For discount rate. Were proposing two options for assumption. Option one would reduce Price Inflation and Wage Inflation and discount rate by 25 base points. Option two would reduce price and wage by 25 basis points. The data in the study shows the reasons for pushing in particular the Price Inflation down. Then we have a discussion of the discount rates, i guess we show the historical changes weve made in these assumptions. If im just going to skip forward just quickly, Price Inflation, if you look at all the survey information, 3 is kind of a high level. There are some of the california plans that are above 3 including this plan. But generally all the forecasts are lower including any pcs assumptions. Were keeping the spread between Price Inflation and Wage Inflation p flaition constant in all and surprise inflation constant iPrice Inflationconsta. There are lower rates particularly for california. We looked at all the systems that had an assumption of 7. 5 or above and looked at what theyre doing this year. Theyre only three other systems that have not already made a decision to go lower than 7. 5 in california. Weve talked about this, but this is the key thing reflecting the new Asset Allocation looking at any pcs assumptions over 5 to 7 years and over a 30 year timeframe. And both options, were reducing the Price Inflation, one by 50 basis points, the other by 25 basis points. So to go quickly right back to the summary of the recommendations. Were happy to answer questions and get into more detail on any of the data behind them. But those are the options were putting forward. We think both sets of options are reasonable. Any questions from the board . More of an observation than a question. I always look at this spread number. The spread is widened. It leads to the contributors. I hate to use the word bonus or advantage but it helps. It relates to the citys budget, not just the trust fund budget. The confidence you have in this you tend to be conservative. You have no doubtses that an acceptable recommendation . Yes. And if you look at the slide where we had the history of the assumptions, we had narrowed the spread and this is putting it back where the spread used to be. Those spreads are a reasonable range. Thank you. Questions from the board . Commissioner. I dont expect you to have it now, but if you can provide it to the board, on page 24, would we be able to go back one or two years and look at this chart so we can view this five to seven year projection and 30 year projection charged off of the fact that now weve had hedge funds in the program and id like to see where we were before we put it in for a nice comparison. So we have last years information from nepc, but that was the first year we had information to send in. The year before, hedge funds wouldnt be in it, id like to see that chart off of this chart presented to the commission at that time. Id like to say thats a lot of moving parts. Maybe im trying to make it easy, the one presented to the board two years ago. Im saying, the underlying Capital Market a sumse assumptis changed in two years so it wouldnt be a good comparison, but ill attempt to it can be done. Im not asking you to analyze anything. Just the document presented to us. Back three years. Two . Because weve only had hedge funds for a year, right . This is through june 30. What youre talking about is through june 30, 2016 would be last year which would be prehedge funds. I believe the hedge funds were adopted in february 2015. So they would have been in going back three years. Yes, thats correct. Three fiscal years. We can check when the hedge funds were included in the projection. Which option are we going with . Staff recommendations. Staff recommended option two. Would it be useful to understand those numbers how theyre based on the Capital Market assumptions for the different asset classs . That will tbement you closer to an apples to apple ts compariso. Im sure, but i dont want to get too far back in time. If they want to present that to the board, that is find. Lets give the commissioner the charts he asked for and he understands its not apples to apples because all the categories change. Please provide him with the stuff as asked for. There is a motion on the table, do we have a second . Commissioner castillo seconded it. Any members of the public who would like to address this item . I want to speak to the point that this gentleman made earlier. Made a lot of good points. Almost everything he said was accurate in his earlier Public Comment. The reason why you have hedge funds right now and the reason i had proposed a 15 allocation is because you are in an unprecedented situation with 2 government bonds. If you had 6 government bonds, everything he said would be fine. I wouldnt have presented that. But you dont have that. All your historical experience doesnt count in that sense. You dont have that diversifying asset. The Italian Government bond is 1. 7 right now. Do you know how absurd that is in july 2012, the country was almost bankrupt. In japan its zero percent. Youre in an absurd government. In july 2012, the italian and spanish bond almost hit 8 . Then they started printing money like crazy. Youve a never had and so are they in japan. You have never had anything like you have right now. So hedge funds stuck in bull markets. Its not going to prove anything. In the old days when i was a tiny little hedge fund manager, hedge funds used to make a lot of money in bull markets. Thats why you paid them the money. What youre paying them money for now is to 30 seconds. Serve and replace government boards in the next bear market. End of story. Otherwise indiks everything and pay low lee fees. Its never happened before like this in history. The Central Banks have recorded it. Thank you. Any other members of the public that would like to address the commission . Seeing none, well close Public Comment. There is a motion on the table, there is a second, any discussion on the item . I