing private equity and

[2:01:06] valuations, I'm not a great time to be aggressive about it. Here, take my money. And this chart

[2:01:11] really captures it. Okay. Here's the appendix, it's all the names.

[2:01:19] So, that's the data.

[2:01:20] We're going to go to the next section, and I'm going to talk fast because you've seen some

[2:01:24] of this before, but we're going to talk about it in more of a formal setting.

[2:01:28] questions. Yes. On your chart that you showed relative to fees and returns. Where do we rank

[2:01:36] in there because I didn't see us listed on that list. So we're now in the middle.

[2:01:45] Okay. Yeah. And in the middle kind of moving to the right. Thank you.

[2:01:53] like in the 60s.

[2:02:00] High-fee stuff for digeration.

[2:02:03] Unless we want to bail out the subject.

[2:02:05] But it moves.

[2:02:06] So we get money back.

[2:02:07] We had these conversations.

[2:02:08] People say you should go on our next fund.

[2:02:10] And we go, how much is it?

[2:02:11] And how much will we get return?

[2:02:12] You know, what are returns?

[2:02:13] And so you walk through the trends,

[2:02:14] and they say, well, it's 220.

[2:02:16] And we're going, we're a problem with that.

[2:02:18] And plus we just hire this fantastic

[2:02:19] for public pension capital.

[2:02:21] And it's like one in tech.

[2:02:23] Hey, I'll go.

[2:02:23] You know, we should talk.

[2:02:24] We have another way to do this.

[2:02:27] So, as soon as you say you have an alternative and you want to get that alignment, there's

[2:02:31] always this side conversation.

[2:02:33] We should talk we have something else we should say.

[2:02:35] All right, private markets model.

[2:02:38] So, Corey Wuhan worked with us last year, he had been at the city, and what we want to do

[2:02:43] is array.

[2:02:44] How do you do these?

[2:02:45] Who doesn't?

[2:02:45] How do you do it?

[2:02:46] What can we learn from that?

[2:02:48] And so, what I'm going to do is rapidly go through the models, and I'm going to summarize

[2:02:52] a recommendation that I have as we go forward next year.

[2:02:55] It's not a policy recommendation, but it's how we'd operate.

[2:02:58] So I want you to say, yes, to ask questions if you disagree.

[2:03:02] So there's no decision here, but I think it's thoughtful

[2:03:05] and it fits some of the prior conversation.

[2:03:07] So let's go through the models very fast.

[2:03:09] If you're small and you want to be in private equity,

[2:03:13] fun to find is not a bad solution.

[2:03:15] It's like a mutual fund of private equity.

[2:03:16] That's a good news.

[2:03:17] Well, diversified, it's easy, it's one decision.

[2:03:20] The challenge is, it's very expensive,

[2:03:22] and you have limited control, because it's a fun, it's got to respect this, it's got two layers of fees.

[2:03:27] But it's efficient for that part of the market. The second way to do it is outsource the whole deal.

[2:03:33] There are outsourced CIO firms for five markets. There's one very successful here in Malaya, step so.

[2:03:39] You pay down, you say, here's the money, you decide where to put it.

[2:03:43] And you'll be paid fees, plus performance fees, and then the annoying managers will be paid fees, plus performance fees.

[2:03:49] but we think we'll get the high returns we want. We'll do it. That's two.

[2:03:54] Option three, which is really what we have today in many ways,

[2:03:59] is you hire a consulting firm or firms to tell you how much money to be

[2:04:05] in which asset class and which managers to consider hiring,

[2:04:09] and then you assign the staff to go find them and the staff comes back to you and say,

[2:04:12] hire this manager. And so if you think about the pieces there,

[2:04:17] Aon would say, be 10% private equity and you say, okay, and then you say to the staff,

[2:04:24] well go find 10% private equity so we would call up Aon or all born and say, well, who

[2:04:29] should we hire?

[2:04:31] And they say, well, here's the best firms, go interview them, and then Tom and I go back

[2:04:34] to our office and say, if we don't get this money invested by the next board meeting,

[2:04:37] we'll probably lose our jobs and we, I mean, a bit extreme, but that's the basic structure

[2:04:42] of the model, right?

[2:04:43] it's get the money in the ground, find good firms. Then there's a fourth option. This has been done

[2:04:49] enormously successfully by the Canadians. The state was consenced on it well, the state of

[2:04:54] South Dakota has done it well in public funds. And basically you say, why would we pay all these fees

[2:05:00] out here? If we pay 20% of that in here, we can get better returns and save 80% of the fees.

[2:05:08] And so it's the internal model.

[2:05:10] The challenge to that is the Canadian say, oh, our solution is we pay our investment staff

[2:05:14] like our hockey players.

[2:05:16] You know, there's his headline news.

[2:05:19] I mean, there's a kerfuffle in Wisconsin because we're got out the bonus pool for the staff

[2:05:23] as $11 million in a year that the numbers were below zero.

[2:05:28] Well, it's tough to manage that.

[2:05:30] Although Tom and I wouldn't mind splitting $11 million, but I mean, so those are the four

[2:05:34] options.

[2:05:36] These are standard options. We have in the deck for your reference points some information on each of them.

[2:05:42] I'm going to talk about the fifth option here. And what we've done the underwriting model.

[2:05:47] And as you know, we've gone from a lot of managers to smaller managers, smaller side, stable managers.

[2:05:52] We've looked for the best people in the best firms and we've worked to create alignment with them

[2:05:58] and have them working what they do day in and day out where they're the best at.

[2:06:03] Jim's a good example today.

[2:06:04] But they're going to be for our trust fund and we're paying them fairly to do that.

[2:06:08] What that means in private equity then is this theme of alignment.

[2:06:12] Who are the firms? We're not going to work with every firm.

[2:06:15] And we want to, it'll be three, four, five, ten.

[2:06:20] And those are the firms we want to work with and then the people.

[2:06:23] So, for example, we have $400 million in real estate in a separate account with Reef, which

[2:06:30] is the division of Deutsche Bank.

[2:06:31] They've done a good job for us.

[2:06:33] They're very experienced.

[2:06:35] When we talk to them, it's a serious conversation about how much money will we make?

[2:06:38] How are we making it?

[2:06:40] How are you paying us?

[2:06:41] Their response is very clear.

[2:06:43] Here's what we're doing.

[2:06:43] Here's how much we think you can make now.

[2:06:45] And by the way, we are completely open to how we structure this separate account going

[2:06:50] forward.

[2:06:50] So it's a properly aligned rather reasonable that's different than saying we have the best performance for the last three years

[2:06:57] And we joined this fund we're trying to raise a billion dollars

[2:07:00] So this is underwriting the people and then I'm going to go to if we go to the next I want to go to one thing on that deck

[2:07:10] Sorry, but I'm going to go through a couple points on the underwriting

[2:07:15] But we have a fee appendix in here, which Greg and Tom will go through next meeting.

[2:07:22] But this is really important.

[2:07:24] We spend a lot of money on our private equity portfolio, and you can see it here.

[2:07:28] And we've called this the trusty hand clock chart, because he has to see spending in perspective.

[2:07:33] So let me tell you what's here.

[2:07:35] The first two bars are fiscal year 14 and 15.

[2:07:38] It's all the fees we've spent that have been reported in the CAFER.

[2:07:41] What is not, I don't know why not in here, is a breakout between public and private markets,

[2:07:48] between incentives and not incentives, because we don't have the granularity,

[2:07:53] because Greg's new and I'm new and Tom's new. We do have it for 16 and 17.

[2:08:00] And so what you can see here is, one, fees are down a lot to trust the

[2:08:04] Riffy's question from about 105 basis points, 110 basis points, down into the 60 range and

[2:08:11] basis points, and the big chunk of that is our commitments towards private.

[2:08:18] And here you can see it in basis points.

[2:08:20] So we think Tom and I think it's 63 this year, down from 107.

[2:08:26] We want to think real carefully how we spend this money, and that's our goal here in private.

[2:08:30] We want to spend, we want to pay our manager's money.

[2:08:32] But you want the staff to be able to say, we paid PIMCO $100, but there's $300 in the trust fund after we paid them

[2:08:41] because of their work, and we can see it, we can measure it.

