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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
New Mexico Educational Retirement Board: August 23, 2013 3
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
New Mexico Educational Retirement Board: August 23, 2013 4
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
New Mexico Educational Retirement Board: August 23, 2013 5
MINUTES OF THE
NEW MEXICO EDUCATIONAL RETIREMENT BOARD
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
New Mexico Educational Retirement Board: August 23, 2013 6
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
New Mexico Educational Retirement Board: August 23, 2013 7
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.
New Mexico Educational Retirement Board: August 23, 2013 8
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
New Mexico Educational Retirement Board: August 23, 2013 9
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
New Mexico Educational Retirement Board: August 23, 2013 10
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.
New Mexico Educational Retirement Board: August 23, 2013 11
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.
New Mexico Educational Retirement Board: August 23, 2013 12
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.
New Mexico Educational Retirement Board: August 23, 2013 13
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.
New Mexico Educational Retirement Board: August 23, 2013 14
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
New Mexico Educational Retirement Board: August 23, 2013 15
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.
New Mexico Educational Retirement Board: August 23, 2013 16
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.”
New Mexico Educational Retirement Board: August 23, 2013 17
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.
New Mexico Educational Retirement Board: August 23, 2013 18
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
New Mexico Educational Retirement Board: August 23, 2013 19
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.
New Mexico Educational Retirement Board: August 23, 2013 20
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.
New Mexico Educational Retirement Board: August 23, 2013 21
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.
New Mexico Educational Retirement Board: August 23, 2013 22
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.
New Mexico Educational Retirement Board: August 23, 2013 23
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