LACERA

RFP – Fiduciary Performance Review

Respondents’ Questions and LACERA’s Answers

August 2006

  1. What aspects of the Executive Office role is investment related?

LACERA’s Chief Investment Officer (CIO) is hired by the Chief Executive Officer (CEO) and is responsible for managing the investment portfolio. The CIO reports to the CEO administratively and functionally.

The Chief Executive Officer serves as the sole director for LACERA’s 80 (approximately) Title Holding Corporations (THCs). The remaining officers include the Assistant CEO and staff from the Legal Office. LACERA holds legal title to its real estate investment properties through THCs.

  1. How many LACERA employees are considered investment related?

Approximately 41, which includes staff from the following areas:

Executive Office – 2,

Investment Office – 22,

Financial and Accounting Services Division– 10,

Legal Office – 4,

Internal Audit – 3.

  1. a) Is the role of officers of the Title Holding Corporationsincluded in this review? b) Are those officers all LACERA employees? c) If sohow many are there? d) If not, how many are external?

a)Yes.

b)Yes.

c)5

d)Not applicable.

  1. How are the title holding corporations related to LACERA's legaloffice?

Formation and maintenance of the Title Holding Corporations are handled by staff in the Legal Office, and three of the corporate officers are in the Legal Office and the Executive Office. LACERA's CEO serves as the director.

  1. To analyze staff qualifications and skill sets, will LACERAprovide resumes?

Yes, biographies or equivalent documentation.

  1. Are job descriptions written?

Yes, the classification specifications (job descriptions) are available on LACERA’s website.

  1. a) Does LACERA wish to limit level of employees whose skill setsare reviewed to more senior or management level staff (or on some otherbasis)? b) If not, to how many employees does this analysis apply?

a)No. The analysis would apply to all staff with investments or investments-related responsibilities.

b)There are approximately 41 individuals to which this applies.

  1. a) Does LACERA have an incentive component to staff pay? b) If so, tohow many employees does incentive compensation apply?

a)No, LACERA does not have an incentive component explicitly based on the fund’s investment performance.

However, some executive and management level staff are part of the Management Appraisal Program (MAP). This program has, in the past and may in the future, allowed incentive compensation tied to job performance and not to pension fund performance. In addition to MAP, the County’s Salary Ordinance allows the LACERA’s CEO to a grant salary adjustment up to 2.75% in any 12 month period for special achievement or exceptional contribution.

b)The MAP program applies to designated executive and management staff working in the Executive Office, Investment Office, Financial and Accounting Services Division, Legal Office and Internal Audit.

  1. Are there any policies currently being decided by the Board(s)but not yet formalized that would be considered by the successfulcandidate, e.g., an anti-terrorism policy?

No.

  1. a) Does LACERA currently have any internal management? b) What assets?

a)LACERA’s investment activity is managed externally. However, it should be noted:

  • As part of an emerging manager program, the Board of Investments, at the recommendation of LACERA’s Investment Office, invests in certain private equity partnerships and real estate limited partnerships/limited liability companies.
  • LACERA’s Investment Office, Real Estate Section staff, serve as the asset manager for one property, GatewayPlaza. This property is a multi-story office building located in Pasadena, California which is owned by LACERA as part of its real estate portfolio and serves as LACERA’s administrative headquarters.
  • Pursuant to the Board’s Investment Policy Statement, LACERA’s Chief Investment Officer (CIO)is responsible for re-balancing the portfolio to maintain asset allocation and/or to provide liquidity for cash needs or benefit payments.

b)See answer a) above.

  1. a) Are Real Estate title papers and signed limited partnershipagreements kept at LACERA or elsewhere? b) Will such documents be availablefor review, if needed?

a)The records for the Title Holding Corporations are maintained in the Legal Office, or in archive space controlled by Legal Office staff. The records include the closing binders of acquisitions and dispositions. The Minute Books contain documents for the corporations or partnerships, including the Articles, Bylaws, Resolutions, Operating Agreements and Partnership Agreements.

b)Yes.