[2:08:44] Okay, that was, let's go to the next one now, and we'll see if I can visit.

[2:08:50] I had a comment to that on that chart, first of all,

[2:08:54] you've shown on that earlier research from Pew that paying high fees does not correlate to getting higher returns.

[2:09:01] I mean, that's clear, you've the concept of the underwriting model makes total sense.

[2:09:10] I mean, we have intelligent leaders in the investment side of San Eosera.

[2:09:16] You are trying to control what you can control, which is the element of interest and the fees

[2:09:21] that you pay and the managers you deal with.

[2:09:24] So you're selecting those that you have conviction about, it will be intelligent with the money.

[2:09:30] you're going to create stronger alignment of interests.

[2:09:33] It's going to manifest itself in lower fees.

[2:09:37] And I believe it would also improve returns

[2:09:40] and certainly alignment of interests.

[2:09:42] So it makes absolute sense.

[2:09:46] And you'll be working with those managers

[2:09:47] who would be stingy right now deploying capital.

[2:09:51] So make commitments so you have the exposure

[2:09:54] to the asset class, to the edge,

[2:09:57] the competitive advantage that they have.

[2:09:58] But they're going to be very thoughtful about the deployment of that capital because even

[2:10:03] though you make a commitment on one year, it'll be five before that capital is ultimately

[2:10:09] deployed.

[2:10:10] So again, it comes back to working with the right manager.

[2:10:13] So that Model 5 makes absolutely total sense and you've already begun implementing it

[2:10:20] in effect when you became CIO.

[2:10:24] So, the spirit, transparency and accountability, we're going to go build on what Trustee

[2:10:30] M. P. said.

[2:10:31] So, we want you to know what we're doing, but I'm also going to review and tab 15.

[2:10:39] The underwriting process, we've already put in place for private markets, we made it

[2:10:43] too step.

[2:10:44] I just don't repeat this just so long on the same page.

[2:10:47] If we see a private market's investment, we come to you and say, here's the firm, that's

[2:10:52] why we won't put the firm.

[2:10:53] Here's the people.

[2:10:54] Here's how much we'll make.

[2:10:56] Here's the people that are going to present to you.

[2:10:58] You make a decision to go forward or not.

[2:11:01] If we go forward, then we come back to you with a second analysis.

[2:11:04] We've repeated a few.

[2:11:06] We tell you we've done all the legal work.

[2:11:08] So we've just made it a two-step process,

[2:11:09] and that's what this tab memorializes for you.

[2:11:12] That's already in place, and we're doing it.

[2:11:15] Okay, so now we go to the next tab.

[2:11:19] And we're going to conclude this section.

[2:11:23] And what I've written to you is that we actually adopt this underwriting model.

[2:11:30] And we can do this within the IPS.

[2:11:34] We were Tom, David and I reviewed it.

[2:11:37] But we think it's so important that the board understand it and talk about it

[2:11:42] that you would affirm to us, yes, we understand you're doing it

[2:11:45] and we're comfortable if this is how you're going about your private markets work today for us.

[2:11:53] I don't know if we need a policy adoption on this, but my goal is transparency and accountability.

[2:11:59] This is what we're doing.

[2:12:01] And this is what we think will add value.

[2:12:07] I would certainly put that forth as recommended by Steve.

[2:12:12] I'll second that.

[2:12:13] I think it is within the purview of staff, but I think a motion does, in fact, reinforce the fact that everything's been put on the table in front of us.

[2:12:21] and we are in concurrence to move in that direction.

[2:12:25] And motion is?

[2:12:27] To adopt the underwriting model for private markets and

[2:12:30] applications.

[2:12:31] And that is my second.

[2:12:33] Okay.

[2:12:34] Tim.

[2:12:34] And then Dick.

[2:12:35] Read with the motion.

[2:12:37] Oh, it's easy.

[2:12:38] I mean, it's for us now and for future boards,

[2:12:43] the best thing about it is we've classified

[2:12:46] the range of options out there.

[2:12:48] And we've made it very clear what is

[2:12:51] is the most effective structure for this board.

[2:12:56] Dick?

[2:12:57] Just for clarity, putting a whole process in picture here from once we the board have

[2:13:03] agreed on a asset allocation, which would include a segment devoted to this.

[2:13:08] And once you have brought a candidate that fits your in the running model and we have approved

[2:13:12] that, if I'm understanding it, let's pick a number, we got a hundred million dollars.

[2:13:16] You're going to be funding them through their budget and so on and so forth.

[2:13:19] But whether or not you commit that $100 million, we've delegated to you to make that decision

[2:13:25] if and when the stars are aligned right based on your cooperation.

[2:13:30] And until you decide to fund that, that $100 million will be spread across the allocation pro-rata

[2:13:36] and when you do fund it, you'll draw down from the other aligned items pro-rata

[2:13:40] that the intention about would work.

[2:13:43] I mean, previously, if my memory's right, when we used to have an allocation for alternative

[2:13:47] of the capital calls hasn't been gone yet. We tried to replicate that through a hybrid

[2:13:54] of other investments.

[2:13:56] And it's out there and we call it quasi-alternative.

[2:13:59] The IPS calls for rebalancing ranges around asset class targets. So your staff, Steven's team

[2:14:05] has flexibility to alter that, but ultimately it will be roughly 70% return seeking equities

[2:14:11] and roughly 30% fixed income. And so at any point in time, when one of your private managers

[2:14:16] calls capital down, Tom, Steve, and Mike, and I look at current allocations and where

[2:14:22] should that money come from based upon their judgment.

[2:14:24] The model gives them flexibility to operate within board approved policy.

[2:14:29] Tactically, you become aware that within the range, right?

[2:14:34] I would like to append one important thing to that.

[2:14:37] It does not, the intention is not to go off and sign contracts or do things, the intention

[2:14:42] is that there's a process, the firm, the people, the investment, and that we will come

[2:14:50] to you and say, we think we should do this, which increases this part of the market at

[2:14:53] this time within the ranges.

[2:14:56] When you said discretion or tactical, it's not as though we're making

[2:15:10] I'm actually a little bit hesitant to adopt this at this point. I think this is a personnel

[2:15:16] specific authoritative or dict mandate. So that is to say that I feel comfortable with

[2:15:24] this since you're in the spot. So if we adopt this model and then you're not in the spot,

[2:15:28] basically give them the next CIO sort of free reign. I don't know if we should have a sunset

[2:15:33] clause on it and have it be sort of, yeah, that it has to renew with each new CIO. But I mean,

[2:15:41] this is basically complete authority. So again, I'm not entirely comfortable only assuming,

[2:15:48] you know, you were in that role. So I don't know if it's something we can revisit in the future,

[2:15:52] or not, but that's my one concern.

[2:15:57] David, do you want to respond to that?

[2:15:59] Well, Steve should, because I had a question for Steve, respect to complete authority.

[2:16:04] One of Steve's strengths in terms of transparency and coming back to the board getting people

[2:16:08] on the boat is this process envisions the board being involved in making these decisions,

[2:16:14] not Steve doing it or Tom, whether or not.

[2:16:16] But that's my point, though, David, is that I completely trust the people he's bringing

[2:16:19] forth.

[2:16:20] And then that two-step process that he gives us the information that we then act on.

[2:16:24] But if it wasn't Steve, then it's a different gatekeeper.

[2:16:28] that's bringing us in opportunities or investments

[2:16:31] that I think I would have concern with this sort of

[2:16:33] expertise.

[2:16:34] So that's my only point.

[2:16:35] So I understand Trustee Vega just question.

[2:16:39] Let me try a kind of a connected sequence here

[2:16:42] that maybe Daniel said, oh, this is an improvement

[2:16:45] for more rad.

[2:16:46] Right now, we're in mixed mode.

[2:16:50] We have this top-down allocation with big ranges

[2:16:53] that's been set or visited next month.

[2:16:56] We don't have a set of rules for how to do it in the middle.

[2:17:00] So as money comes into our investments or we get cash from the county,

[2:17:04] there is no set process of how to put those private investments in the ground.

[2:17:11] We just don't, we haven't had one under and I've been promising you to come back with one.

[2:17:16] So I think this process would be bigger than me in the sense that

[2:17:21] there's an annual allocation review with the consultant on what the ranges are.

