PASADENA PASADENA FIRE POLICE RETIREMENT SYSTEM FIRE ... · 4/20/2016 · withdraw funds towards...

PASADENA

FIRE &

POLICE

PASADENA FIRE & POLICE RETIREMENT SYSTEM

RETIREMENT BOARD - REGULAR MEETING

Wednesday, April 20, 2016 RETIREMENT SYSTEM City Council Chambers, 100 N. Garfield Ave., #S249

10:15 a.m.

AGENDA

1. Call to Order 2. Public Comment 3. Minutes: March 16, 2016 (Regular Meeting)

CONSENT CALENDAR 4. Approve the monthly retirement allowance roll of $1, 111,905.50 for March 2016. 5. Approve additions/removals of the following members/beneficiaries to/from the

mon thl II II 1y a owance ro : Effective Add/ Pension Pension

Name Date Remove Continuance Amount a. T. Fillbach 03/12/16 remove No $8,671.32

6. Schedule the hearing on the CalPERS Industrial Disability Retirement application for Laurie Youmans, Fire Fighter, for the May 18, 2016 regularly scheduled meeting of the FPRS Board.

CalPERS HEARINGS 7. CalPERS scheduled hearing on the Service Pending Industrial Disability

Retirement application for Lawrence Contreras, Fire Captain. 8. CalPERS scheduled hearing on the Service Pending Industrial Disability

Retirement application for Alfredo Magallon, Jr., Police Officer. (Requested Continuance to the regular meeting of May 18, 2016)

ACTION ITEMS - The Board may discuss and take action on the following items: 9. Receive, discuss and possibly take action on the presentation from Small Cap

asset manager, Atlanta Capital Management. 10. Discuss and possibly take action on the following investment reports submitted

by Verus Investments Associates: a. Review and approve, Revised Investment Policy Statement b. Receive and file, March 2016 Performance Update c. Review and approve, 2nd Quarter 2016 Rebalance and Withdrawal d. Receive and file, Active Management Environment

of 2

11. Review, discuss and take action on the update and draft policy for Domestic Relations Orders Procedures, as prepared by System Counsel Best Best & Krieger LLP.

INFORMATION ITEMS 12. Staff Report

a. March 2016 Budget Report 13. Counsel Report 14. Articles/Newsletters/Conferences

COMMENTS FROM BOARD MEMBERS

ADJOURN

POSTING STATEMENT: I HEREBY CERTIFY that this Agenda was posted in its entirety at the City Kiosk and on the City Council Chamber bulletin board, Room S249, on April 13, 2016 at 5:00 p.m., and a copy was sent to the Central Library for posting.

lit,~ Jill Fosselman

Administrator/Secretary to the Board

In compliance with the Americans with Disabilities Act of 1990, listening assistive devices are available from the City Clerk's Office with a 24-hour advance notice. Please call (626) 7 44-4320 to request use of a listening device.

Any documents distributed to a majority of the Pasadena Fire & Police Retirement Board regarding any item on this agenda will be made available at the office of the Fire & Police Retirement System, located at 100 N. Garfield Avenue, #N204, Pasadena, CA 91101. To make arrangements to view items, during normal business hours, please contact the Retirement office at (626)744-4320.

DISTRIBUTION Board Members Bartel Associates A. Taylor, Verus Assoc. I. Safie, City Atty

Police Dept (Admin Srv) Fire Chief Director of Finance City Treasurer

Workers' Compensation S. Lebovitz A. Snitzer J. Acosta, Keenan

of 2

T. Phillips, CPA D.Johnson, Keenan S. Rasmussen, Keenan

W. Boyer, PIO Library, N IS City Controller

PASADENA FIRE & POLICE RETIREMENT SYSTEM RETIREMENT BOARD - REGULAR MEETING

Wednesday, March 16, 2016 City Council Chambers S249

Pasadena City Hall, 100 N. Garfield Avenue 10:15 a.m.

MINUTES

1. Call to Order

The regular meeting of the Pasadena Fire & Police Retirement Board was called to order by the Chair, Mr. Keith Jones, on Wednesday, March 16, 2016 at 10:24 a.m. in the City Council Chambers at Pasadena City Hall.

Members - Present K. Jones, Chair P. Boyle, Vice Chair J. Milligan J. Brinsley

Staff - Present J. Fosselman, Administrator/Secretary E. Wong, Tech. Assistant J. Wahlin, City Attorney Representative

Others Present

Not Present T. Tomek

Not Present

A. Taylor (Verus Investments), A. Joseph (Worker's Comp)

2. Public Comment

None.

3. Minutes: Approve the minutes for the regular meeting of February 17, 2016.

MOTION by Mr. Brinsley, seconded by Mr. Milligan, to approve the Minutes for the regular meeting of February 17, 2016. (Motion unanimously carried, 4-0)

CONSENT CALENDAR

4. Approve the monthly retirement allowance roll of $1, 120,576.82 for February 2016. 5. Schedule the hearing on the CalPERS Service Pending Industrial Disability Retirement

application for Lawrence Contreras, Fire Captain, for the April 20, 2016 regularly scheduled meeting of the FPRS Board.

Page 1 of 4

6. Schedule the hearing on the CalPERS Service Pending Industrial Disability Retirement application for Alfredo Magallon, Jr., Police Officer, for the April 20, 2016 regularly scheduled meeting of the FPRS Board.

MOTION by Mr. Boyle, seconded by Mr. Brinsley, to approve items 4-6 on the Consent Calendar. (Motion unanimously carried, 4-0)

Following this action, the Chair moved to item 8 on the agenda.

ACTION ITEMS - The Board may discuss and take action on the following items:

8. Review, discuss and take action on the revised policies for Disability Retirement Hearing Procedures and Disability Retirement Document Procedures, as prepared by System Counsel Best Best & Krieger LLP.