  1. Does LACERA presently know of any aspect of this review thatwould have to be performed at sites other than LACERA's main office?

LACERA expects that the review can be completed by visiting LACERA’s main office with no other site visits required. The Consultant can, however, at its discretion, ask to visit other offices such as those of the Master Custodian or General Investment Consultant.

  1. a) Is the disaster recovery plan written? b) When was it revised last?

a)Yes.

b)June 2006.

  1. Are investment manager contracts generally uniform?

Generally yes. The form of the contract with the real estate investment managers differs from the form of the contract with the public market investment managers. Each contract is negotiated, so no two contracts are exactly alike.

  1. The list of investment managers includes 4 securities lendingmanagers. a) Are all 4 included in the review? b) Is Mellon one of themanagers? c) Are all 4 S/L agreements generally uniform?

a)Yes, all four are included in the review.

b)Mellon Global Securities Lending is one of the four.

c)Some of the boilerplate language is uniform. However, each manager provides LACERA with different securities lending services:

  • Standish Mellon—Cash collateral reinvestment.
  • Goldman Sachs—Domestic equities and corporate bonds.
  • Met West Securities—Treasuries, agencies and mortgage-backed securities.
  • Mellon Global—International equities.
  1. Does LACERA presently have a written securities litigationpolicy?

Yes.

  1. Will the four consultants included in Task 12 be available forinterview at LACERA's office or subsequently by telephone?

Yes, by telephone. Consultant, at its discretion, may decide to conduct site visits for one or more of the four consultants.

  1. Can the Entrance Conference coincide with the beginning of theonsite work?

Yes.

  1. a) If the Exit Conference occurs after the Final Report isdelivered, how does it differ from the Final Report Conference? b) Can thetwo conferences occur the same day?

a)The language in Section III.C.3. requires clarification. The Consultant would not deliver the final report at the exit conference but instead as indicated in Section III.C.5. at the Final Report Conference to the Boards of Retirement and Investments. The Exit Conference is a meeting at LACERA’s offices between the Consultant and applicable LACERA management and staff to render the field work at LACERA’s offices complete and discuss any potential findings the Consultant might have at that point.

b)These two conferences would not occur on the same day. The Exit Conference would occur at the completion of fieldwork and the Final Report Conference might occur 60 days later (upon completion of the final report) at formal Boards of Retirement and Investments meetings or possibly a joint session meeting. If a joint session meeting is not held, Consultant will present the final report at two separate formal meetings, one for the Board of Retirement and the other for the Board of Investments.

  1. Can you please confirm the number of on sites required afteranswering questions 17, 18 and 19?

During the RFP process, the Consultant may be required to complete one or two formal presentations or site visits to the Boards of Retirement and Investments. During the engagement, the Consultant may be required to visit LACERA’s offices at least twice to complete the following tasks: Entrance Conference, on-site test work and Exit Conference, and Final Report Conference(s).

  1. Regarding the certification required under Section IV. B. of theRFP, if a CPA firm that proposes on this RFP has to evaluate the currentfinancial statement auditor and its work product (Tasks 3, 7), does thatcreate an actual or potential conflict of interest?

LACERA is effectively amending the RFP document as follows:

  • Remove/Ignore the second bullet point under Section II, Task 7, Measurement, System-wide, which reads “Evaluation of the external financial statement auditor’s assessment of internal controls as part of their annual financial statement audit.”

The Consultant may, however, use a process-based approach to evaluate LACERA’s procedure for obtaining an annual audit opinion of its financial statements.

  1. Likewise, regarding the certification required under Section IV.B. of the RFP, if an Investment Consulting firm that consults for publicfunds proposes on this RFP and has to evaluate the current investmentconsultants and their work product (Tasks 3, 4, 6, 12), does that createan actual or potential conflict of interest?

a)Consultant should identify all actual and potential conflicts and propose methods and controls to minimize those conflicts.

