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NEW MEXICO EDUCATIONAL RETIREMENT BOARD

ACTION SUMMARY

August 23, 2013

Item Action Page

APPROVAL OF AGENDA Approved 4

APPROVAL OF MINUTES

June 14, 2013 Approved 4

INTRODUCTION OF GUESTS Informational 4

ELECTION OF BOARD OFFICERS

Mary Lou Cameron, Chair; Russell Goff,

Vice Chair; Hipolito Aguilar, Secretary Approved 4

CONSENT AGENDA: BOARD TRAVEL

Mary Lou Cameron to NCTR Annual

Convention, October 5-9, Washington DC Approved 6

GENERAL INVESTMENT CONSULTANT

SELECTION

Interviews with Callan and NEPC Approved NEPC 6

INVESTMENT REPORTS

Investment Division Procurement

Policy; Draft Revision for Approval Approved [amended] 13

June 2013 Quarterly Performance Report Informational 16

Investment Committee Report Informational 16

FY15 BUDGET APPROPRIATION

REQUEST& STRATEGIC PLAN Approved 16

DISABILITY RETIREMENTS Approved 20

New Applicants (Perm & Continuing)

COLAs

Appeals

HISTORICAL DISABILITY

RETIREMENT REVIEW Informational 20

New Mexico Educational Retirement Board: August 23, 2013 2

Item Action Page

AGE & SERVICE RETIREMENTS Approved 20

DIRECTOR’S REPORT

Retirement Season Update Informational 21

Audit Update Informational 21

Stakeholder Update Informational 21

Retiree Health Care Update Informational 21

Interest Overpayment Status Report Informational 21

Refund Interest Rate Informational 21

Other Informational 21

NEXT MEETING: OCTOBER 25, 2013



ACTION SUMMARY

August 23, 2013

Item Action Page

APPROVAL OF AGENDA Approved 4

APPROVAL OF MINUTES

June 14, 2013 Approved 4

INTRODUCTION OF GUESTS Informational 4

ELECTION OF BOARD OFFICERS

Mary Lou Cameron, Chair; Russell Goff,

Vice Chair; Hipolito Aguilar, Secretary Approved 4

CONSENT AGENDA: BOARD TRAVEL

Mary Lou Cameron to NCTR Annual

Convention, October 5-9, Washington DC Approved 6

GENERAL INVESTMENT CONSULTANT

SELECTION

Interviews with Callan and NEPC Approved NEPC 6

INVESTMENT REPORTS

Investment Division Procurement

Policy; Draft Revision for Approval Approved [amended] 13

June 2013 Quarterly Performance Report Informational 16

Investment Committee Report Informational 16

FY15 BUDGET APPROPRIATION

REQUEST& STRATEGIC PLAN Approved 16

DISABILITY RETIREMENTS Approved 20

New Applicants (Perm & Continuing)

COLAs


Appeals

HISTORICAL DISABILITY

RETIREMENT REVIEW Informational 20

Item Action Page

AGE & SERVICE RETIREMENTS Approved 20

DIRECTOR’S REPORT

Retirement Season Update Informational 21

Audit Update Informational 21

Stakeholder Update Informational 21

Retiree Health Care Update Informational 21

Interest Overpayment Status Report Informational 21

Refund Interest Rate Informational 21

Other Informational 21

NEXT MEETING: OCTOBER 25, 2013


MINUTES OF THE


REGULAR MEETING

August 23, 2013

A Regular Meeting of the New Mexico Educational Retirement Board was called to

order on this date at 9:00 a.m. in the Educational Retirement Board Room, 6201 Uptown

Boulevard, N.E., Ste. 203, Albuquerque, New Mexico.

Members Present:

Ms. Mary Lou Cameron, Chairwoman

Mr. H. Russell Goff, Vice Chairman

Mr. Hipolito J. Aguilar

Mr. Bradley Day

Dr. J. Thomas McGuckin

The Honorable James Lewis, State Treasurer

Members Excused:

Mr. Delman Shirley, Secretary

Legal Counsel Present:

Mr. Chris Schatzman, General Counsel

Staff Present:

Ms. Jan Goodwin, Executive Director

Mr. Rick Scroggins, Deputy Director

Mr. Bob Jacksha, Chief Investment Officer

Mr. Steve Neel, Deputy Chief Investment Officer

Ms. Sara Brownstein, Chief Financial Officer

Mr. Robert Cardone, Financial Auditor

Mr. Mark Canavan, Real Estate Portfolio Manager

Others Present:

Mr. Allan Martin, NEPC

Ms. Claudia Armijo, Staff Attorney, LCS

Ms. Charmaine Clair for Judith Beatty, Recorder


b. Approval of Agenda

Treasurer Lewis moved approval of the agenda, as published. Dr. McGuckin

seconded the motion, which passed unanimously by voice vote.