Mr. John Wahlin reviewed the report, including highlighting the clarification provided in the March 15, 2016 memorandum to the Board regarding hearing options with an administrative law judge. It was further clarified that the Board maintains the authority to reconsider hearing decisions for PERS public safety applicants. The revised policies establish the procedures and necessary documentation for hearing appeals. Following discussion of the process outlined and the role of the Board in the appeals hearing, a technical question was raised regarding applicability or appropriateness for a proposed penalty in Section XXll (Decision) B.2.b. Mr. Wahlin reported that counsel would look further into the question. The Board agreed that upon receipt of an appeal, the Board would determine its role in the appeal hearing process, subject to the procedures outlined in the policy.

MOTION by Mr. Brinsley, seconded by Mr. Boyle, to approve the revised policies for Disability Retirement Hearing Procedures and Disability Retirement Document Procedures, as prepared by System Counsel Best Best & Krieger LLP, subject to Counsel clarification of Disability Retirement Hearing Procedures paragraph XXll.B.2.b. (Motion unanimously carried, 4-0)

Following this action, the chair returned to item 7 on the agenda.

7. Review, discuss and take action on the contract for auditing financial services with System Auditor Macias Gini & O'Connell.

Ms. Fosselman briefly reviewed the lowered fee in the total annual not-to-exceed contract amount, which will be included in the Fiscal Year 2017 Budget Request.

MOTION by Mr. Boyle, seconded by Mr. Brinsley, to approve the amendment to the contract with System Auditor Macias Gini & O'Connell to extend the term for two years and to include the June 30, 2016 and June 30, 2017 financial audits. (Motion unanimously carried, 4-0)

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9. Discuss and possibly take action on the following investment reports submitted by Verus Investments:

a. Receive and file, February 2016 Performance Update

The flash report was reviewed reflecting performance without pooled cash. The total fund returned -0.4% net of fees (v. the policy index of -0.1 %) for February, bringing the fiscal year-to-date return to -5.3% net of fees (vs. the policy index of -3.4%). Ms. Taylor noted the majority of the negative earnings on a fiscal year-to-date basis were from both Domestic Equities (-9.0%) and International Equities (-20.1 %). Total market value for the end of February was $124.2 million, including pooled cash with the City.

Upon reviewing the assets against their policy targets and ranges, Ms. Taylor noted that all assets were very close to their respective targets with the exception of private real estate which was approaching the higher end of the range as specified in the Investment Performance Statement (IPS). She reported that private real estate asset manager Invesco was currently at 14.1 %, relative to the upper IPS range of 15% (the target allocation is 10%), based on January's reported earnings. Given that real estate has continued to perform as expected over the first quarter to-date, it was anticipated that earnings to be posted in April for the first quarter 2016 will increase the allocation to or above the upper ceiling of the range. Due to the quarterly queue and the timing needed to request a withdrawal, Ms. Taylor recommended submitting a redemption request for Ju~ 1, 2016 in the amount $3,000,000 to rebalance and withdraw funds towards 3r quarter pension benefits.

MOTION by Mr. Boyle, seconded by Mr. Brinsley, to receive and file the February 2016 Performance Update, and to direct staff to submit a redemption request to asset manager Invesco Core Real Estate for $3,000,000 to fund the July 2016 withdrawal for pension benefits and administration, as recommended by Verus Investments. (Motion unanimously carried, 4-0)

b. Review, discuss and possibly take action on the System's 10-Year Asset Allocation Review and Return Forecast

Ms. Taylor reviewed the 10-Year Asset Allocation Review and geometric return forecast by asset class. Overall, Verus anticipates that returns are forecast to continue to remain low over the next ten years, and generally lowered expected returns for most individual asset classes. The 10-year return forecast of 5.6% was discussed within the context of the policy's standard deviation forecast, and the amount of risk that has been removed by the addition of bank loans and liquid alternative assets. Given the expected continuation of a low-return environment, Ms. Taylor presented two alternative allocation mixes for consideration to further de-risk the portfolio by moving 1-2% from Large Cap Domestic Equities to either International Equities or Fixed Income.

Discussion ensued regarding the two proposed asset allocation mixes. As proposed, Mix 1 moves 1 % from Large Cap Domestic Equity to International Equity creating parity between Domestic (21 %) and International (21 %) Equity,

Page 3 of 4

which may yield slightly higher long-term portfolio earnings (5.6% to 5.7%). Alternatively, Mix 2 moves 2% from Large Cap Domestic Equity to Core Fixed Income, which primarily offers more risk protection while likely maintaining the same long-term portfolio earnings (5.6%) as the current asset allocation. Although both mixes represent very small adjustments to the current allocation, given the lower earnings environment and outlook, Ms. Taylor recommended Mix 2 as a prudent move. Following discussion and questions, the Board accepted the recommendation.

MOTION by Mr. Brinsley, seconded by Mr. Boyle, to approve asset allocation Mix 2 moving 2% from Large Cap Domestic Equity to Core Fixed Income, as recommended by Verus Investments. (Motion unanimously carried, 4-0)

INFORMATION ITEMS

10. Staff Report - Ms. Fosselman provided a brief update on the Concord, upcoming Board calendar for April, pending disability hearings, and the future use of City email address for delivery of Board materials. a. February 2016 Budget/Expense Report - noted.

11. Counsel Report - none noted. 12. Articles/Newsletters/Conferences - Ms. Fosselman noted that the last Board meeting

to approve attendance at the NCPERS conference and trustee training in San Diego, May 14-19, 2016 will be April.

COMMENTS FROM BOARD MEMBERS

ADJOURNMENT

MOTION by Mr. Brinsley, seconded by Mr. Milligan, to adjourn the Board meeting at 11 :39 a.m. (Motion unanimously carried, 4-0)

Respectfully submitted,

Jill Fosselman Keith Jones Secretary to the Board/Administrator Chair, Retirement Board

Details of this meeting are contained on a DVD recording of the meeting and will be kept in the archives for two years, per Board policy.