have one question. Price inflation, does it take into account assets like real estate . Cost of living . Rents . The assumptions built around the national cpiu index that obviously has relationships to returns in real estate, returns in equity markets, returns in other fixed income markets as well as the Wage Inflation. Until that sense, there is that relationship. Following up, youre using the cpi index . No seclusions . No exclusions. Just cpiu. Cpiu. I personally its urban consumer. I didnt use the word urban because there are differences. I understand its yo urban nt u. S. A. , it is the urban consumer. Its the urban consumer, but the data we showed was based on the u. S. Measure of that index as oppose to the bay area. But the u. S. A. Urban index. Right. Okay. Shall we call do we need to call for a vote . Or does the board want to take this without objection . All right. We can take this item without objection. Thank you. Next item. Thank you. Item 11 action item presentation of a june 30, 2017 report. Thank you. This item is required for our Financial Statements and i was able to provide this to our Accounting Department and auditors it was hot off the press. Now its before the board for you to approve and if you have any questions, kiran is here to answer them for you. Can we take this report, Action Committee . Great. Anyone like it mac a motion . No one wants to adopt this . We have a motion by commissioner driscoll. A second by commissioner bridges. Are there members of the public that want to make comments on this 1234 can we take this item without objection . I see no objection. Item passes. Mr. Secretary. Thank you. Thank you very much. Secretary presentation on fiduciary duties. T. As part of the recommendations coming out of the recent retreat that the board adopted, they proposed that there be regular fiduciary training conducted in regular board meetings. And so, we have the City Attorney who will be walking us through part one. Weve allocated his presentation should take no more than 20 minutes because we dont want it to necessarily being long and protect protracted. Part two will be after the first of the year. May i tee this up . As part of the government offsite that we attended and the board moved forward with recommendations. One is fiduciary one is board training. One thing that well see is the topics coming before the board sort of as a reminder of what our obligations are as fiduciaries and trustees from everything on what it means it to be a fiduciary to conflicts of interest, etc. This is the firsz part of twopart presentation. It would be shorter than 20 minutes or could be. The first part is about the legal framework, the law to establish fiduciary responsibilities. The second part presented at a later meeting will be about the fiduciary duties in practice. So i think much of this youll be familiar with already. The first part is divided into three sub parts, one is the fiduciary, applicable California City laws and fiduciary versus federal functions. So what is a fiduciary . I think the most useful definition for you in your practice to keep in mind is the definition provided in arisa and inpersonal revenue code. Its hard to find a more useful definition in california law. That definition is that a fiduciary is any person that exercises exercise or control of any management, rernlds Investment Advice for a fee or compensation. The important concept here is if youre exercising dressing over the administration or investment, you are likely a fiduciary. Thus youd be required to act with a High Standard of care and loyalty for the plan for the fiduciary. For the beneficiary. The definition is functional, not what you call yourself but what youre doing. If youre exercising fiduciary responsibilities, think of yourself as a fiduciary and act with a high degree of care. Appointing a fiduciary or del kuwaiting fiduciary responsibilities to someone is in itself a fiduciary act which means you should exercise the high degree of care in making that appointment or delegation of duty. That is important because we do appoint and delegate much of your duty to staff. Examples of fudz are the board and committees. Fiduciaries are board and committees. Members of the board and investment and benefit staff who are the Discretionary Authority over the management of the plan and Investment Managers who make Investment Decisions for the plan. And the most important is the settler. In this case, its the city of San Francisco who creates the plan. Laws that establish the pension plan and authorizes the creation of compensation plan. Recordkeepers who generally act in ministerial ways only. Attorneys, auditors and consults. Youre experts but not making fiduciary duty but providing you advice on certain matters so you can in turn make the discretionary judgment. Applicable california and city law, i think were all aware that your fiduciary authority flows from the california constitution article 16 section 17 and gives you, the retirement board exclusive fiduciary responsibility over the assets of retirement system. That is the genesis of your fiduciary responsibility. And the constitution describes essentially three types of duties that apply to you. That you must acknowledge and recognize when you act. The first is duty of loyalty which requires you to act solely in the purpose of providing benefits to the participants and beneficiaries. The duty of prudence which requires to you exercise a high degree of care and youve seen it stated as care and Due Diligence and prudens that a prudent person. The duty of prudence and third is duty of diversification to minimize risk of loss and maximize rate of return. There is a fourth dutied up common trust law in california which is that the duty to accordance with the plan terms and applicable law. Those are the duties that we keep in mind as you act. The duty of loyalty generally addresses conflicts of interest. And those types of sorts of things and thats an important one as well as theyre all important, but its one that youre more commonly confronted with. Article 12 of the San Francisco charter, basically acknowledges and restates your fiduciary authority under the constitution. And article section 12. 