Mr. Day asked if each board member could be consulted before the agenda is

published to see if they have something they want included.

Chairwoman Cameron asked staff to send out the draft agenda to board members 10

to 14 days prior to finalization.

c. Approval of Minutes: 6/14/13 Board Meeting

Vice Chairman Goff moved approval of the minutes of the June 14, 2013,

meeting, as submitted. Dr. McGuckin seconded the motion, which passed

unanimously by voice vote.

d. Introduction of Guests

Guests were introduced.

2. ELECTION OF BOARD OFFICERS

Chairwoman Cameron stated that today the Board would hold its annual election of

Chair, Vice Chair, and Secretary.

Dr. McGuckin nominated Ms. Cameron as Chair. Treasurer Lewis seconded

the motion.

Mr. Day nominated Paul Aguilar as Chair. Mr. Aguilar seconded the

nomination for discussion.

There were no other nominations for Chair and the nominations were closed.

Mr. Aguilar said he appreciated the nomination, but was concerned that he would

not have sufficient time to serve as Board Chair.

Mr. Day said he nominated Mr. Aguilar because, for at least as long as he has been

a member, the Chair and Vice Chair positions have been occupied by people who are

former teachers or former principals who are also beneficiaries of the plan. To avoid

potential conflicts of interest, he would like some kind of rotation where people not

covered by the plan could occupy the officer positions. He questioned how a plan


beneficiary could be impartial in voting for benefit changes, for instance, and how that

wouldn’t be subject to criticism from the outside.

Chairwoman Cameron responded that rotation was something that the Board could

address later if they wished.

Mr. Schatzman said the Chair could do voice votes or paper ballots.

Mr. Day suggested paper ballots.

Ballots were distributed.

Responding to Chairwoman Cameron, Mr. Aguilar stated that he is an inactive

member of the plan and a future beneficiary. He said he taught for a number of years and

was covered by ERB at the time, and he worked at UNM for seven years.

Mr. Schatzman opened the ballots and announced the votes were five in favor

of Mary Lou Cameron and one in favor of Paul Aguilar.

Ms. Cameron was reelected Chair.

Dr. McGuckin said he thought Mr. Day’s point a good one. Chairwoman Cameron

said she would put that on the agenda.

Nominations for the office of Vice Chair were opened.

Dr. McGuckin nominated Russell Goff, and Treasurer Lewis seconded the

motion.

There were no other nominations, and the nominations were closed.

Treasurer Lewis moved that nominations cease and Russell Goff be elected by

acclamation. The motion was passed by majority voice vote, with Mr. Day voting

against the motion.

Nominations for the office of Secretary were opened.

Vice Chairman Goff nominated Paul Aguilar as Board Secretary. Dr.

McGuckin seconded.

Dr. McGuckin moved to close the nomination for Secretary and approve Paul

Aguilar to the office of Secretary by acclamation. The motion was passed

unanimously.


3. CONSENT AGENDA – BOARD TRAVEL

a. Mary Lou Cameron to NCTR Annual Convention, October 5-9,

Washington, D.C.

Vice Chairman Goff moved approval of the Consent Agenda, as presented.

Dr. McGuckin seconded the motion, which passed unanimously by voice vote.

4. GENERAL INVESTMENT CONSULTANT SELECTION

Mr. Jacksha said NEPC’s contract comes due later this year and is running into the

eight-year limit in the current Procurement Policy. Staff has issued an RFP, which was

noticed in a number of on-line publications that are normally followed in the industry.

The ERB received three responses, from NEPC, Callan and PCA. He, Executive Director

Goodwin and Deputy CFO Steve Neel met, separately scored the RFPs, and unanimously

selected Callan and NEPC. He said PCA is a rather small firm and there were concerns

about their resources. A fourth firm, Wiltshire, submitted written questions but ultimately

did not submit a proposal.

Mr. Jacksha distributed scoring sheets and asked Board members to enter their

scores after both presentations were heard.

A 30-minute time limit was set for each presentation, with additional time allotted

for questions from the Board.

Callan

Paul Erlandson and John Jackson, Senior Vice Presidents at Callan, appeared before

the Board and made a presentation.

Dr. McGuckin asked Callan representatives to comment on how certain “big funds”

will play out, and how that might affect the ERB’s strategy.

Mr. Erlandson responded that the investment programs in a lot of these plans have

been very close to achieving their actuarial objectives. A dilemma is that, in the early

1990s, more than 95 percent of pension funds across the country did better than 7.5

percent. Benefit levels were consequently increased, which created the problem. He said

these funds will have to increase contributions, but no one wants to admit there is a

problem.