DISTRIBUTION: Board Members City Attorney Director of Finance

Fire & Police Retirees Assn. Police Chief Fire Chief

Workers Compensation A. Snitzer S. Lebovitz L. Tomlison

Page 4 of 4

DATE ~/ZO/Ib

MONTHLY ALLOWANCE ROLL- TOTALS ITEM#_4 __ _

Approved 2015- Actual 2015-MONTH 2013-2014 2014-2015 2016 2016

JULY 1,192,972.10 1 '156,360.39 1 '133,056.86 1 '133,056.86 AUGUST 1 '192,01 0.00 1,139,148.67 1 '132, 739.08 1 '132, 739.08 SEPTEMBER 1 '191 ,857.42 1,140,585.54 1 '127, 165.89 1,127,165.89 OCTOBER 1 '183,343.98 1,141,527.41 1,122,125.71 1 '122, 125.71 NOVEMBER 1 '185, 193.00 1 '139,378.41 1 '121 ,651.68 1,121,651.68 DECEMBER 1 '173,208.24 1 '137,229.40 1 '120,576.82 1 '120,576.82 JANUARY 1 '175,416.55 1,137,229.40 1,120,576.82 1 '120,576.82 FEBRUARY 1 '186,095.58 1,137,229.40 1 '120,576.82 1,120,576.82 MARCH 1 '169, 199.58 1,130,773.44 1,111,905.50 APRIL 1,164,877.82 1,131,857.62 0.00 MAY 1,169,287.95 1,126,038.77 0.00 JUNE 1 '159,580.64 1,122,917.19 0.00 FYTOTALS 14,143,042.86 13,640,275.64 8,998,469.68 10,110,375.18

COL BENEFITS INCLUDED ABOVE 7,451,093.87 7,177,264.72 4, 738,709.84 5,325,716.94

COL-% Of Total 53% 53% 53% 53%

Y:\Office Docs\Retiree Payroii\PGoldiPGIMonthly Reconcilliationi[PGReconciliation 2016 April.xls]Monthly Chgs 3/29/2016

.. ~CalPERS

December 30, 2015

City of Pasadena P.O. Box 7115 Pasadena, CA 91109-7215

Re: Laurie A Youmans Occupation: Firefighter

Dear Personnel Officer,

P.O. Box 2796 Sacr~mento, CA 95812-2796 888 CaiPERS (or 888·225·7377) TTY: (877) 249-7442 I Fax: (916) 795-1280 www.calpers.ca.gov

California Public Employees' Retirement System

CaiPERS ID; 5860522206

Laurie A Youmans has filed an application for Industrial disability retirement. Your agency needs to make a determination of the member's disability In accordance with Government Code sections 21154 and 21156. You must make your determination within six months of this request unless the local safety member waives the requirements of this provision (Government Code section 21157}.

Under the California Public Employees' Retirement Law, disability means the Incapacity of a member from the performance of duty in public services for permanent or extended and uncertain duration, as determined on the basis of competent medical opinion. Dlsabllity is not necessarily an Inability to perform every function of a given position. Rather, the courts have concluded that the test in any case is whether the employee can substantially perform his or her usual duties.

Disputed questions regarding the industrial relationship of the disabling injury to the member's worl< will be resolved by the Workers' Compensation Appeals Board (WCAB). In the event there is no dispute, such a finding can be made by the employer, A Workers' Compensation Award is not sufficient evidence that a local safety member is disabled for retirement purposes. There must be a specific finding under Government Code section 21166, by the employer, with respect to the disability for which the member will be retired ..

If it is determined that the member is not disabled from the performance of his or her duties, a Resolution to that effect must be filed with CaiPERS. Please refer to sample Resolution No. 11n the Public Agency and School Reference Guide- Benefits Procedures (see link below).

If the member is found to be disabled, CaiPERS will require the following documentation:

1. A finding that the member has been found to be substantially incapacitated from the performance of the usual duties of his or her position.

Page 1 of 3

DATE 4/20/2016ITEM # 6

2. A finding by your agency as to whether or not the disability is industrial.

a) In case of a dispute, a Findings and Award by the WCAB resolving the industrial relationship.

3. A certified statement (Resolution) by the local agency of the member's last day on payroll. In case of a dispute regarding the member's effective date of retirement, a request must be filed with the WCAB for Finding of Fact to determine on what date the member's condition became permanent and stationary. That date then becomes the effective date of retirement (Government Code section 21164}.

4. A statement identifying the type of disability retirement determined, l.e., non-industrial disability retirement or Industrial disability retirement. A member must have minimum of five years of credited service to qualify for non-industrial disability retirement. If a member does not meet the minimum service requirements for disability retirement, they may still qualify by re-depositing previously withdrawn contributions or contributing an amount for service rendered prior to membership with CaiPERS. Time during which the member is absent from State service by reason of Injury or illness, which is determined within one year after the end of such absence to be jobrelated, shall be considered as time spent In State service for the purpose of qualification for retirement and death benefits.

5. A statement by the agency to the effect that there Is, or is not, a possibility of third-party liability present, if the member's disability was caused by negligence or an intentional act of a party other than the employer.

If a person (other than the employer) caused an injury that results In certain CaiPERS benefits being paid, then we have the right to recover from the responsible person up to one-half of the total retirement benefit costs payable due to this injury (Right of Subrogation- Government Code section 20250}

Please advise us if you are aware our member is pursuing a claim (other than a Workers' Compensation claim) against any person or entity for the same injuries that also entitle the member to a disability retirement from CaiPERS.

6. A statement Identifying the disabling condition(s) and body part(s}, I.e., orthopedic (right knee}, psychological, cardiovascular, internal (l<ldney}, neurological (leg) or other.