[2:17:26] All investments will be driven by, this is the right firm, the right people, and the right

[2:17:31] investment.

[2:17:32] And all investments come to you for twice.

[2:17:37] So you actually have a lot of control.

[2:17:39] So it just memorializes how we've been operating in a way.

[2:17:44] This defines the discipline of the process that is added control.

[2:17:51] And if for some reason Steve should ever not be here, A, we have the ability to change the process.

[2:17:58] And B, we have the comfort and control of our general consultant.

[2:18:03] It's a piece of concrete you're standing on.

[2:18:05] So let's say that I guess the UT reported there's a lot of sharks off the coast these days.

[2:18:11] I might mention that to me.

[2:18:12] It's funny on the morning.

[2:18:14] But to your point, you don't want these things to be tied to an individual or a team.

[2:18:18] I would think if I wasn't here tomorrow morning, you're in good shape because it's a process

[2:18:23] that everybody's in.

[2:18:24] And you can say, I want to talk about this process, pull up that memorandum and how we're

[2:18:29] going to change it.

[2:18:30] Without that, you don't, we don't have any concrete right now because we were in this transition

[2:18:34] period and this is the apartment market's concrete.

[2:18:38] And I think what Samantha's raising is the model, is that something that does not depend

[2:18:44] and on one particular individual that establishes a model that would go depending on whoever is the CIO?

[2:18:54] I'm going to ask the independent experts.

[2:18:58] Well, a couple things to keep in mind.

[2:19:01] One, this particular model doesn't change the fact that all private investments come before you for approval.

[2:19:06] So the IPS currently calls for that section B, the delegation authority, all private investments

[2:19:13] have to come to you.

[2:19:14] The staff can make follow-on investments of up to 1% to an existing, so you have an

[2:19:18] existing relationship with a private manager, Stephen Tom can decide after their underwriting

[2:19:23] using the processes and the methods that he just described, they can do follow-on investments

[2:19:27] of 1%.

[2:19:28] So you're still in control of the aggregate asset allocation to private equity and private

[2:19:34] real estate.

[2:19:34] You're still in control of the ranges around those and they will continue to be sufficiently

[2:19:40] narrow so that you get what you expect to get and you're still vetting hearing from

[2:19:46] and vetting the private investment deals before they go into the trust fund.

[2:19:51] So the answer is we like the model we encourage you to endorse it in terms of whether it's

[2:19:57] hard coded in policy or an addendum to the statement of the investment policy.

[2:20:00] They don't have a really strong opinion on that.

[2:20:02] We're Steve or your circumstances were

[2:20:05] to change tomorrow.

[2:20:07] You revisit structure, you visit policy.

[2:20:10] And I don't feel more comfortable about it.

[2:20:11] There was a line that said this policy

[2:20:12] should be visited upon installation of a new CIO.

[2:20:16] I didn't hear in the motion though

[2:20:17] that we were asking staff to come back with a policy.

[2:20:19] What I heard is that we're adopting the recommendation

[2:20:23] on the model, the underwriting model

[2:20:26] for private market allocation.

[2:20:28] So it's simply a motion and action of this board which could be changed and we're supporting

[2:20:35] with staff is saying.

[2:20:37] So it's not, it's not, it's not ever locked in, it could always be changed by this

[2:20:43] board or future board, but it's guidance and we don't have anything now.

[2:20:49] So this at least puts in place or codifies what you are already doing.

[2:20:55] Is that fair to say?

[2:20:56] It does.

[2:20:56] Okay, so it's really a codification of what the staff is doing, and by the motion it

[2:21:03] supports what the staff is currently doing.

[2:21:07] And of course the sentence at the end may be that this process gets reviewed annually,

[2:21:14] the annual ask allocation update.

[2:21:16] Okay, really driven by depending on the results.

[2:21:19] Samantha, is that for you?

[2:21:21] Yes, perfect.

[2:21:21] Okay, Richard, skip, and then Dan.

[2:21:26] Almost every conversation of this general area and others as well, you talk about interest

[2:21:34] alignments and incentive alignments and so to me there must be some, there's an inference

[2:21:43] not knowing you or not knowing the history of the last couple of sentences, not being

[2:21:52] and number four of the model, as opposed to just, or by the way, we're going to work

[2:21:59] on incentive alignments.

[2:22:02] So what was your decision to not make a requirement and alignment as opposed to Google

[2:22:11] work toward it?

[2:22:15] Which page are we on, Trustee?

[2:22:17] We're on the page that's on the board.

[2:22:18] You have four, three main points with respect to the underwriting model and then your conclusion is we're going to work on aligning the interests.

[2:22:33] Okay. My question being, isn't that at the fourth point or do you not want to be bound by that?

[2:22:41] Yes.

[2:22:43] It is the fourth point.

[2:22:47] I made it a separate paragraph because we have this larger effort including public markets

[2:22:52] have given better alignment of interest, but I could have easily been the fourth point.

[2:22:56] As I say, not knowing the context, reading it alone, the words will work to create, sort

[2:23:04] of give wiggle room to subsequent generations of people.

[2:23:10] So we'll make it the fourth point when we update this.

[2:23:12] It's not a big point. It is a point, however.

[2:23:15] We'll do that. We will make that the fourth, and we'll add the sentence.

[2:23:19] The new last sentence will be the annual review of the IPS.

[2:23:23] Skip?

[2:23:23] Yeah, I'm totally in support of endorsing this concept.

[2:23:30] And my question to Steve is, this sounds like what you and I have talked about in the past.

[2:23:37] relative to PIMCO. I see all these blurbs and I wonder what's going on and you

[2:23:42] told me that we're dealing with a firm that's solid. We're dealing with

[2:23:46] certain people that are in our corner and we have an alignment with. Is this

[2:23:51] this is exactly what you're trying to do, correct? Exactly. Okay.

[2:23:59] Dan? I'll

[2:24:00] answer the question. Okay. We have a motion and a second to support the adoption of

[2:24:08] the underwriting model for private market allocations, please vote.

[2:24:16] Adopt is the motion is the motion going to change the last sense to point four or is it?

[2:24:25] I don't think the motion is the change.

[2:24:27] Adopting the underwriting model and what you added is just is a part of it.

[2:24:32] Okay, well I won't vote on it for this in this way.

[2:24:35] I mean, I won't.

[2:24:36] Oh, yes.

[2:24:37] It's just for clarity.

[2:24:39] What was it?

[2:24:40] What was it?

[2:24:41] What was it?

[2:24:42] What was it?

[2:24:42] It was heard to add the fourth part that Richard mentioned.

[2:24:45] No, it's not.

[2:24:46] The annual review.

[2:24:47] As amended.

[2:24:48] So as amended would be the right term.

[2:24:51] We're going to amend what you see in the screen, too.

[2:24:53] As one, the last paragraph becomes point four.

[2:24:56] As amended is fine.

[2:24:57] And then the last sentence will be for trusty beg of it that we review.

[2:25:02] That really makes me a lot happier.

[2:25:03] Yeah.

[2:25:04] I want you to be happy.

[2:25:05] Thank you.

[2:25:06] That is what my wife felt the same way.

[2:25:09] Whoever is recording this motion, have it all now.

[2:25:13] Is that you, Elaine?

[2:25:15] And it's on the tape as well.

[2:25:16] Thank you.

[2:25:18] Does the second concur in the interview?

[2:25:20] I do.

[2:25:22] Please vote.

[2:25:29] Motion carries unanimously.

[2:25:31] All members present.

[2:25:32] Moving right along.

[2:25:34] Okay.

[2:25:34] Can I make one point on Samantha's comment?

[2:25:38] Sure.

[2:25:39] If that is her concern, which I don't doubt, and if I don't happen to be here, all you

[2:25:46] have to do when you interview CIO candidates is take this document in and put it right

[2:25:51] next to the face of the person you're looking at, and if you don't trust them to do what you

[2:25:54] just adopted, don't hire them.

[2:25:57] It's about that simple.

[2:26:00] Huh?

[2:26:01] Or her?

[2:26:02] I guess.

[2:26:03] Unless it's her.

[2:26:04] Okay.

[2:26:05] I think the fact of the matter seems to me that you were doing this anyway and just because

[2:26:12] we're operating now in full transparency, you brought it to the attention of the board

[2:26:16] and you didn't really ask us to adopt it, but I think that that's part of our responsibility

[2:26:22] to support what already is being done.