Mr. Day asked Callan to name the top three or four things they could do to address

the ERB plan, which is about 60 percent funded. He said the plan is a mature one, and the

ERB is paying out $900 million annually in benefits, which is increasing by $60 million a


year. He commented that the ERB is walking a very thin line, and a couple of bad years

in a row could create a serious situation.

Mr. Erlandson responded that they would first have to define the audience that is

concerned about this, and for some it is a matter of education. He stated that in one

instance in another state, legislators decided to take a credit as a contribution holiday

going forward whenever returns exceeded 8 percent even though allocation and actuarial

models factor in up and down years. He said people who are critical of the process need

to understand how it works.

Mr. Day asked how Callan would assist the ERB in educating people, and Mr.

Erlandson responded that it would be through the research papers they publish, for

example. He said every situation is different, and perhaps only one or two legislators may

need to be convinced. He said people covered by the plan are also afraid.

Mr. Erlandson said Callan worked with the State of Texas to get legislation passed,

and would send the details on that to staff.

Mr. Day asked what other things Callan would do to assist the ERB.

Mr. Jackson responded that they would seek to control expenses with allocations to

passive large cap on the long-only side; mid cap, small cap, and international small cap

and emerging markets. He said these areas, with the exclusion of large cap are ripe for

active management.

Mr. Jackson said that, in terms of shorter-term changes in the marketplace, Callan

agrees with the ERB’s approach taken for more opportunistic fixed income, and they

would promote continuity there.

Mr. Day asked how Callan would help the Board match assets and liabilities given

that they are a mature plan.

Mr. Erlandson responded that they would work with the actuary to model the

liabilities out, find out what changes might be happening, and then accommodate that in

the future.

Mr. Erlandson said Callan would also look at the ERB’s funding policy.

Mr. Day noted that the ERB has a 30-year closed policy, with 28 years left to pay

off the liability. He asked how Callan will help the ERB match its liabilities in the asset

base.

Mr. Erlandson responded that they would they would take the actuarial evaluation,

look at changes or issues that might be different in the future and model those, and then


look at alternative investment programs in terms of the impact and variability between

the investments and growth of liabilities.

Mr. Day noted that returns at 7.75 percent would wipe out the liability issue within

the next 30 years. Mr. Erlandson responded that they would use that to model an

allocation policy in combination with the funding policy and benefit policy – these would

be married together to minimize the variability on any one of them and find the “sweet

spot.” He said Callan has done it with all of their clients and would provide some

examples to staff.

Mr. Day noted six funds of similar size to the ERB that Callan has managed for the

past five years, and asked what was the best performance.

Mr. Erlandson responded that he did not have that information but could provide it

to Mr. Jacksha within two hours. He added that many of the decisions made by these

funds are not owned by Callan and Callan can’t take credit for them. He said Alaska, for

instance, has a very different funding policy from the ERB.

Treasurer Lewis asked how Callan would contain costs for the ERB plan.

Mr. Erlandson responded that they would look at existing fee schedules and the fee

schedules versus what Callan knows with other clients they work with; and they would

selectively find managers and work with them to rethink their fee models. He said timing

is important, because there are times when the momentum is in the ERB’s favor, and in

those cases the ERB would have more leverage.

Mr. Jackson said structure is also a factor, since passive management in large cap

equity would present a huge savings in an area where active management is struggling to

outperform.

Treasurer Lewis noted that Callan states that it is “the industry leader” for public

pension plans, and Mr. Erlandson responded that this was a bit of puffery. He said Callan

consults to more plans with more assets with very long records in many cases.

Treasurer Lewis asked if there are any pending legal matters that the Board should

be aware of with Callan, and Mr. Erlandson responded no.

Responding to Treasurer Lewis, Mr. Erlandson said liability driven investing is

essentially taking much of the equity risk off the table because there is cash flow from a

bond portfolio matched to benefit payments, so there is no need to take any risk.

Mr. Jackson added that, it also has a lock-in feature. If under-funded, the gap has to

be made up. Mr. Erlandson commented that liability-driven investing is for rich people,

because otherwise these are lower-returning assets that mean taking greater risks with the

remaining assets. He said this is not a good fit for the ERB.


Mr. Day asked if Mr. Erlandson was saying Callan would recommend that the ERB

not match assets with liabilities if a 10-year Treasury bond was paying 8 percent today.

Mr. Erlandson responded yes if the return the ERB needed to wholly fund was 8 percent.

Mr. Day said his point was that it wasn’t “all or nothing,” but something to move

towards, because the bond market cycle is at the end of the 30-year bull run, and now

there is a 100 basis point increase in ten year Treasuries in the last 45 days. He said the

way to run a defined benefit plan is to get to the point of matching assets and liabilities

gradually, since it can’t be done all at once.