  1. How many copies of the final report are required?

LACERA will request one-hundred and fifty (150) bound hard copies and an electronic copy in PDF or portable document format.

********************************

  1. If proposing or performing work pursuant to the RFP, what restrictions would LACERAimpose on Consultant with respect to proposing or performing advisory services forLACERA’s service providers?

Conflicts will be taken into consideration in the proposal evaluation and scoring process. The contract awarded will require the Consultant to continuously monitor and disclose conflicts.

  1. Please explain the meaning of “material conflict of interest with LACERA or any of its service providers,” as required at Section V, Part B of the RFP. a) Specifically, what kind of services, if proposed or provided to one or more of LACERA’s service providers, would constitute a “material conflict of interest”? b) What constraints would LACERA expect Consultant to accept on its proposal or performance of services to one or more of LACERA’s service providers while proposing or performing the Fiduciary Performance Review for LACERA per the RFP (e.g., the minimum amount of time since services were last performed; common personnel between the services performed for LACERA and one or more of its service providers, price paid to Consultant for the services, etc.)?

a)Please refer to Section IV, Part B (not Section V as indicated in the above question). A material conflict of interest would arise with LACERA’s “direct” service providers. The Consultant cannot, for example, complete the Fiduciary Performance Review contained in this proposal and simultaneously perform LACERA’s external financial statement audit.

b)The constraints/factors described in the question above will be considered in the evaluation of the proposals.

  1. Would Consultant still be considered to be a “qualified” Respondent without the inclusion (and thus, possible public disclosure) of confidential reports, findings, and/or recommendations from advisory services performed for clients similar to LACERA, as required at Section V, Part C-8 of the RFP?

Consultant may redact confidential and/or proprietary information in its reports, findings, and/or recommendations.

  1. a) Would Consultant still be considered to be a “qualified” Respondent if the Consultant does not propose on every task listed in Section II, Tasks 1 – 12? b) Is LACERA willing to consider joint bids including multiple firms? (Note: the second question was listed separately in the original correspondence.)

a)No. Consultant’s proposal would be disqualified if Consultant does not address all of the Tasks indicated. See additional explanation in question #32.

b)However, should, for example, Consultant A propose on Tasks 1-6 and partner with Consultant B who proposes on Tasks 7-12, and Consultant A and B submit a joint proposal, the joint proposal would be considered by LACERA’s evaluation team.

  1. This question intentionally left blank.
  1. The RFP is titled “Fiduciary Performance Review”, and the term “review” is used to characterize the work in many places throughout the RFP document. In some places, however, such as in the Sample Agreement in Exhibit C, the term “audit” is used, and the party previously referred to as “Consultant” is referred to as “Auditor.” Is LACERA requesting proposals for a review of the investment operations, or an audit of the investment operations?

For clarification, all instances in the RFP where the term “audit” is used should be replaced by the term “review.” In addition, all instances where the term “Auditor” is used, the term should be replaced by“Consultant.”

  1. a) What level of testing (including interviews with and observations of staff, development of testing plans, and execution of plans) does LACERA expect Consultant to complete? b) If testing is only anticipated for certain tasks within Section II, which tasks require testing, and what scope is anticipated for such testing?

a)The Consultant should perform all steps necessary, in its judgment, to complete the review. If the Consultant feels there are multiple “levels” of review, the Consultant should indicate so in the proposal, review plan, and fee structure.

b)The Consultant is to determine the appropriate level of testing required to complete this type of review (i.e., Fiduciary Performance Review) based on the Consultant’s experience in performing these reviews.

  1. How many finalists do the Audit Sub-Committee and LACERA staff intend to submit for review by the Boards of Retirement and Investments?

The evaluation team will review the proposals received and rate them according to a pre-determined scoring matrix. If, for example, the evaluation team determines there are five firms qualified to perform the engagement, these five qualified firms would be recommended to the Boards of Retirement and Investments.