7. If Advance Disability Pension Payments (ADPP) will be paid to the member, include the monthly amount and the beginning date. Also, please include where the reimbursement checl< should be mailed.

It Is the employer's responsibility to report to CaiPERS the amount of ADPP paid to a member. If the employer fails to notify CaiPERS that ADPP is paid or if the member service retires, the local agency and the employee shall arrange for repayment. CaiPERS will not reimburse the employer in these situations.

Page 2 of3

All such documentation submitted by your agency must be signed by the governing body or its lawful delegate (I.e., City Manager, Chief Administrative Officer, County Executive, or other comparable Individual). If the governing body chooses to delegate the responsibility of making a determination, a certified copy of the delegation order of this authority must accompany the finding by such delegate in each instance. For Public Agency and Schools Reference Guide- Benefits Procedures and sample resolutions, please refer to the following two links for further information:

Public Agency and Schools Reference Guide- Benefits Procedures: https :1/www. ca I pers. ca. gov I docs/forms-publications/pas-ref-guIde. pdf

Sample Resolutions: ~~WW..:falgerg_a.gov{.docs/forms-gublications(gas-ref-gulde.pdf

Thank you for your assistance. Your cooperation Is appreciated.

If you have any questions, please visit our website at www.calpers.ca.gov, or you may ca II us toll free at 888 CaiPERS (888-225-7377).

Sincerely,

·~~//.?s:/ sco~rng ~: Retirement Progra Specialist Disability Retirement Section

Enclosure: LS- 1st Letter to Member

cc: Laurie A Youmans

Page 3 of 3

City of Pasadena Fire and Police Retirement SystemHigh Quality Small Cap Equity

Brian Smith, CFADirector of Institutional Services, Principal

Chip Reed, CFAManaging Director, Principal

April 20, 2016

FOR USE IN ONE-ON-ONE PRESENTATIONS ONLY

- 2 -

Small Cap$1.9 bn │ 1992

17%

SMID Cap$8.8 bn │ 2004

79%

Investment Franchises($16.4 Billion)

Core Equity Management($11.2 Billion)

Atlanta Capital Management Co., LLCAs of March 31, 2016

Founded in 1969 in Atlanta, Georgia

Singular focus on High Quality stocks and bonds

Owned by employees & Eaton Vance Corporation

Employ 45 professionals (21 are equity partners)

Growth Equity 20%

Fixed Income

69%

11%

Core Equity

Assets under management │ inception date of strategy.

Select Equity$502 mm │ 2006

- 3 -

Seasoned & Stable Investment Team

Matt Hereford, CFA21 Yrs │ 2002

Bill Bell, CFA21 Yrs │ 1999

Chip Reed, CFA27 Yrs │ 1998

Michael Jaje, CFA21 Yrs │ 2014

Portfolio managers are generalists and serve as both research analyst and portfolio manager Our team does not rely on a research staff to generate ideas or perform fundamental research Each portfolio manager conducts his own research while decisions are made on a consensus basis

Portfolio Managers

Investment Specialist

A focused team that combines the benefit of conducting independent fundamental research with the ability to make timely investment decisions.

Years industry experience as of 3/31/16 │ year joined Atlanta Capital.

- 4 -

Consistent Growth & Stability in EarningsKey Tenet of Our Investment Philosophy

Earnings Stability Avg. 5-Year CAGR Earnings Variability # Positive Periods # Negative PeriodsAbove-Average 7.0% 1.7% 120 or 100% 0 or 0%Below-Average 3.6% 3.6% 100 or 83% 20 or 17%

*Time period: January 1, 1986 – December 31, 2015. The Above-Average Earnings Stability and Below-Average Earnings Stability portfolios are provided to compare the aggregate of all companies with High Quality S&P Rankings (B+ orBetter) to those with Low Quality S&P Rankings (B or Below). The universe includes all Russell 2000® Index constituents with S&P Quality Rankings and prices greater than $1. The Earnings Stability portfolios are model portfolios formed andrebalanced monthly by Atlanta Capital and are not based on investment decisions. Investment management fees, transaction costs or other expenses are not deducted from the model portfolios, and the deduction of fees and expenses wouldlower the results shown. Five-year historical earnings growth rates are calculated using a market capitalization-weighted methodology. The Russell 2000® Index is a widely-accepted measure of the U.S. small cap stock market. US marketindexes are unmanaged and it is not possible to directly invest in an index. The Above-Average Earnings Stability and Below-Average Earnings Stability portfolios were derived in part from the Russell Index Data and Frank Russell Companyremains the source and owner of the Russell Index Data contained or reflected and all trademarks and copyrights. Sources: Russell, Standard & Poor’s, Wilshire Atlas, Atlanta Capital. The material is based upon information that Russell, S&P,Wilshire and Atlanta Capital considers to be reliable, but neither Russell, S&P, Wilshire nor Atlanta Capital warrants its completeness, accuracy or adequacy and it should not be relied upon as such. This information should not be consideredinvestment advice. Performance during certain periods reflects strong stock market performance that is not typical and may not be repeated. Past performance does not predict future results. Reproduction or redistribution of this page in anyform without express permission from Atlanta Capital is prohibited.

86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15(3%)

0%

3%

6%

9%

12%

15%

Russell 2000® Index by Earnings StabilityFive-Year Rolling CAGR of As Reported Earnings

Recession

- 5 -

BetaHQ Small | R2000®

0.72 | 1.00

DECLINING MARKETS(33 Negative Quarters)

RISING MARKETS(63 Positive Quarters)

FULL MARKET CYCLE(96 Total Quarters)

Standard DeviationHQ Small | R2000®

15.5% | 19.9%

Upside Reward + Downside Protection = Strong Long-Term Results

31.5%36.2%

0%

10%

20%

30%

40%

-15.8%

-29.1%

-40%

-30%

-20%

-10%

0%12.7%

8.8%

5%

7%

9%

11%

13%

87%

54%

+3.9%

Investment ObjectiveApril 1, 1992 – March 31, 2016

We seek to outperform over a full market cycle by participating in rising markets and protecting capital during declining markets…

…without the volatility typically associated with small cap investing.