[2:26:26] So nothing new.

[2:26:26] We did have a lot of discussion on it and thank you very much.

[2:26:30] We'll move on.

[2:26:31] We are now on tab 12, which will be the fun part, and so here's how I'm going to very

[2:26:36] briefly set the stage for what's coming in June, but I'm not going to go through a lot

[2:26:39] of the beginning, which is my part.

[2:26:42] Nothing I turned over to Jim.

[2:26:43] What tab did you say?

[2:26:47] Tab 17.

[2:26:48] Yeah, that sounds better.

[2:26:50] Tab 17 were on item 13.

[2:26:55] So the chart on the screen is the chart you saw when we did the work in the fall of

[2:27:01] 15 and it took the capital markets inputs from our consultant at the time, which is

[2:27:06] Varus.

[2:27:07] This is the capital markets input from ANHUIT.

[2:27:10] It used their risk models to simulate what could happen to our trust fund over the

[2:27:16] next decade.

[2:27:17] And I've labeled this the thumb chart because if you take your thumb and put it on the chart

[2:27:22] on the page at the bottom of the gray bar, you should expect anything under your thumb

[2:27:26] to happen.

[2:27:27] It's really important.

[2:27:28] And so what we've done, because this is industry standard, yes, we've had...

[2:27:35] Depends on how big your thumb is.

[2:27:37] Yes, my thumb.

[2:27:39] So we've had two board educations on how...

[2:27:42] Am I thinking of President Trump?

[2:27:43] Yes.

[2:27:44] How returns are calculated, what risk is, what liquidity is, what uncertainty is.

[2:27:50] So what we've done to be prepared for June is if you go to the next page,

[2:27:57] which is our asset allocation, we've given this to seven firms and said you analyze our portfolio and tell us what your models tell you it would be.

[2:28:09] This is the portfolio we gave them in detail. You've seen this type of chart before.

[2:28:14] They have all come back and said based on our expertise, here's what we think the risk and return of the portfolio could be.

[2:28:23] We've also asked them to say if the wheels come off a kind of coldest chair Jacob chart,

[2:28:29] it's really bad what happens based on their modeling.

[2:28:34] And when you think about models, I put the opening line to Anna Krenner down there,

[2:28:40] like just like all happy families are like, but each unhappy family is unhappy in its own way.

[2:28:47] All of these best in class firms have the same modeling expertise that they all model differently.

[2:28:55] So we should expect it in results. The important thing is, one, we have a wide breadth of inputs.

[2:29:00] We'll share with you in more detail in June. Two, we've got the best of the best in the experts doing it.

[2:29:06] So what I'm going to do now is I'm going to end my part on this and turn it over to June because Jim is here to talk with you.

[2:29:13] more talk with you for some time. How do we do this? How does this happen? How do we do it?

[2:29:18] And you can see the PIMCO numbers are here on the chart on this table.

[2:29:23] So you have some context for how the best people do it and where these numbers came from.

[2:29:28] No one Jim's done is represented as a way on. Mike and Steve are going to walk you through how they do it.

[2:29:33] There's no decision here. There's no judgment. It's so you have this granularity of these numbers from the best people.

[2:29:41] And then in June when we talk, hopefully you'll have more comfort like okay when we see what they did

[2:29:47] We see why they're recommending you have this deeper context

[2:29:49] So if that I'm going to turn over to Jim and then Mike and Steve. Tim, did you have something before we go to Jim?

[2:29:55] Okay

[2:29:56] You're on. Thank you. It's a pleasure to be here

[2:30:00] First, let me thank SD Sarah for the vote of confidence they have in PIMCO. It's a pleasure to serve you and manage money on your behalf and behalf of your retirees and current active employees. I had a group called Investment Client Solutions. If we look globally in the team, combined strategist, analytics, and technology, we're a little over 30 people. We do studies

[2:30:29] is like the one that's in your board book, probably 750 to 800 studies for clients globally.

[2:30:38] What's in the board book was something that my colleagues walked through with Steve

[2:30:46] about six weeks ago.

[2:30:48] In the interest of time, I think would you spend about an hour and a half going through

[2:30:52] it with Anshul?

[2:30:53] Is that right?

[2:30:53] In the interest of time, I'm going to go to a few pages to highlight some of the focus

[2:30:58] It's Steve wanted us to talk principally about process

[2:31:01] and how we think about this.

[2:31:04] So I'm going to spend the majority of time

[2:31:05] talking about how we get to our expected returns

[2:31:09] on our capital markets, assumptions,

[2:31:11] and then how we do in a manner that's scalable,

[2:31:14] so we can run studies globally, because we're not just doing it

[2:31:19] for the US, we're doing it for clients in the UK

[2:31:21] in Germany, in Malaysia, in Switzerland, Japan, et cetera.

[2:31:27] So there's a whole large amount of things that we need to come up with expected returns on.

[2:31:34] So skip ahead to page five.

[2:31:39] And this is a process that we've evolved over the past five or so years that I've been involved with it.

[2:31:47] And traditionally what you see in terms of expected returns is one of three different approaches.

[2:31:55] The first is to say we have a long history of returns and we think all those returns

[2:32:00] are equally likely in time.

[2:32:04] The second is to say, well, returns can go up and down over time is their information

[2:32:10] that we can use to condition those expected returns going forward and that can either

[2:32:15] be a model-driven approach or some subjective approach.

[2:32:19] Our approach is kind of a combination of the two.

[2:32:22] We have a large team of about 60 people in analytics who look at various different

[2:32:27] relationships in markets and we will use those models as guide values.

[2:32:35] And then in addition to the guide values, there is a structured survey that there are about

[2:32:39] 14 of us who go through every six months.

[2:32:43] The last time we did it was the end December beginning of January or setting up to do it for

[2:32:47] mid-year assumptions and what we have is a web-based tool that we go in and we have the

[2:32:55] analytics guide values you can click and see what we put in the last time we did it

[2:32:59] and then taking account subjective things that we're seeing in the markets we may tailor

[2:33:04] our assumptions for what returns will look like over the next three and ten years.

[2:33:10] The way the guide values work is we start by looking at macroeconomic factors.

[2:33:15] what are views for GDP growth, what are views for inflation, US, Europe, Japan, other

[2:33:22] large markets, because conditional on our views, the models will then give specific individual

[2:33:29] guide values.

[2:33:30] So if I was very bullish on the US economy over the next 10 years and say it was growing

[2:33:33] at 4%, the model would imply that it should have a higher view on equity markets and other

[2:33:41] return values.

[2:33:42] And so as we do this, we collect these things and also the information also gives us some

[2:33:49] consistency checks in the process.

[2:33:51] So we first start with the models, we take the survey process and then because we're

[2:33:57] spanning about 3,000 different indices in a lot of different currencies we use something

[2:34:03] which is a factor approach and instead of going into the nuances of factor approach for those

[2:34:08] who are not familiar with it.

[2:34:09] If you think about all the food that's out there and sort of decompose food, you got

[2:34:15] carbohydrates, fat, protein, and then some other things that actually affect the flavor

[2:34:19] but the real nutrients are really those things.

[2:34:23] And so when we decompose the markets into factors from the 55 inputs, we can get a number

[2:34:29] of factors that span the set and then recast that out to populate about 3,000 different indices

[2:34:36] that we have in the system.

[2:34:38] When we get those, there are system of automated checks that sort of go back and

[2:34:43] iteratively look at them to say, are there consistencies?

[2:34:47] Are certain things just look too good to be true, which would drive any sort of

[2:34:53] optimization results to give sort of implausible asset allocations?

[2:34:57] And generally, what we find is currencies, people have some subjective

[2:35:03] of views on currencies that in reality don't square too well with historical information

[2:35:09] ratio.

[2:35:10] So we tend to truncate or sort of ameliorate the range on currencies, particularly emerging

[2:35:15] market currencies.

[2:35:17] So once we've got that, we've got a course that have used that when you take any portfolio

[2:35:24] we come across, we can then take the asset allocation weights times those core expected

[2:35:31] returns and that gives us a centering of the distribution.