Treasurer Lewis spoke to the challenges the ERB faces when the media and

legislators miss the point that the fund has a 30-year horizon and there is a downturn in

the market for a short period of time. He asked how legislators can be educated to

understand this kind of thing when on the house side of the legislature they are running

for office every two years.

Mr. Jackson responded that education is important. He said asset liability studies

reflect projections going out 10 years plus, so to expect a two-month return to be an

indicator of trend is faulty.

Responding to Mr. Day, Mr. Jackson said Callan sees a lot of interest in liability-

driven investments on the corporate side because they want to get volatility off their

balance sheets. While many of them have been put in place, the idea now is that this is a

low interest rate environment and locking in losses now is a good idea. As rates are

increasing, liabilities will come down. He said many have put the structure and traders in

place in terms of their funding levels – watching the liability side and where they are at

with the funding side – so when they hit the traders, the corresponding treatment is to

take off the bigger chunk of the liability and to immunize that.

Mr. Goff noted that Callan is servicing both DC and DB plans. He asked if Callan is

promoting one over the other. He noted that a DC plan is more expensive.

Mr. Erlandson responded that Callan’s mission is to work with the fiduciary capital,

and has taken the position that DB plans are far more cost effective in the public sector.

He said other organizations might not believe that, or have other objectives, and so create

another plan. Callan still believes it can add value to them, and so helps them in terms of

coming up with collective investment vehicles, which are lower cost, and passive

investing. He said they bring to them the same research, which is sensitive to cost and the

culture of the organization, to come up with more institutional quality and lower cost

programs to solve their funding objective.

Mr. Aguilar asked what the client-to-manager ratio is, and how many accounts are

managed by Callan.


Mr. Erlandson responded that he works with nine clients, and Mr. Jackson works

with seven. Mr. Jackson stated that Callan thinks it is critical to have manageable account

loads for the consultant-client ratio.

Mr. Erlandson said the company has a Trust Advisory Group (TAG), which is a

fund-of-funds solution. The two strategies TAG oversees are small cap funds, which are

not distributed because of the conflict question; if Callan is suggesting solutions that it

will economically benefit from, they see that as a clear conflict. He stated that Callan is

paid for the consulting advice, but is not promoting this as solutions to other clients.

Mr. Aguilar asked if people that serve on the trust advisory group also serve on

Callan’s other committees (client policy review committee, alternative investment review

committee or manager search committee), and Mr. Erlandson responded that Greg Allan,

director and president of research, oversees everything that happens in the firm, but the

operational people in all of those entities are completely separate.

Mr. Jacksha noted that there are other revenue sources for Callan in addition to

pension clients in general, and asked Mr. Erlandson to discuss those sources.

Mr. Erlandson responded that there are four areas they operate in: Fund Sponsor

Consulting (sovereign wealth funds, nuclear decommissioning trusts, DC plans and

pension funds like the ERB); Independent Advisor Group (middle market consulting

firms and financial intermediaries); Institutional Consulting Group (investment

management organizations); and the Trust Advisory Group.

Mr. Erlandson said Callan keeps records and there is full disclosure. Callan is aware

of their potential conflicts and discloses the managers with whom they do business. Mr.

Jackson added that what sets Callan apart is their level of transparency – whether six

managers or three managers are selected, the meetings are open to clients, who can listen

in or participate in the process.

Chairwoman Cameron asked who would attend Board meetings and work with the

Investment Committee.

Mr. Erlandson responded that both he and Mr. Jackson would attend, or just one of

them attend. Depending on the topic(s) covered, they would bring the research person to

that meeting.

Chairwoman Cameron asked what the typical response time, if there are questions,

and Mr. Erlandson responded that the founder says calls should be returned within 24

hours, even if it's just to acknowledge the question. That is the goal embedded in the firm.

Mr. Jacksha asked if the fee proposal is Callan's best and final or if they want to

modify that.


Mr. Erlandson said that is their best and final offer “unless there are things in there

that you don’t want, or there are things you do want.” He said Callan wants a long-term

relationship with the ERB.

[Break.]

NEPC

Allan Martin, NEPC, appeared before the Board and made a presentation.

Dr. McGuckin noted the large amount of “non-conventional” investments the ERB

has in its portfolio that are not available to the general public. He asked if that is a

reasonable strategy for a public fund and if that is sustainable in the long run.

Mr. Martin commented that NEPC believes that alternatives are a very important

part of public plans, and many of the ERB’s peers support that with fairly substantial

allocations in illiquid or alternative assets. Real estate is doing well in the ERB portfolio.

He said NEPC also believes ERB should be invested in private equity, currently at 7

percent, which is also stable and growing. He commented that opportunistic credit, which

took advantage of sellers in a panicked market, is now starting to shrink and to some

degree that piece of the portfolio will have to shift to something else. He said the ERB

did very well in opportunistic credit.