The charts above illustrate the average (annualized) return of the High Quality Small Capitalization Composite during both Rising, Declining & Full market cycles. Rising markets are defined as quarters where the return of the Russell 2000® indexwas positive. Declining markets are defined as quarters where the return of the Russell 2000® index was negative. Full market cycles include both rising and declining periods. These positive and negative quarters are separated out from theintervening quarters, cumulated across the period, and annualized. Composite performance is shown in US dollars and reflects reinvestment of all income and capital gains. Composite performance is shown gross of investment advisory and custodyfees, and a client’s return will be reduced by these and other expenses. Composite performance on a net-of-fees basis was 11.8% for the period (after a maximum annual fee of 0.80% accrued monthly). Performance during certain periods reflectsstrong stock market performance that is not typical and may not be repeated. Individual client returns will vary due to client-imposed investment constraints and client inception date. This material is supplemental to the GIPS® presentation included inthe Appendix. Please see the composite presentation for important additional information and disclosure. Past performance does not predict or guarantee future results. Source: eVestment Alliance.

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Performance Inception Date: June 30, 2009Net Investment Contributions: ($4,212,966)

Investment Dollars Earned: $9,168,417

Market Value (03/31/16): $4,955,451

Account Summary

Annualized PerformanceAs of 03/31/16

City of Pasadena Fire and Police Retirement System

*Time periods greater than one year are annualized.Performance reflects reinvestment of all income and capital gains (realized and unrealized). Results are based on the accrual method of accounting as well as trade date valuation. Returns are gross of fees unless otherwise noted.Gross of fee returns do not reflect the deduction of management and custodial fees. Net of fee returns reflect the deduction of the management fee accrued on a monthly basis.Returns are based on the total assets of the client’s account, calculated on a daily basis, and geometrically linked to calculate returns for longer periods of time. The unmanaged indexes shown for comparative purposes do not reflect the subtraction of any fees or transaction costs. It is not possible to directly invest in an index.Past performance does not guarantee or predict future results.

QTD YTD 1 Yr 3 Yrs* 5 Yrs* 7 Yrs* 10 Yrs*Since

Inception*(%) (%) (%) (%) (%) (%) (%) (%)

High Quality Small Cap 4.02 4.02 2.43 12.63 12.84 -- -- 18.04

Russell 2500 ~ 2000 (03/01/15) -1.52 -1.52 -9.76 7.34 8.09 -- -- 14.97Periods < 3/1/15 represents SMID strategy

0 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0 0.00 0.00 0.00 0.00 0.00 0.00 0.00

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Performance AttributionLast 12-Months Ending 03/31/16

City of Pasadena Fire and Police Retirement SystemHigh Quality Small Cap vs. Russell 2000® Index

(2.0) 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0

TOTAL

Utilities

Telecom Services

Financials

Cash

Industrials

Consumer Staples

Consumer Discretionary

Energy

Materials

Information Technology

Health Care

Stock Selection Sector Concentration

Top Five Contributors (%)

Avg Wt.

Absolute Contribution

Manhattan Associates 4.53 0.79 Blackbaud 2.81 0.77 AptarGroup 2.56 0.67 Casey's General Stores 2.77 0.60 Morningstar 2.95 0.52

Top Five Detractors (%)

Avg Wt.

Absolute Contribution

Moog 1.85 (0.98)Wolverine World Wide 0.96 (0.61)Artisan Partners 1.52 (0.51)Advisory Board Co. 0.85 (0.51)WEX 1.84 (0.45)

Index Index

Consumer Discretionary 14.1 13.9 (4.3) (13.2) 1.38 (0.02)

Consumer Staples 7.4 3.3 14.4 (0.3) 0.93 0.41

Energy 1.6 3.1 (11.4) (43.8) 0.65 0.72

Financials 17.7 25.1 3.4 (1.6) 0.99 (0.67)

Health Care 7.8 15.7 8.1 (20.3) 2.37 0.94

Industrials 23.0 12.8 (7.4) (11.2) 0.78 (0.02)

Information Technology 20.5 17.8 7.8 (3.8) 2.29 0.17

Materials 4.6 3.9 24.3 (18.7) 1.82 0.00

Telecom Services 0.0 0.8 0.0 4.4 0.00 (0.18)

Utilities 0.0 3.7 0.0 9.2 0.00 (0.81)

Cash 3.4 0.0 0.1 0.0 0.00 0.44

TOTAL 2.5 (9.8) 11.21 0.99

Stock Selection

Sector Concentration

Average Weights Returns Relative Contributions

Sectors Total Portfolio

Total Portfolio

Source: FactSet.

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High Quality Small Cap TransactionsJanuary 1, 2016 – March 31, 2016

Purchases Sector

First Quarter 2016Kirby Corp. (KEX) Industrials

Sales Sector

First Quarter 2016Forest City Realty Trust (FCE.A) FinancialsCEB (CEB) IndustrialsHub Group (HUBG) Industrials

The specific securities identified are not representative of all of the securities purchased, sold or recommended for advisory clients. Actual holdings will vary for each client and there is no guarantee that a particular client’s account willhold any or all of the securities listed. It should not be assumed that any of the above securities were or will be profitable. For a complete list of all recommendations made by Atlanta Capital for the High Quality Small CapitalizationComposite during the preceding 12 months, please contact the Performance Department at Atlanta Capital. This material is supplemental to the GIPS® presentation included in the Appendix.