[2:35:35] What we then do with the factors is we have 20 years worth of past data and so in we

[2:35:39] see month by month how those factors have actually performed and will resample from

[2:35:46] those past monthly data and the procedure known as the bootstrap which will give you a wide

[2:35:51] variation around that and I'll get to that in a minute in terms of an analog to Steve's

[2:35:58] thumb chart.

[2:36:01] So skipping ahead to page 10,

[2:36:07] this was the analysis that Steve asked us to

[2:36:10] do with a 7030 benchmark, the current portfolio and portfolio option 1 and portfolio option

[2:36:29] One moves assets from the 18% in the S&P index and into the acquies so more sort of a

[2:36:42] broader global diversification of the equity mix so take down a U.S.

[2:36:46] centric concentration and also takes down the exposure to high yield.

[2:36:53] portfolio. Portfolio 2 increases the exposure to U.S. equity and reduces the exposure to

[2:37:03] emerging markets. And what you see down below, if you make those changes, the estimated

[2:37:08] returns move from about 5.1 percent in either the current portfolio or portfolio 1 down to

[2:37:19] to about 5% in option 2 and that's relative to the 70-30 benchmark expected return of

[2:37:27] about 4.4%.

[2:37:29] So let me take a minute to say, and if you look at the equity expected returns, we're

[2:37:36] at a little over 4.5% annualized over the next 10 years for the US S&P 500, slightly higher

[2:37:45] for EFU, which would be Europe, Asia,

[2:37:49] Far East developed markets, and then a couple points higher

[2:37:52] from an emerging markets perspective.

[2:37:56] That represents a couple things, both in terms

[2:37:58] of an initial valuation perspective and where we see growth

[2:38:03] globally over the next decade.

[2:38:06] If you look at what our growth expectations are

[2:38:09] in the United States, we're predicting about a 2% real GDP growth

[2:38:14] in the U.S. and about 2.3 percent inflation. So slightly higher on growth in

[2:38:20] inflation than we've seen over the last 10 years but noticeably lower than if

[2:38:24] we look back to say 97 through 2007. If you're understanding the numbers here,

[2:38:31] the returns, you used to word return, those are nominal returns, I'm not reading.

[2:38:34] Those are nominal returns. And they're aromatic or geometric. Those are geometric.

[2:38:40] If we look at that, you combine with the starting point of higher valuations in the, you know,

[2:38:51] using a 10-year treasury yield of about 2.45 percent right now,

[2:38:57] compare that with, you know, a decade ago where it was about 4.6 percent to start

[2:39:02] and current Schiller Cape or cyclical adjusted price earnings ratio at around 27

[2:39:11] versus an average long-term of around 17. We see assets being not incredibly

[2:39:21] rich but sort of on the on the on the rich side globally rates much richer

[2:39:28] abroad than in the United States, if you look at Europe and you look at Japan, for example.

[2:39:34] We also see aging demographics, sort of tampering, or tempering how much we see returns

[2:39:45] reverting to longer-term historicals, and I think one of the things that's important

[2:39:49] to understand is we're now in the third-largest expansion in the US history, so the likelihood

[2:39:54] of seeing a recession or two over in the next 10 years is not insignificant.

[2:40:00] So our current forecast is about 20% probability of recession in the next year.

[2:40:06] If you said was that mean for five years, that means there's probably about two and three

[2:40:10] chance that we'll see a recession in the next five years.

[2:40:13] HMF, I could ask you to help with the row at the bottom, the expected volatility and how

[2:40:21] you estimate that.

[2:40:22] And then if we could go through the pictures on that because I think you've done a good job

[2:40:26] Most people don't do a looking at different scenarios. Yeah

[2:40:30] One of the things we do is since we have these factor exposures monthly for 20 years

[2:40:35] What the process does is resample from those 20 years. So what we may get is is a repeat of history

[2:40:43] But we may get an over sampling of the 2008 period or an over sampling of the 2000 tech meltdown

[2:40:50] And so what that's going to do is the volatilities are going to correspond or the width of the

[2:40:57] distribution is going to correspond roughly to what historical volatilities are, but it's

[2:41:03] also going to give you much more exposure to tails because you're coming up with hypothetical

[2:41:08] worlds because you could get a tech bubble followed by a 2008 that give you some tails scenarios.

[2:41:17] And the one thing, you know, I do want to stress because it's interesting looking at the figures

[2:41:23] of what the realized volatility was over the past three years, is the estimated volatility

[2:41:28] for all these portfolios are 11.5 to 12 percent, which is roughly twice what we've experienced

[2:41:34] over the past three years.

[2:41:35] And we're worried about investors getting complacent by anchoring just on the returns we've

[2:41:42] seen which we think is largely a result of the amount of stimulus from central

[2:41:47] blanks in the U.S. and global.

[2:41:51] If I could just jump in and I want to translate something or practical things

[2:41:55] we've had multiple board meetings to talk we've talked on the staff up being

[2:41:58] very diversified. Part of it is to Jim's point about the potential for higher

[2:42:04] volatility so when we look at these numbers and we look at different

[2:42:08] portfolios, what we would not want to see which we don't is there's some jump

[2:42:14] So that gives us confidence that whatever we're thinking of doing is in this space.

[2:42:19] It also gives us confidence to stay diverse like, because Jim's got a couple of series

[2:42:24] of visuals here that kind of capture that.

[2:42:29] So yeah, to do, sure, just before you move on to the next one.

[2:42:35] As I look at these different portfolio options, I see such minor changes between them and I

[2:42:41] I think this is kind of going to maybe a little bit of your point.

[2:42:45] They're so similar in my view.

[2:42:48] I mean, if we were to make a change,

[2:42:53] it would be such a minor change, which

[2:42:56] tells me that we're kind of on the right track.

[2:42:59] So it gives me comfort.

[2:43:00] I think it's kind of one of them saying,

[2:43:02] I don't know how everybody else feels, but I want

[2:43:06] to amplify trustee hand talks, one, when you look at this work

[2:43:10] done independent staff, it tells you that whether we recommend the current portfolio or one or two,

[2:43:16] the specifics of what we're recommending are two different, and it's fact-based who have an

[2:43:21] independent assessment from a pretty rigorous process, and it's one of seven. So it's specific,

[2:43:28] and the recommendation, June's going to be, we're not going to make many changes. We're not going

[2:43:31] to recommend many changes. Right, I think you have evidence of what that means. Yeah, so I think that's

[2:43:36] my point is that we're heading into a period where we're not making major changes. We're on the right

[2:43:40] path and if we tweak a little bit here or there, so it kind of, it gives me confidence

[2:43:45] that we're moving in the right direction.

[2:43:49] Dick?

[2:43:50] I understand a lot of this is just from our background education as we prepare to make decisions

[2:43:55] next month, but looking at the, to Tim's point, the expected returns across these options

[2:44:01] here are all very similar, are also very deficient relative to our actual assumption.

[2:44:06] Well, you also put in front of us alternative portfolios based on the capital market assumptions

[2:44:14] that would get us to our actual essence.

[2:44:19] We can see how extreme they would have to be in order to achieve that.

[2:44:23] So, the

[2:44:27] run is going to bring up the thumb chart,

[2:44:32] but prior to that,

[2:44:36] there's not we can

[2:44:37] use Jim's one.

[2:44:42] It's up to that one.

[2:44:45] Mr. Boardman, your comment is a good one.

[2:44:48] The word extreme is an important word in that, because when we look at the cap market assumptions from PIMCO,

[2:44:54] our own, some of the other providers that provided input, there's really very few asset classes that will get you there.

[2:45:00] And our humble opinion that would get you there prudently. The expected return for private equity is in the range of eight to nine percent. That is an excess of your ex-world Zoom-grade return, but not prudent to invest your money in private equity. Our expected return for global equities is seven point two.

[2:45:17] But the volatility is close to 19 and Jim's comment about volatility expectations on a go-forward basis in the complacency that we've had for the last 5 to 7 years in a low of our market environment means we shouldn't be reaching for those types of things.

[2:45:31] I didn't want to suggest we should but I think it would be useful for the record to show that we have considered those because we have established an actual assumption.

[2:45:39] And I know what our actual is going to say is if we pick one of these, it's woefully lower than what he's using and whether he's going to come back in 12

[2:45:46] So we have to make that adjustment through what we have concluded.