101 of article 12 makes the assistant director the administrator of the retirement system requiring him to do so in a accordance with the charter and policy and regulations. It means that much of what the executive director does is fiduciary and in that sense he would be a fiduciary as well. So, as ive said before, much of your authority is del kateed to to delegated from staff either you or executive director. That makes the staff fiduciary. The rules that apply to you as fiduciaries apply to staff also. They have to be mindful of what im saying here. It is as important to them as it is to you. So, i mentioned arisa before. I think were all generally familiar with the fact that it it applies to private sector retirement plans. But its an important not the government of plans, but its an important piece of law, because the fiduciary concept in the california state laws basically type the contract in it so it can be an important tool for us for case law and interpretation by the enforcing federal signature sis. Federal agencies. So, what are fiduciary versus settler functions . In the settler, tea lengsly its someone who creates the trust. That would mean the city and county of San Francisco. Ill skip to the next slide to get to the next point. The settler function includes adoption, amendment and determination of the plan. We see that in regard to the pension plan in the charter etc. And with regard to the compensation plan, the administrative code. In terms of setter versus fiduciary, the concept that is important here is that someone can be both a settler and fiduciary. When theyre acting as a member of the board, they must separate their federal responsibilities from their fiduciary responsibilities. And vice versa. When acting as a settler. Similar tensions exist for each board member under the duty of loyalty which i talked about in the concept of conflicts of interest. So a settler can act nm accordance with the interests of the settler itself and not in the best interest of the plan. The city can make laws and doesnt have to be concerned about what is in the best interest of the participants or beneficiaries. Its in the best interest of the city, economically and socially or otherwise. Once something is enacted in law as an implementation of that thing, its the fiduciarys responsibility. A simple example here, acting on the early retirement window, your fiduciary responsibility would be letting the participant know about the window and giving them accurate and timely information so they can make good decisions about their future plans. So examples of fiduciary decisions versus settler decisions with regards to settler actions determine the formula for the benefits. Determine which employees will be covered. The decision to offer, lets say matching contributions or the decision to terminate the plan as opposed to fiduciary decisions which are selecting and uponner toking thement. Selecting and Monitoring Service providers ard payments and planned fees and expenses and Timely Delivery of benefits. Account monitoring is mentioned as a fiduciary action because that goes to the duty of prudence in making sure that the person selected or investment selected are always good for the plan and not become poor for the plan without your basically camping it. The monitoring is important. That is essentially part one of the presentation. I think part two will be a little bit lorng, but i wanted to lay the framework for part two which will be presented at another time. Any questions . Madam vice chair. Thank you. Thank you for the presentation. I have a question on how to engage a good fiduciary. Lets start there, how do you pronounce the word . Ive heard it both bay ways. So how do you gauge good fiduciary behavior if there is an absence of good, unbiased information . Well, i think one of the duties would be if you dont have the expertise to make the decision that there is good unbiased information would be to retain an expert. Who could provide you the information. An expert who would then monitor or watch whatever it is that youre making a decision about. So, getting advice as an expert or asking the probing questions if there is something you dont have the answer to and you think its important for the decisionmaking, a fiduciary should ask about that information. Why isnt it being presented . So explore. Thank you. Commissioners, if i could ask more. How does it work when you want to get to an answer . If you take your literal response, there are some commissioners that need more information than others and theyre sensitive timing to some of the investments. How do you balance those issues . Because one person is foregoing some of their fiduciary duty by lowering their own bar, but the machine is carrying it forward. The machine is a board, they there is enough information to make a decision. But you get to vote as a member of the board. You can tell them if you dont have inform information. Because if that situation, you should vote. You can vote against or not vote. Exactly. Okay. Commissioner driscoll. The word settler or settling. Sounds like that requires trustees, fiduciaries. Sometimes youre required to interpret what things are. There are not simple answers. A lot of times, yes, you have to make interpretations. Then, the bullet plan on page 18 is for settlers are not required settler functions can be carried out in the best plan. That means the employer in our case . Generally yes, that means the employer. This is not to say the employer couldnt consider the interests of the plan participants or plan. The employer is considering what is in the best interest of the plan in its own way. Because the sponsors are at different entities and trust fund itself. Yes. Now, th the converse