Mr. Martin stated that NEPC does not believe the ERB can reach the 7.75 percent

target with 60 percent in vanilla equities and 40 percent in long bonds.

Mr. Day asked Mr. Martin to list the top three things NEPC gives the ERB in value.

Mr. Martin responded that NEPC has delivered guidance, support and advice to the

Board that has enabled the ERB to perform well in challenging markets because NEPC is

willing to look more broadly than a lot of conventional firms at illiquid asset classes

where performance is available. He added that, at the end of the day, it is differentiated

investment advice to try to get returns as close to the return target as possible.

Responding to Mr. Aguilar, Mr. Martin said NEPC has a peer review process when

making recommendations. Every quarter, the practice team reviews the quarterly results

of its clients, the strategies that worked and didn't and where there should be more

concern when a strategy is not working. He said any manager recommended to the Board

has been through due diligence with the research team, and in the case of alternatives,

they do operational due diligence and visit the firm, look at compliance, and test out the

back office activities. He said the analyst makes recommendations to a peer review group

in their research area before they are put on the Focused Placement List.

Mr. Martin responded to questions from Treasurer Lewis on NEPC’s fee structure.


Mr. Jacksha asked Mr. Martin if their fee proposal is their best and final. Mr. Martin

responded that NEPC feels the fee is fair but stressed that NEPC would not want to lose

the ERB’s business over a fee.

[Mr. Martin left the proceedings.]

Mr. Jacksha distributed notes made by the evaluation team that reviewed the RFPs

and selected the finalists.

Board members turned in their scoring sheets.

Mr. Jacksha read the scores, noting that the Board unanimously ranked NEPC as

number one.

Vice Chairman Goff moved that the New Mexico Education Retirement Board

authorize Staff to execute the General Consulting Contract with NEPC contingent

upon New Mexico state law, Education Retirement Board policies, Education

Retirement Board approval for placement agents and negotiation of final terms and

conditions and completion of appropriate paperwork. Dr. McGuckin seconded the

motion.

Mr. Aguilar suggested that NEPC’s scope of work include, as a performance

measure, a requirement that NEPC demonstrate what steps it has taken to negotiate lower

fees with fund managers being considered for investment.

Mr. Schatzman suggested that, for more flexibility, the Board give a directive to

staff to assist with negotiating fees, and to report back periodically on the fees, which will

be monitored as part of NEPC’s overall performance. The report would include NEPC’s

efforts at cost containment through fee negotiations.

Mr. Jacksha agreed that the scope of work could say that one of NEPC’s duties will

be to help staff negotiate the lowest fees possible, or something to that effect.

The motion passed unanimously by voice vote.

Chairwoman Cameron thanked staff for their work.

Mr. Jacksha thanked the trustees for their questions and said this has been a good

discussion.

5. INVESTMENT REPORTS:

BOB JACKSHA, CIO & ALLAN MARTIN, NEPC


a. Investment Division Procurement Policy – Draft Revision

for Approval

Mr. Jacksha reviewed major changes made to the Investment Services Procurement

Policy.

-- Removed the eight-year limit on contracts and replaced it with four-year

contracts with contract extensions that cannot exceed two years.

Responding to Mr. Day, Mr. Jacksha said the extension periods would be formally

approved each time. He said the rationale is that if a manager is doing well, it would

seem unnecessary to go through the RFP process.

Mr. Day said this seemed like an evergreen deal and was not a good idea, in his

opinion. He commented that there are numerous benefits to issuing an RFP periodically.

Mr. Jacksha responded that this wouldn’t preclude the ERB from surveying the

marketplace periodically and making comparisons. Mr. Day said he disagreed with that

idea.

Responding to Mr. Aguilar, Mr. Schatzman said investment-related procurement is

exempted from the Procurement Code.

Mr. Aguilar said he agrees there is staff time in issuing an RFP, but it was evident

that the time and effort involved resulted in the Board being immensely engaged today in

a fruitful discussion about two great proposals that were presented to it. Because of that,

the Board has ownership of its advisor, NEPC.

Chairwoman Cameron recalled when the Board went through a similar process with

NEPC eight years ago that was very valuable for the members.

Mr. Jacksha stressed that the proposed language does not preclude the Board or

Investment Committee from deciding to conduct a search.

Treasurer Lewis asked Mr. Jacksha what the best practices are in other states. He

noted that the State Board of Finance is looking at some four-year contracts with the idea

of changing them to eight years. The issue is the amount of work involved in issuing

custodial and fiscal agent RFPs every four years.

Mr. Jacksha responded that the law varies from state to state.

Mr. Jacksha stated that he would like the proposed language to at least apply to

custodial bank services because the transition period is extremely difficult.


Chairwoman Cameron said she likes the current policy of four years with two-year

extensions. She said she appreciated the seriousness with which Mr. Martin took this

process today and his professionalism in approaching it.