[2:45:49] That's right.

[2:45:51] Let me make a really critical point here.

[2:45:55] The question is what was these pronouns?

[2:45:58] So one of these is an ass allocation.

[2:46:01] So if you remember the chart that we had up that showed the assing classes.

[2:46:07] In Jim Moore's case, he should have expected risk for a chart.

[2:46:11] So that these is an allocation.

[2:46:12] So we can put an allocation in front of the board.

[2:46:15] Problem is, if you look at this chart, every allocation we put in front of you, everyone will have the following.

[2:46:24] It looks like based on what we know, and our best estimate of thousands of variables, you will get 5%.

[2:46:33] but you should not be shocked if you get 15 or minus 5.

[2:46:39] In every portfolio we put in front of you will have that profile.

[2:46:43] So if you think about it, to say this portfolio will get 7,

[2:46:48] the portfolio that I say gets 7 on an expected basis

[2:46:51] will be statistically not too different than the one that gets 5.

[2:46:58] So the question is what's the driving logic?

[2:47:00] The driving logic, as Cyril says,

[2:47:05] diversifies and minimizes the risk of loss and maximizes the return.

[2:47:09] And with these pictures, tell us, as we've done that, we are well diversified.

[2:47:16] We've managed the things we can't our fees.

[2:47:18] And every one of these portfolios, and Brent, if you go down to two pictures,

[2:47:25] oh, I don't have to click one, just click yeah, click down to keep going.

[2:47:30] Every one of these portfolios could return easily, return 7 or 8 or 0.

[2:47:39] And so there is no, my point is there is no profile that says you'll get 7 and a quarter.

[2:47:46] Because every time we put that down we have to give you a range around it.

[2:47:49] The range is going to be big.

[2:47:51] And in Jim's point it's particularly going to be big now.

[2:47:54] So I think what the path of going down is.

[2:48:00] Can you bring it down?

[2:48:01] I'm sure.

[2:48:07] That's the one way to go.

[2:48:11] Well, what are you doing for that?

[2:48:13] What I'm hearing, correct me if I'm wrong,

[2:48:16] these are really best guesses.

[2:48:19] But their expert best guesses based on their modeling of both history

[2:48:23] and I'm going to, I always call it crystal balling

[2:48:27] Where might go is that a fair assumption? Yeah, I think that is it's I would say they're educated

[2:48:35] Yes, it's based on all the information we have available in our our professional best estimate

[2:48:45] Funds or

[2:48:47] Comprehensible obligation regarding

[2:48:50] There aren't very many real outliers. I mean almost everyone is kind of somewhere

[2:48:57] between hours and portfolio one and two and 70, 30.

[2:49:01] I mean, they're just aren't any major outliers.

[2:49:05] Not in the public on the space, no.

[2:49:07] Well, probably, rarely even in the private ones.

[2:49:09] Well, corporate, you have a different problem.

[2:49:11] They're more often than not de-risking.

[2:49:14] They're frozen.

[2:49:15] They're de-risking.

[2:49:15] They're glide-pathing down.

[2:49:17] So they're more heavily tilted towards longer data.

[2:49:20] Fixed income and less towards it.

[2:49:21] So I mean, we're not going to get any revolutionary

[2:49:29] We're just faced with this reality that we are around this number somewhere, and the implication of that is, are some,

[2:49:39] assume great, as uncomfortable as our sponsor might feel about it, is high, and all of our peers are high.

[2:49:49] They've been coming down.

[2:49:50] I know that we've settled down.

[2:49:52] Everyone's coming down.

[2:49:56] We're probably shock sponsors throughout the world

[2:49:59] with how much further they have to come down to be realistic.

[2:50:03] And the cost of that is telephone numbers.

[2:50:07] I think the difficulty is between a rock and a hard place,

[2:50:12] the rock being the investment returns in the hard place,

[2:50:16] being the political reality of if you squared the expected investment returns with the funding

[2:50:21] contributions would be very difficult and painful for taxpayers.

[2:50:29] So it's an educated guess.

[2:50:31] We went through those before and we know where we are now with the 10%.

[2:50:38] So I mean like you said Steve, we could be shocked, pleasantly shocked with 15% or we could

[2:50:45] go on the minus side.

[2:50:46] So, why don't we move on and complete this process of an educated yes.

[2:50:56] So I'm going to ask Jim to spend a couple more minutes like this.

[2:50:59] Maybe the next five.

[2:51:00] There's a series of charts here that capture what could happen and then we're going to have Mike and Steve go through how they do it.

[2:51:08] So what this chart shows is taking that whole resampling out of 25,000 hypothetical years.

[2:51:20] What you get is a slightly different shape in the distribution with the principle difference

[2:51:30] between the current portfolio and option one being shown up in the upper left or near

[2:51:39] the peak of the distribution and then really into the right tail.

[2:51:43] And that's really driven by the overweight to emerging market equities which has the

[2:51:51] propensity to in some years outperform tremendously and I think that was a large driver of what you

[2:51:58] saw in your equity performance last year is emerging market equities had a very good year.

[2:52:05] And if you look at what our expected return assumptions are for emerging market equities,

[2:52:10] we're more bullish on emerging markets than we are in developed markets for a few reasons.

[2:52:15] One from a valuation perspective, as a multiple of earnings that are at a lower level, two

[2:52:21] real rates are higher and three from a demographic perspective, they tend to be younger, which is

[2:52:28] where you tend to see more growth.

[2:52:30] Being emerging markets that has the attendant risks

[2:52:33] of being more volatile.

[2:52:35] You don't have the same sort of rule of law.

[2:52:37] You have more fluctuations in currencies

[2:52:39] and those sorts of things.

[2:52:41] So it's a question of understanding those risk

[2:52:45] and return trade-offs in your comfort order.

[2:52:47] So I'm going to take the moderator's part.

[2:52:50] There's my favorite chart.

[2:52:51] It's two charts in.

[2:52:54] And

[2:52:57] which I need to click on.

[2:52:59] I just want to ask, I just think that one more.

[2:53:03] So kind of close Jim's presentation here.

[2:53:09] Not only do they simulate what could happen,

[2:53:11] they said what happens in bad times,

[2:53:13] which is the lower chart.

[2:53:16] They said what happens in normal times,

[2:53:18] which is the one you saw in general.

[2:53:20] And they said what happens in really good times.

[2:53:23] The reason, I think this is a good place to close

[2:53:26] is twofold. One is the amount of rigor that's been going on behind the scenes and I want to be

[2:53:31] confident of it. Two, a wide range of outcomes. And I was looking in my book to see the charts I

[2:53:38] showed you two years ago and we were fully diversified and we focused on our fees and we've had really

[2:53:45] great returns. So part of the unpredictability of life is being diversified and being prepared.

[2:53:50] But we've also done this kind of homework so we're not going to be shocked at these outcomes.

[2:53:55] So, any questions for Jim before we jump into that?

[2:53:58] I wanted to ask you a question, Jim.

[2:54:00] First of all, I really appreciate you being here and the work that you do in PIMCO does

[2:54:05] for us.

[2:54:06] My question, though, you concern me when you say over the next five years, there's a pretty

[2:54:12] good chance of another recession.

[2:54:14] I'd like you to dig a little deeper on that and provide some facts as to why you made

[2:54:20] that statement.

[2:54:21] Sure.

[2:54:23] If you look at the frequency of recessions historically over US history, you tend to see

[2:54:30] on average a recession about once every six years.

[2:54:33] The last recession we had started December of 2007 and ended in early in early 2009.

[2:54:42] So if you go back, we're eight years since a recession.

[2:54:46] At any point in time it's very difficult to have a crystal ball that will tell you exactly

[2:54:52] when a recession will happen and so we look at it probabilistically and we have a number

[2:54:59] of walls that sort of look at is it is the probability increasing is the probability decreasing

[2:55:05] and it uses things like the chart of sentiment that Steve showed you the chart of industrial

[2:55:10] production and a number of other factors that go in.

[2:55:13] Our current estimate of a probability of recession in the next year is about one in five

[2:55:21] or twenty percent, which means there is an eighty percent probability of no recession

[2:55:27] in the next year.