  1. Is the list of tasks laid out in Section II considered to be an exhaustive list of work to be performed, or may Consultant suggest modifications to or extensions of these tasks?

LACERA invites Consultants to suggest modifications to or extensions of these tasks. As indicated in the RFP, Section II, Scope of Work, paragraph 2, the twelve (12) tasks identified are the minimum tasks that shall be included in the scope of the project.

  1. a) Does LACERA currently perform an annual risk assessment? b) Are these risk assessments subsequently used to measure internal business performance?

a)Yes. It is completed by Division Management with help from Internal Audit.

b)No. The risks assessment is used to develop the annual plan for performing audits and continuous process tests.

  1. Following the submission of Consultant’s final report, is LACERA willing to accept responsibility for the inclusion of Consultant’s terms and conditions for use upon the distribution of the report outside of LACERA?

These terms and conditions set forth by the Consultant should be clearly identified and submitted with the Consultant’s proposal. These terms and conditions will be reviewed by LACERA’s Chief Legal Counsel. In addition, LACERA may request to negotiate certain provisions the Consultant’s “terms and conditions” should LACERA deem necessary. Please keep in mind that LACERA abides by all applicable laws including the California Public Records Act.

  1. Would LACERA entertain a meeting with Consultant prior to presentation of Consultant’s Response to the RFP?

No.

********************************

  1. In reference to Task 3 – In the analysis of the compensation program for the Investment Office staff, is the successful bidder expected to review the program for reasonableness or suggest compensation ranges for various positions?

LACERA is expecting the successful bidder to review the compensation program. If, for example, the Consultant finds deficiencies in the program, the Consultant may recommend a review of the program, or make specific recommendations based on the Consultant’s previous research and experience in the investments industry, should the Consultant feel qualified to make such recommendations.

  1. In reference to Task 6 – Is it expected that the successful bidder would perform a full Asset/Liability study?

No. The Consultant might take a process-based approach and review LACERA’s process, procedures, methods, and approach to completing Asset/Liability studies. The Consultant should have expert knowledge in the investments industry and have intimate knowledge of the Asset/Liability study process.

  1. In reference to Task 7 – Are historical monthly rate-of-return data available for investment managers, asset classes, and total fund in Microsoft Excel format?

Monthly data is available in Excel format for investment managers and assets classes. However, total fund data is provided quarterly.

  1. a) Has LACERA received a recent report from CEM as to the Association’s expenses for investment management? b) If so, is it publicly available?

a)LACERA has the latest copy of the CEM report dated February 8, 2006. The report does not specifically address investment management expenses but instead focuses on the total cost of pension fund administration.

b)A copy of the report can be provided to the Consultant.

  1. Is this review to cover the home loan program that LACERA offers?

Yes.

  1. What is the desired deadline for completion of this audit?

LACERA has not set a specific deadline for the project, however, management expects the project to be completed by August 2007.

  1. Are the terms of the contract negotiable?

Yes. The Consultant must make a statement that the Consultant agrees to all of the terms and conditions set forth in Exhibit C (Sample Agreement), except as to any specific provision that Consultant objects to. If Consultant objects to a provision in the Sample Agreement, then the Consultant shall set forth the basis of the objection and provide substitute language that would make the provision acceptable to Consultant. LACERA reserves the right to make changes to the Sample Agreement at any time prior to execution.

***********************************

  1. Which currencies, if any, outside the OECD currencies are present or allowed in the portfolio?

LACERA’s international investment managers are allowed to use the currencies of 49 countries in the ACWI x US index, compared to the currencies of 30 countries listed in the OECD. Each manager’s specific mandate and investment guidelines determine which currencies are used.

  1. What system is used to monitor the portfolio at present and how long has that system been in place?

For composite level and manager level data, Mellon Analytic Solutions has been utilized for over 10 years. In addition, Wilshire Atlas has been used (9 years) for equity attribution and risk analysis, and Zephyr Style Advisor has been used (7 years) for manager style analysis.

End of Document.

Page 1 of 9