Mr. Jacksha said the Board always has the option of canceling contracts it has with

any of its consultants, and most investment managers, with 30 days’ notice.

Mr. Day expressed concern that the Board could once again be partly populated

with people who seemed to lack a moral compass. His said an RFP keeps people on their

toes. He suggested a four-year contract, one two-year extension only, and then an RFP.

Vice Chair Goff expressed concern that six years might not be a long-enough

timeframe for some private equity managers, where it can take seven or eight years for a

fund to begin to show results.

Mr. Jacksha responded that this is addressed on page 8 of the policy, where it states

that investments in certain types of illiquid assets (opportunistic credit, real assets, private

equity and privately-held real estate) may only be made pursuant to contracts that are for

longer terms. Once signed, there is no “out” during the ten-year period unless key people

leave or the manager commits certain bad acts.

Mr. Jacksha said another type of contract is an evergreen fund (e.g., hedge funds),

which have no fixed term. After the ERB signs the contract, four years later the

Investment Committee reviews it and authorizes it for another four years.

Mr. Day moved that the language be changed to reflect a four-year contract

with one two-year extension followed by an RFP. Dr. McGuckin seconded the

motion.

Mr. Jacksha said he understands the Board's concern but he would stand by his

original recommendation not to have the limits. He said the fees can renegotiated when

the Board considers an extension.

Mr. Jacksha asked that the language be modified to call for “doing a search” as

opposed to issuing an RFP, since there are other methods that might be approved by the

Investment Committee or Board.

Mr. Schatzman asked if Mr. Day intended to include custodial banking services in

his amendment and Mr. Day responded no.

Mr. Jacksha suggested adding to Mr. Day’s language, “after such time a

search must be conducted under the procurement methods listed in paragraph F.”

Mr. Day added, “…if the RFP is not the preferred method.”


These amendments were accepted as friendly.

Mr. Schatzman read the language as follows: “Other than a contract for custodial

banking services, a single contract extension for two years may be granted. Thereafter the

Board or Investment Committee shall conduct a procurement search using one of the

procurement methods specified in paragraph F.” He said he would add a sentence stating

“there shall be no limit on the number of contract extensions for custodial banking

services.”

Mr. Day restated his suggested amendment to say, “with the RFP being the

preferred method.”

Dr. McGuckin agreed to this change.

The motion by Mr. Day, as amended, passed unanimously by voice vote.

Mr. Day moved to accept the Investment Services Procurement Policy, as

revised. Dr. McGuckin seconded the motion.

Mr. Jacksha commented that the Board has just shortened the maximum tenure of a

manager consultant from eight years to six years. He said the ERB has some that are

already at seven years.

Chairwoman Cameron said it was her understanding that the changes to the policy

do not affect existing contracts.

Mr. Schatzman said the discussion has made it clear that there is no intent to

abrogate the term of the existing contracts.

This was accepted as a friendly amendment.

Mr. Schatzman said the first sentence will remain as written in paragraph I.1:

and the next sentence would be “Other than a contract for custodial banking

services a single contract extension of two years may be granted by the Board or the

Investment Committee as applicable. Thereafter a procurement shall be conducted

using the procurement processes set forth in Paragraph F, with the RFP process

being the preferred process. There shall be no limit on the number of extensions of

a contract for custodial banking services.”

Mr. Schatzman said he would add language that those should be approved by

the Board or Investment Committee.

The main motion to accept the Investment Services Procurement Policy, as

amended, and re-amended, passed unanimously by voice vote.


b. June 2013 Quarterly Performance Report

Mr. Martin presented NEPC’s Investment Performance Analysis for the period

ending June 30, 2013, with the following highlights:

-- Over the one-year period ending June 30, the fund experienced a net

investment gain of $1.0 billion, which includes a net investment loss of $17.2 million

during the second calendar quarter. Assets increased from $9.4 billion 12 months ago to

$10.1 billion on June 30, with $320.4 million in net distributions during the year.

-- Over the past five years, the fund returned 5.8 percent per annum,

outperforming the policy index by 1.3 percent and ranking in the 24th percentile of the

InvestorForce Public Funds > $1 Billion universe. Fund volatility was 12 percent,

ranking in the 51st percentile of its peers. Risk-adjusted performance as measured by the

Sharpe Ratio ranks in the 26th percentile of its peers. Thus, the fund has produced more

return per unit of risk taken over this period than 74 percent of its peers.

-- Over the past year, the fund returned 11.0 percent, outperforming the policy

index by 1.6 percent and ranking in the 70th percentile of its peers. The fund’s volatility

over the last year was 3.8 percent, ranking in the 22nd percentile of its peer group,

resulting in a Sharpe Ratio of 2.9, which ranks in the 58th percentile.