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MetricsRussell 2000®

IndexTotal

Portfolio 0

# of Holdings 1,959 59 0Wtd. Avg. Mkt. Cap (billions) $1.9 $2.9 $Historical Earnings Growth 10% 9% %Forecasted Earnings Growth* 14% 11% %Return on Equity 7% 18% %Price/Earnings (NTM) 16.7x 21x xDividend Yield 1.6% 1.1% 0.0%

Top Ten Holdings %

Sector Exposure

Portfolio Metrics

High Quality Small Cap – as of 03/31/16

*First Call estimate. Source: FactSet.

Total Portfolio S&P 500® Index Russell 1000® Growth Index

Manhattan Associates, Inc. 4.2Casey's General Stores, Inc. 3.2Morningstar, Inc. 3.2Sally Beauty Holdings, Inc. 2.9Aptargroup, Inc. 2.9Blackbaud, Inc. 2.9Exponent, Inc. 2.6Fair Isaac Corporation 2.5West Pharmaceutical 2.3VCA Inc. 2.2

24.220.9

15.5 14.8

8.1 7.85.0

1.5 0.0 0.02.1

13.0

18.0

26.1

14.0 13.7

3.6 3.9 2.6 0.94.3

0.00

5

10

15

20

25

30

35

40

Industrials InformationTechnology

Financials ConsumerDiscretionary

Health Care ConsumerStaples

Materials Energy TelecommServices

Utilities Cash

Total Portfolio Russell 2000® Index

City of Pasadena Fire and Police Retirement System

- 10 -

Source: FactSet.

Current Portfolio HoldingsAs of 03/31/16

City of Pasadena Fire and Police Retirement SystemHigh Quality Small Cap

Total Portfolio

Russell 2000® Index

Consumer Discretionary 14.8% vs. 14.0% State Bank Financial (STBZ) 1.4% UniFirst Corp. (UNF) 1.2% Choice Hotels Int'l (CHH) 2.1% Umpqua Holdings Corp. (UMPQ) 1.3% US Ecology (ECOL) 0.7% Columbia Sportsw ear (COLM) 2.0% Universal Health Realty (UHT) 1.1% Information Technology 20.9% vs. 18.0% Dorman Products (DORM) 2.0% Westamerica Bancorp. (WABC) 1.2% Blackbaud (BLKB) 2.9% Hibbett Sports (HIBB) 1.2% Health Care 8.1% vs. 13.7% Cass Information Sys (CASS) 1.0% Monro Muffler Brake (MNRO) 2.0% Bio-Rad Labs (BIO) 1.8% CoreLogic (CLGX) 1.9% Pool Corp. (POOL) 1.9% Bio-Techne (TECH) 1.8% Fair Isaac Corp. (FICO) 2.5% Sally Beauty Hldgs. (SBH) 2.9% VCA (WOOF) 2.2% Jack Henry & Assoc. (JKHY) 1.7% Wolverine World Wide (WWW) 0.7% West Pharmaceutical (WST) 2.3% Manhattan Associates (MANH) 4.2%Consumer Staples 7.8% vs. 3.6% Industrials 24.2% vs. 13.0% Monotype Imaging (TYPE) 1.3% Casey's General Stores (CASY) 3.2% AAON (AAON) 1.2% National Instruments (NATI) 1.1% Inter Parfums (IPAR) 1.8% Advisory Board Co. (ABCO) 0.6% Pow er Integrations (POWI) 1.0% J&J Snack Foods Corp. (JJSF) 1.5% Beacon Roofing Supply (BECN) 1.3% ScanSource (SCSC) 1.3% Lancaster Colony Corp. (LANC) 1.3% CLARCOR (CLC) 2.2% WEX (WEX) 2.1%Energy 1.5% vs. 2.6% Exponent (EXPO) 2.6% Materials 5.0% vs. 3.9% Dril-Quip (DRQ) 1.5% Forw ard Air (FWRD) 1.8% AptarGroup (ATR) 2.9%Financials 15.5% vs. 26.1% Graco (GGG) 2.2% Balchem Corp. (BCPC) 1.2% Artisan Partners (APAM) 1.3% HEICO Corp. A (HEI.A) 1.6% Stepan Co. (SCL) 0.9% IBERIABANK Corp. (IBKC) 1.1% Huron Consulting Group (HURN) 1.3% Telecommunication Services 0.0% vs. 0.9% Morningstar (MORN) 3.2% Kirby Corp. (KEX) 1.6% Navigators Group (NAVG) 0.7% Knight Transportation (KNX) 2.2% Utilities 0.0% vs. 4.3% Pinnacle Fin'l Partners (PNFP) 1.4% Landstar System (LSTR) 1.8% Prosperity Bancshares (PB) 1.5% Moog (MOG.A) 1.3% Cash 2.1% vs. 0.0% RLI Corp. (RLI) 1.5% Raven Industries (RAVN) 0.6%

Ending Sector Weight

- 11 -

Risk Management ResultsAs of December 31, 2015

CaptureMarketDown

DeviationStandard

ErrorTracking

RatioSharpe

1009080706050403020100

Last Five Years Ending December 31, 2015Small Cap Broad Style

67.1 (96) 15.2 (95) 4.68 (41) 0.91 (3)

100.0 (29) 17.9 (58) 0.00 (100) 0.51 (72)

High Quality Small Cap Russell 2000® Index

Definitions of RiskNot Most

Important Important Important

Loss of Capital

Volatility of Return

Deviation from Benchmark

Strong Financial Condition (% of Holdings)

Positive Positive NetEarnings Free Cash Flow Debt Free

High Quality Small Cap 98% 92% 45%

Composite performance is gross of investment advisory and custody fees, and a client’s return will be reduced by these and other expenses. This material is supplemental to the GIPS® presentation included in the Appendix. Past performance does notpredict or guarantee future results. Inception date for the High Quality Small Cap Composite is April 1, 1992. Source: Callan Associates, Inc. & Baseline. Membership of Small Cap Broad Style Group is 188 managers.