[2:55:28] If you just say, if I assume it's twenty percent each and every year of the next five

[2:55:33] or eighty percent probably of no recession, then the probability of no recessions at all

[2:55:38] over the next five years is 0.8 to the fifth power, which is roughly about a little

[2:55:44] over 30%.

[2:55:45] So that gets you the idea of the odds of having a recession over the next five years

[2:55:49] is about two and three or once at least one in the next.

[2:55:52] But the circumstances, the last recession were very different, I mean today all indicators

[2:55:59] are the economy is strong, the business environment is good, the market is good, so that's why

[2:56:07] I don't get that speculation, you're just facing it on the averages, is that it?

[2:56:16] The averages and how things change, I can relate a conversation, you know, I had in late

[2:56:22] 2006 with Tony Sanemero who was then the president of Philly Fed and was one of my dissertation

[2:56:29] advisors.

[2:56:30] And you know, Tony over lunch said, what are you guys seeing because we were bearish in

[2:56:35] in late 2006 and 2007 and we were specifically looking at the housing market and some other

[2:56:41] things because the Fed economists weren't saying it and in 2006 indicators looked

[2:56:48] very robust.

[2:56:50] Right now we don't see any strong indicators and that's why we're at sort of a 20% indicator.

[2:56:57] If we start seeing more issues of China, for example, or we see some other fundamentals in terms of consumer behavior, and that probably may rise.

[2:57:09] A year from now, I could come back and say our estimates are only 15 or 10%, but I could come back and say it's 20 or 25 or even 40%.

[2:57:18] Okay. So it's a little red flag, not a big one right now.

[2:57:24] Okay, Steve. Okay, we might be focusing on with the light just to bell curves.

[2:57:32] Can you put that back up to that chart if I'm understanding it quickly.

[2:57:36] This is the average and the return over a 10-year period and the tails get to

[2:57:41] the extreme of this would say with an extremely low probability that we would

[2:57:45] have a 70% annual return for 10 years. No, it is it is a what you could expect

[2:57:52] for any one-year draw within the ten years. So if I looked at the cumulative over ten years,

[2:57:59] that would probably shrink to a width of about a third of what you should have.

[2:58:03] It can't be this. But there's a relationship between an enormous annual drawdown

[2:58:08] and the subsequent years. I don't know how one reads anything.

[2:58:11] Yeah, and in some sense, one of the criticisms of a bootstrapped technique is the likelihood of

[2:58:21] getting back to back years, which we did happen to see in equity markets in

[2:58:26] 2000, 2001, 2002. So you have three bad years. But the flip side is you had

[2:58:32] 2007, 2000, or principally 2008 being a very bad year and it had a very sharp

[2:58:37] rebound in 2009. So the possibility of getting recessions or

[2:58:43] reversals is what gives you sort of a more peaked distribution but also

[2:58:46] about or fail.

[2:58:47] The key point is this is an annual outcome based on a 10-year average, a 10-year.

[2:58:53] So this is a good time to transition.

[2:58:56] Wait, Steve.

[2:58:57] Bob?

[2:58:58] I'd like to piggyback on Supervisor Jacob Madam Chair's question to Mr. Moore.

[2:59:05] You mentioned the 2007-2008, the housing industry was the culprit.

[2:59:10] All right, you mentioned as we're going forward now in 2017, we're not really seeing anything.

[2:59:18] How do you come up with the 20% is that just a default setting?

[2:59:22] How did you come up with that number?

[2:59:24] It's a modeling technique known as sort of a probit is the modeling technique and it takes

[2:59:31] various different macroeconomic and financial variables that go into this model to predict

[2:59:37] predict or recession. The models in the predictor recessions can be quite volatile in terms

[2:59:45] of the probability. So for example, when you get a downturn in GDP prints, it can spike

[2:59:51] a bit higher. When you get downturns in sentiment or industrial production, it can go up.

[3:00:00] Just take the moderator's perspective, because we're out of town, because I can summarize Jim's answer, having lived it, but I think in terms of it makes sense. We don't know when the next procession is coming, but there are rigorous kind of standard statistical procedures to take data and try and have an estimate. So the question is, is some estimate that you'll understand is imperfect? Better than none. And so I think the process is rigorous. And I just want to close in those

[3:00:29] three charts. My favorite clause is the illusion of precision. We can get things to ten

[3:00:36] decimal points, and you do it because it's better than having nothing, but there's

[3:00:41] a precision that that could happen or will happen, not the case. So I think it's the

[3:00:45] rigor to have a rigorous approach, but there's no certainty in Jim and others will know that.

[3:00:51] So I think that there is a very robust way to describe it. You have to take data and say,

[3:00:56] So let's make an estimate, and we could have a whole off site on that.

[3:01:01] Thank you.

[3:01:02] So what we're going to do is Steve and Mike are going to close us up and represent

[3:01:07] their colleagues that do this, and they'll also be here next month to cover this for this.

[3:01:12] Great.

[3:01:13] Thank you.

[3:01:14] Great.

[3:01:15] So let's pull up the next.

[3:01:16] It's already there.

[3:01:17] Fantastic.

[3:01:17] So this is a continued discussion from what we've been having with you.

[3:01:20] Going back to the educational retreat on March 2nd, where you heard from all the aunts.

[3:01:24] you heard from us, you heard from Dr. Melvin

[3:01:27] from the University of California, San Diego,

[3:01:29] and of course from Steve.

[3:01:31] What we're going to talk about today is a continuation

[3:01:34] of what Pipco just went through it, Jim,

[3:01:36] just walked us through, and that is the cap market assumptions.

[3:01:38] It's one of the necessary ingredients

[3:01:39] to do an asset allocation study, things

[3:01:42] that we need to be mindful of or what are the expected returns.

[3:01:44] We've just been a fair amount of time on that.

[3:01:46] What's the volatility or risk with a range around those?

[3:01:49] Jim showed you different bell shape distributions

[3:01:51] and what are the correlation assumptions?

[3:01:54] When we do our work, we're looking out 10 years,

[3:01:56] and over 30 years as well.

[3:01:59] And these really are best estimates

[3:02:00] that we come humbly and suggest

[3:02:02] that we know that we will be precisely wrong,

[3:02:05] but we do believe that we will be directionally accurate

[3:02:07] and we do believe that we will get the relationship

[3:02:09] between cash and core bonds and equity

[3:02:13] and private equity directionally accurate.

[3:02:15] And we'll show you our past experiences with that.

[3:02:18] But just because you see decimal points

[3:02:20] to Steve's comments a moment ago, don't believe that that precision gives us any more insights

[3:02:25] or different information or better information to make choices.

[3:02:29] We are modeling indexed returns, the beta that you can get in the marketplace.

[3:02:33] In some areas such as private equity and hedge funds, however, we do factor in some selection

[3:02:39] effect that we do think that you can get better than, quote, the broad market.

[3:02:43] It's started to find the broad market for things like hedge funds and private equity.

[3:02:47] We do these quarterly, and then roll them out to our clients as well.

[3:02:53] The methodology that we use is not too dissimilar from what PIMCO is doing in terms of a building

[3:02:58] block approach that is a common and best practice PIMCO takes it a step further to look at risk

[3:03:03] factor conversions, which we think is a nice element to look at to think about how everything

[3:03:08] comes together at the end of the day.

[3:03:10] The building blocks that we use for equity, much like PIMCO, its income, inflation, growth

[3:03:15] and valuations.

[3:03:17] you'll see our numbers in just a few minutes for interest rates we're looking at

[3:03:20] the current market yields and fair value pricing inflation we have a consensus

[3:03:24] forecast number of 2.2 percent I think the number I heard Jim reference a

[3:03:28] minute ago was 2.3 percent so we're in the right neighborhood there and then we

[3:03:32] look backwards when we're thinking about volatility and correlations but don't

[3:03:36] rely naively just on past performance and past volatility we are looking at

[3:03:41] where we are in the cycle and making adjustments we do believe that volatility

[3:03:44] consistent with PIMCO's comments of volatility will be higher in the next ten

[3:03:48] years than it has been observed in the last ten years. So let's take a look at

[3:03:54] what our actual assumptions are and we'll keep the discussion going.

[3:03:58] Sounds good. Thanks Steve.