Mr. Jacksha noted that Mr. Martin has done preliminary work in analyzing fees and

performance for one of NEPC’s clients.

Mr. Martin commented that fees are a major issue for public funds, because

obviously the ERB could hire an index manager, although it cannot index alternative

exposure. He said the ERB is in alternatives to generate a higher return for the fee. He

stated that NEPC is doing a pilot project for one client, to look at every one of their

managers, calculate the fees and then look at the return.

Mr. Martin stated that NEPC will be doing this for the ERB and should have a

report in October.

c. Investment Committee Report

Mr. Jacksha said the Investment Committee met yesterday and took the following

actions:

-- Committed a total of $135 million in two private equity funds from Industry

Ventures. The first fund buys company interests from venture funds. The advantage is

that a lot of the risk is gone because these venture companies have proven concepts,

proven marketing, and so forth. The second fund is a fund-of-funds mainly, where they

buy interests in venture funds or make commitments to them both in new funds or in the


secondary market. Connected to both of these are “overage funds,” where large deals go

into these spillover funds, which have lower fees than the main funds.

-- Committed $50 million to the Raith Fund, which buys distressed real estate

securities.

-- Reviewed two finalists from the risk parity search and selected PanAgora.

-- Because of turnover at NEPC on the private equity side, with the departure of

Bill Monagle two years ago and the more recent departure of Kevin Tatlow, the

committee has directed staff to do some due diligence on the matter and report back.

d. Other Investment Reports

None.

6. FY15 BUDGET APPROPRIATION REQUEST –

SARA BROWNSTEIN, CFO

Ms. Brownstein presented the FY Appropriation Request Summary to the Board.

She said it would be due on September 3.

-- Under Personal Services and Benefits: ERB is requesting the number stay flat.

The FY 2012/2013 actuals in that category are about $1.5 million less because of a large

number of vacancies in the agency.

-- Contractual Services: ERB is requesting $4 million more due to increase in

estimated investment fees.

-- Other Costs: ERB has included $350,000 more in the request; a small increase

for employee education as well as lease for another office space. If they become fully

staffed, they will outgrow the space, and are seeking space in Albuquerque or Santa Fe.

Also included is offsite space in the event of a disaster.

Responding to Mr. Aguilar, Ms. Goodwin explained that the ERB gets no general

fund revenue. She said the increase in investment fees is because the ERB Fund has more

assets in categories with higher fees.

Ms. Goodwin also clarified that a commission on the purchase of an investment

such as a stock becomes part of the cost basis of the stock. She said some fees paid to an

investment manager are “on budget,” as reflected in the budget, and others are “off

budget,” which means they are paid directly out of the funds that the manager is investing

for the ERB.


Mr. Jacksha stated that all of the ERB’s consultants, including NEPC and RAPM,

the actuary and the attorneys are on budget. Investment managers, which are typically

public equities and regular bond managers, are on budget and charge separately.

Responding to Mr. Aguilar, Ms. Goodwin said the budget set aside for a disaster

occurrence is part of the ERB’s disaster recovery plan.

Vice Chairman Goff asked how much extra space is being looked at. He said the

ERB has budget set aside for a new facility somewhere down the line, and wondered if

this is something the Board should be requesting from the legislature.

Ms. Brownstein responded that currently the ERB is looking at space equivalent to

the size of its Albuquerque office and which could accommodate five to ten FTE. As far

as constructing a new building, management has agreed that it would be better to stay in

the Gonzales Building in Santa Fe for the next five years instead of taking several million

dollars out of the Trust.

Mr. Day asked why there is a $1.5 million increase in Personal Services.

Ms. Brownstein responded that the FY 2013 numbers are actual numbers. She said

65 FTE are currently allocated for FY 14, which includes two term; and in FY 13 they

were allocated 62 FTE, and during the year they had at least ten vacant positions.

Mr. Day commented that this is $150,000 apiece.

Ms. Brownstein responded that this is based upon a huge range that is provided by

the State Personnel Office. She said pay band ranges are very wide, and all of the FY 14

numbers are based on the midpoint of that range, but could be higher or lower. Ms.

Brownstein added that she would revise the 10 vacant positions to reflect 15 because two

term positions are not filled. She added that the amount set aside for each employee

includes workers comp fees, unemployment fees, and other benefits, and those have been

increasing.

Mr. Day said he has done research since the last budget. The 55 employee salaries

and benefits were about $90,000 each at the time he researched this, and he called friends

who own pension companies and asked the average for salary and benefits. He said he

was getting numbers of about $58,000-$60,000, so it appears that the ERB is about 50

percent higher than the private sector.

Mr. Day pointed out that this is money coming out of the fund, and wondered why

the Board hasn’t looked at privatizing this.