- 12 -

Overview of Atlanta Capital

High Quality Small Cap Equity

Biographies, Performance, Disclosures

- 13 -

William O. Bell, IV, CFA Vice President & Principal Portfolio Manager, Core Equity BS, Florida State University 21 Years Investment Experience

Charles B. Reed, CFA Managing Director & Principal Portfolio Manager, Core Equity Management Committee Member BS, Florida State University 27 Years Investment Experience

Core Equity Team BiographiesAs of March 31, 2016

W. Matt Hereford, CFA Vice President & Principal Portfolio Manager, Core Equity BBA, University of Mississippi 21 Years Investment Experience

J. Michael Jaje, Jr., CFA Vice President & Principal Investment Specialist, Core Equity BS, Vanderbilt University 21 Years Investment Experience

- 14 -

Organizational StructureAs of March 31, 2016

Team-Oriented Culture Structure Dedicated to Investment Management

Management Committee

Growth EquityManagement

Richard England, CFAJoe Hudepohl, CFARob Walton, CFA

Lance Garrison, CFAJeff Miller, CFA

Fixed IncomeManagement

Jim Womack, CFABrad Buie, CFA

Kyle Johns, CFA

Core EquityManagement

Chip Reed, CFABill Bell, CFA

Matt Hereford, CFA

Equity Trading

Dallas LundyJoe Roman, CFA

Earl Brown

Richard England, CFAJoe Hudepohl, CFA

Chip Reed, CFAJim Skesavage

Brian Smith, CFAKelly Williams

Jim Womack, CFA

Kelly WilliamsDeborah Bishop

Gillian MooreSuzanne Marger

Julie Ehmig

Accounting &Compliance

Marketing &Client Service

Jim SkesavageBrian Smith, CFA

Mary ByromJim Stafford, CFA

John Ullman, CIMA®Bill Hackney, CFA

Information Technology

AnnMarie DuBoseDarin ClausonAbbas Jaffri

RFPs & Questionnaires

Kattie ElderNichole Shepherd

Operations & Administration

Dorothy Kopp Rose-Lucie Croisiere Amanda KokanDeborah Henry Cheryl Innerarity Rhonda Forde

Robert Allen Vivian Smith Michele SheperdEmma Hutchinson Jackie Poke Dana Wood

Sharon Pinkston

1Growth Equity.2Core Equity.

Investment Specialists

Peggy Taylor, CFA1

Michael Jaje, CFA2

- 15 -

Disciplined Investment ProcessHigh Quality Small Cap Equity

60 – 70 holdings 5% max position sizes 30% absolute sector weights 10 – 15% turnover* Russell 2000® Index

Financial Strength

Overlooked &Under-Followed

Innovative Business Model

EquityUniverse

$200 mm – $3 bnMarket Cap

(at initial purchase)

Exclude companies with:

Focus List150 – 200

Volatile earnings streams Short operating histories High levels of debtWeak cash flow generation Low returns on capital

Shareholder-Oriented Management

Prudent profit taking Change in management or

business strategy Deterioration of financial quality Excessive valuation

Step 1.Create a ‘Focus List’ of High Quality Companies

Step 2.Conduct Proprietary ‘Onsite’ Fundamental Research

Step 3.Construct a Focused YetWell-Diversified Portfolio

Step 4.Monitor Holdings &Review Focus List

AttractiveValuation

* 3-year average based on a single representative client portfolio for the strategyand subject to change. Actual results will vary for each client.


STATEMENT OF INVESTMENT POLICY

Adopted:

February 18, 2015April 20, 2016

of 7 Pasadena Fire & Police Retirement System Investment Policy Statement I. Statement of Purpose

The purpose of this Investment Policy Statement is to set forth in writing: (1) an appropriate set of objectives and goals regarding the investment of the assets of the Pasadena Fire & Police Retirement System(the “System”); (2) the position of the System’s Retirement Board (the “Retirement Board” or “Board”) with respect to the System's risk/return posture, including allocation of assets, and establishment of investment guidelines; and (3) an overall system of investment policies and practices designed to permit the continued financial obligations of the System to be satisfied.

II. Statement of Responsibilities

The following parties associated with the System shall discharge their respective responsibilities in accordance with all applicable fiduciary standards, including: (1) in the sole interest of the System’s participants and beneficiaries; (2) with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and of like aims; (3) by diversifying the investments so as to minimize the risk of large losses; (4) complying with all applicable rulings, regulations, and legislation; and (5) acknowledging and accepting this Statement of Investment Policy. A. Retirement Board: The members of the Retirement Board are fiduciaries with respect to

the System and have been delegated the authority to supervise the System’s investments. B. Investment Managers: The investment managers are delegated the responsibility of

investment management of the System’s assets in accordance with this Investment Policy Statement and any laws that supersede it. The investment managers must either be (1) registered under the Investment Company Act of 1940, (2) registered under the Investment Advisers Act of 1940 (the “Advisers Act”), (3) a bank, as defined in the Advisers Act, (4) an insurance company qualified under the laws of more than one state to perform the services of managing, acquiring or disposing of System assets, or, (5) such other person or organization authorized by applicable law or regulation to function as an investment manager.

C. Custodian: The custodian bank is charged with the responsibility of safekeeping the

securities; collection and disbursement of System assets, and periodic accounting statements. D. Investment Consultant: The investment consultant is charged with the responsibility of

advising the Retirement Board on investment policy, the selection of investment managers, providing performance analysis and monitoring services.

E. Legal Counsel: Legal counsel will advise and represent the Retirement Board in all matters

requiring legal insight and advice.