[3:03:59] What you have in front of you are capital market assumptions commonly utilized

[3:04:04] asset classes that are very relevant for the trust fund. You can see the

[3:04:08] ten-year assumptions for both return and risk defined by standard deviation of

[3:04:13] volatility and these are the numbers that went into the thumb chart that Steve

[3:04:18] presented just a bit ago and what we wanted to do is show you how these

[3:04:23] compare to others out in the space. We've spent some time already looking at

[3:04:27] that but before we do that I want to skip ahead to this slide capital market

[3:04:33] assumptions forecast first actual you might ask yourself how have we done how is

[3:04:38] stand done with their modeling versus what's actually happened.

[3:04:42] Steve mentioned the sense of humility that we come forward with capital market assumptions

[3:04:46] and the precision or best guessing that goes around this.

[3:04:51] But for simplicity, say what we're showing here is a 70% U.S. stock and 30% U.S.

[3:04:58] bond portfolio rolling 15 year periods and in red you can see what was forecasted.

[3:05:05] So on the top left, you can see about 18%.

[3:05:08] That was what we forecasted back in 1981 for the next 15 years.

[3:05:13] And you can see in blue, what was reality?

[3:05:16] A couple of different things.

[3:05:17] We have not been precisely correct.

[3:05:20] I would say directionally accurate is fair.

[3:05:23] Also notice just how much lower return assumptions are today,

[3:05:27] relative to where they were.

[3:05:28] We all know what inflation and interest rates were back in the 80s.

[3:05:32] I think the tenure treasury was at 15%.

[3:05:34] We said here today it's at two and a quarter, return assumptions have come down significantly.

[3:05:42] I mentioned that we're going to share what other other firms estimate for different asset

[3:05:48] classes.

[3:05:49] I believe we've shared this with you before.

[3:05:52] This is a horizon actuarial survey done last year, 35 different firms, and across a wide

[3:06:00] variety of asset classes, what are the return assumptions?

[3:06:03] You can see in blue the high firm for that specific asset class and purple the low assumption

[3:06:10] for that specific asset class.

[3:06:12] The average is the green diamond and we are the red circle.

[3:06:18] I would note that we're pretty close to the average across most of these asset classes,

[3:06:22] maybe a bit more conservative than the average firm out there on average.

[3:06:32] And then I'll conclude. If you don't mind going back, just a couple of slides, the S.D.

[3:06:37] Sarah, I thought it was, forward looking risk and return expectations.

[3:06:43] And what we've done here is we've taken the current asset allocation of the trust fund.

[3:06:48] You can see the numbers represent the target weights.

[3:06:52] We've added our capital market assumptions, and we've displayed a couple of different things here.

[3:06:56] First, on the left, you can see, again, all of the underlying asset classes, what the policy allocation is to each, and on the bottom, starting with what's shaded in that darker gray, the expected nominal return, the expected standard deviation or risk, and then the sharp ratio, and the sharp ratio is really a measure of efficiency, how much return are we getting, how much excess return are we getting per unit of risk? You want to increase that to the extent that you can.

[3:07:24] That's what we show on the left. On the right we show the distribution of expected returns.

[3:07:31] And like what Jim from PIMCO showed, what we're looking at here is a 10 year expected distribution.

[3:07:38] So think of that blue bar 0.7 as sort of a worst case estimate over the next 10 year period.

[3:07:45] It's actually the 95th percentile return to the gold square of 12.8 in the best case scenario.

[3:07:53] of the 5th percentile expectation, we see a 12.8% annualized return over the next 10 years.

[3:08:01] If we were to show this over the next one year or any given year, to Jim's point,

[3:08:06] these would be much, much wider. The return expectation over a short period of time is going to be

[3:08:13] much more variable. So a 0% return or a 12% return in any given year is a pretty high probability

[3:08:19] relative to that 6.6% expected return over the long term.

[3:08:25] And I'll just conclude by reiterating what you all are going to reaffirm or approve

[3:08:30] next month. The asset allocation is the single most important decision that you all can make.

[3:08:36] And I'll commend Steve on what he's put forth in front of you all, making sure that you understand the inputs,

[3:08:43] the methodologies and ultimately the outputs of not just us but a wide variety of firms in the marketplace.

[3:08:52] It's really been fantastic.

[3:08:56] Any questions or might there's questions?

[3:08:59] I might give a right-per-side of your chart here is interesting and I'm not certain I fully understand it.

[3:09:04] Whether it's any given year or it's on heavy one of the 10 years on average, it would look like that.

[3:09:10] But what jumps out at me is profoundly,

[3:09:13] is a 4.1% to a 9.1% is a huge range

[3:09:17] of potential outcomes we'd be facing.

[3:09:19] Yeah, that's fair to say.

[3:09:19] If I'm understanding, this truck truck is half the time,

[3:09:21] it'll be better or worse than that.

[3:09:24] That's huge.

[3:09:27] And I think that reflects two things.

[3:09:29] One is, it's an uncertain world.

[3:09:32] But to remember, we did the education session on risk.

[3:09:37] And we said there was liquidity risk, and that's the big serious one.

[3:09:42] There's risks that you can measure, but we measure it in this very sterile standard

[3:09:47] deviation world, and then there's uncertainty things you can't measure.

[3:09:51] So one of the things that's happening here is since the tool set we have is this middle

[3:09:56] tool set of measuring what could happen using these mathematical tools, you get these results

[3:10:06] that are very precise, but very hard to intuit, and they're trying to capture this uncertainty.

[3:10:12] So when you look at the chart that Mike has up, it says, based on the best we can do with

[3:10:19] the tools that we have, this is what the industry standard is for looking at what could happen.

[3:10:24] It doesn't mean that we should anchor completely on that, because remember we have liquidity,

[3:10:28] we have risk that we can measure this way, we have uncertainty, it's just one of the key

[3:10:32] inputs.

[3:10:34] Okay. Anyone else? Thank you. Well, thank you, Steve, and Steve, and Mike, and Jim, and

[3:10:43] great report. Samantha, this is a David question. In the future, maybe we're thinking about

[3:10:50] flipping our presentation so that we have the experts at first. We have people like Sasha,

[3:10:55] and Jim coming down, and I don't know if it makes sense having them sit around all morning

[3:10:59] through our under-items. And this way, I think we get more quality time early in the morning

[3:11:04] with these presentations because they always end up towards the end sort of pushing in on

[3:11:08] that audit committee, for example. So it may be something to think about, have a time

[3:11:12] certain for the disability.

[3:11:15] You're forgetting what time this started.

[3:11:17] What time was that?

[3:11:18] Which is, we started at nine and they got on at about 10, 15th and if we flip them, then

[3:11:24] our members on the disability side have to come and wait. But I'll take it under advisement.

[3:11:29] But the bottom line is we, not only are we starting our meetings later, we used to instead

[3:11:33] at 8.30 at 9, but we're getting to investments faster

[3:11:36] than we've ever gotten to before.

[3:11:38] Well, and sometimes the disability can't,

[3:11:41] we had an extra long disability calendar this morning.

[3:11:45] I suggest we just play it by ear, and we never know for sure.

[3:11:49] I hate to see our members waiting on the disability thing,

[3:11:54] but I mean, relatively speaking, we're almost done at noon.

[3:11:59] So just recall you had these conversations at six at night.

[3:12:03] No more.

[3:12:05] Thank you.

[3:12:06] Item 14, item 14, seminars and conferences, any additions?

[3:12:15] Item 15, information items, and then future agenda items.

[3:12:21] Any board members want to place anything on the agenda for future?

[3:12:26] Just future, real quick.

[3:12:30] The SACR's modern investment theory and practice for retirement systems is coming up.

[3:12:34] It's a great opportunity to learn a lot at UC Berkeley this summer, and I would commend

[3:12:41] it to, well, you never know, it's a blue and a gold thing.

[3:12:44] We can free speech there, no?

[3:12:46] I don't know.

[3:12:46] You can have whatever you want.

[3:12:48] But I'd like to commend this to our newest elected board alternate as a possible.

[3:12:57] Okay,

[3:13:00] thank you and seeing nothing more we have no closed session meeting is adjourned, but thank you all for attending and thanks for the great work for all of you do for us. Appreciate it and to my colleagues. Thank you.

Board Meeting

Agenda

Transcript