Ms. Goodwin asked Mr. Jacksha what it would cost to outsource his position, and

Mr. Jacksha responded that it would cost at least $1 million to outsource his functions

and some staff.


Mr. Day said the ERB would not want to outsource certain key staff. He is talking

about the rank and file that makes the majority of the 65 employees, who are basically

administrative staff.

Mr. Aguilar commented that Mr. Day has made a very good point but should

remember the ERB is a state agency; so if the Board wants to privatize, then it should put

a proposal together for the legislature to consider, but should first have a study done.

Mr. Aguilar also commented that Mr. Day is comparing actual expenditures at the

end of the year to a budget, which is apples to oranges.

Mr. Day pointed out that investment managers have caused the budget to go up, and

the Board needs to talk to them. He said that is not acceptable.

Mr. Aguilar suggested that the Board take up this discussion at the annual retreat.

Continuing with her report, Ms. Brownstein said the Strategic Plan would be

submitted with the FY 15 appropriation request.

Responding to Mr. Day, Ms. Goodwin stated that staff is working on the business

plan.

Mr. Day suggested that the Item C under Measures (page 5) include the 30-year

closed amortization goal. He asked that it be inserted for people who don’t know what the

funding goal is.

Mr. Day noted that there is nothing in the plan that discusses expenses outside of

referring to “high quality administrative support.” Ms. Goodwin responded that cost

effectiveness is understood – this is the way the ERB does business.

Chairwoman Cameron noted that the Strategic Plan is not meant to include how the

ERB plans to achieve various objectives, because that will be part of another document.

Mr. Aguilar suggested that Measures should be written such that the answers are

more measurable. He commented that Item C (progress toward reaching Board’s funding

goal) isn’t a measure, but is a goal. He suggested that, as staff fleshes out the working

document, which gives the quantifiable data to make decisions, he would be interested in

seeing how that all ties together.

Chairwoman Cameron said it will be important for the Board to bring this back

during the year to review specifics.

Vice Chairman Goff moved to approve the FY 2015 Budget Appropriation

Request and Strategic Plan, as presented. Mr. Aguilar seconded the motion.


Mr. Aguilar asked that, as part of the motion, the Board also schedule budget

status update at the Board meeting after the end of the second quarter.

Vice Chairman Goff accepted this amendment as friendly.

The motion, as amended, passed by majority voice vote with Mr. Day voting

against.

7. DISABILITY RETIREMENTS – RICK SCROGGINS, DEPUTY

DIRECTOR

Mr. Scroggins presented this report.

a. New Applicants (Permanent & Continuing)

b. COLAs

c. Appeals

Vice Chair Goff moved for approval of a, b and c. Treasurer Lewis seconded

the motion, which passed unanimously by voice vote.

7a. HISTORICAL DISABILITY RETIREMENT REVIEW:

RICK SCROGGINS, DEPUTY DIRECTOR

Mr. Scroggins presented this report.

8. AGE & SERVICE RETIREMENTS:

RICK SCROGGINS, DEPUTY DIRECTOR

Vice Chairman Goff moved for approval. Treasurer Lewis seconded the

motion.

Mr. Scroggins said there have been questions about ERB reciprocity in the past. He

noted that the last person on the front page of the report is an ERB reciprocity with two

and a quarter years experience. While the monthly gross benefit reflected in the report

seems extraordinarily high, the bulk of it is paid back to ERB by PERA. Mr. Scroggins

said he is working to revise the report to show both the ERB and the PERA reciprocity

amounts paid.

Mr. Aguilar asked who came up with the “accounting nightmare” where the funds

pay back and forth. Ms. Goodwin replied she has initiated a discussion with her

counterpart at PERA to try to simplify the process.


Mr. Aguilar asked that a future Board agenda include a brief discussion about

reciprocity.

The motion passed by unanimous voice vote.

10. DIRECTOR’S REPORT: JAN GOODWIN, EXECUTIVE

DIRECTOR

a. Retirement Season Update

Ms. Goodwin reported that there were slightly over 1,200 July 1 retirees, and staff

has been able to stay on top of this load and process applications as they come in. She

noted that the next big month for retirement will be January.

b. Audit Update

Ms. Goodwin said the audit report is going smoothly, and staff is currently putting

together all of the information that the auditors will need.

c. Stakeholder Update

Ms. Goodwin stated that there will be a meeting with the stakeholders next

Wednesday.

d. Retiree Healthcare Update

Ms. Goodwin said the NM RHCA had their retreat in July and set premiums that

will go into effect in January. She said they are now in the process of doing a Medicare

RFP, and that will be be awarded in the next couple of months.

e. Interest Overpayment Status Report

Ms. Goodwin noted that the amounts collected at this point are very small either

because of outstanding smaller balances or because of payment plans that are still in

effect.

f. Refund Interest Rate - 7/1/13 - 6/30/14

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