F. Actuary: The plan actuary is charged with the responsibility of preparing a comprehensive evaluation of the System’s funded status, required contribution levels, and attest to the appropriateness of the System’s assumptions and funding policy.

III. Statement of Investment Philosophy

A. The Retirement Board is committed to: (1) protecting the corpus of the System; (2)

obtaining adequate investment returns in order to protect and pay the benefits promised to the participants; (3) complying with applicable law.

of 7 Pasadena Fire & Police Retirement System Investment Policy Statement

B. The System shall be managed in a prudent manner recognizing risk and return trade-offs.

While concerned with avoiding undue risk, the Retirement Board is desirous of maximizing investment gains. Accordingly, consistent with safety of principal over the long term, investments shall be chosen to maximize the return on invested assets. Sufficient liquidity shall also be maintained to fund expenses and benefit payments.

IV. Investment Objectives

The Investment Objectives for the System will be for the asset value, exclusive of contributions or withdrawals, to grow over the long run and earn, through a combination of investment income and capital appreciation, a rate of return (time-weighted total return) in excess of the benchmarks established for the medium term (3 years) and long term (5 years). Given the System is currently a closed-plan, the Retirement Board has adopted a long-term investment horizon such that the chances and duration of investment losses are carefully weighed against the long-term potential for the appreciation of assets.

Medium Term Performance Objectives

A. The objective of the total fund is to earn a return that exceeds the return of the

indexes weighted in accordance with the current target asset allocation.

B. Within each of the following segments, the objective of an index fund is to match the respective index while the objective of an active manager is to exceed the return of the respective index as well as the median return within a representative performance universe.

Segment Index

Large Cap Core Equity S&P 500

Large Cap Growth Equity Russell 1000 Growth

Large Cap Value Equity Russell 1000 Value

Small Cap Core Equity Russell 2000

International Developed Equity MSCI ACWI ex US

Core Plus Fixed Income Barclays Capital Aggregate Bond

Bank Loans S&P/LSTA Leveraged Loan

TIPS Barclays Capital US TIPS

REITs FTSE NAREIT

Real Estate NCREIF-ODCE

Liquid Alternatives Consumer Price Index +5%


Long Term Performance Objectives

A. The objective of the total fund is to earn a return that exceeds the return of the indexes

weighted in accordance with the current target asset allocation. B. The Total Fund is to meet or exceed the actuarial assumed rate of return

V. Asset Allocation

The following allocations of System assets shall serve as the general guidelines for System investments:

Asset Class Target Allocation Minimum Maximum US Large Cap Core 0.0% 0.0% 15.0% US Large Cap Value 9.0%8.0% 3.0% 20.0% US Large Cap Growth 9.0%8.0% 3.0% 20.0% US Small Cap Core 4.0% 0.0% 10.0%

Non-U.S.(Developed Market) 20.0% 10.0% 25.0% US Core Fixed Income 33.0%35.0% 25.0% 50.0% Bank Loans 5.0% 0.0% 10.0%

TIPS 5.0% 0.0% 10.0% US REITS 0.0% 0.0% 15.0% Real Estate 10.0% 0.0% 15.0%

Liquid Alternatives 5.0% 0.0% 10.0%

Cash 0.0% 0.0% 10.0%

VI. Investment Guidelines

It is the intention of the Retirement Board to allow the investment managers full discretion within the scope of these mutually agreed upon investment guidelines, the applicable investment management agreement, and any laws that supersede either of these documents. The investment managers shall review the cash flow requirements with the Retirement Board at least annually and shall take such requirements into consideration in their investment decisions. Annual Review Meeting: Each investment manager will be expected to meet annually with the Retirement Board. The agenda for these meetings shall include, but not be limited to: explain performance behavior against respective benchmarks as given in the performance

standards section of the statement of investment policy the manager’s investment performance and risk levels in light of the stated policies and

objectives; the manager’s view on important developments within the economy and the securities

markets and their potential effect on investment strategy, asset allocation, and portfolio performance;


the effects of changes within the manager’s organization on investment philosophy, strategy, and performance;

amendments to the policies and objectives presented in this Policy; pertinent changes in the portfolio’s actuarial situation.

The Retirement Board may call more frequent meetings at its discretion. Liquidity: The Retirement Board will monitor the System’s cash flow on a regular basis, and sufficient liquidity shall be maintained to fund benefit payment outflows. When withdrawals become necessary, the Board will notify the investment managers as far in advance as possible to allow them sufficient time to acquire necessary liquid reserves. Proxy Voting: The investment managers shall have the sole and exclusive right to vote any and all proxies solicited in connection with the securities held by the System. Investment managers must vote proxies in a manner that, in the judgment of the investment manager, serves the best interests of the System and its beneficiaries. Managers are not permitted to vote proxies blindly as recommended by management, and must exercise due diligence in ascertaining the facts and circumstances of the matter being voted on. Trading and Execution: The investment managers shall use their best efforts to obtain execution of orders through responsible brokerage firms at the most favorable prices and competitive commission rates.

VII. Investment Performance Review and Evaluation

A. It is the objective of the Retirement Board to review the investment results of the System quarterly. Performance comparisons will be made against a representative performance universe and the performance objectives set forth in this policy statement.

B. The Retirement Board, with the assistance of the investment consultant, shall periodically

review the qualitative developments of each investment manager. This evaluation should include: changes in ownership, personnel turnover, adherence to investment style and philosophy, and any other qualities that the Retirement Board deems appropriate. This review should also include an assessment as to whether each investment manager has operated within the scope of this Investment Policy Statement.

C. The Retirement Board is desirous of holding each investment manager accountable for the

performance of the assets over which such investment manager exercises discretion. If an investment manager fails to accomplish the investment objectives as set forth in this Investment Policy Statement over a market cycle (typically three to five years), the Retirement Board may place the investment manager on probation. The Retirement Board will continue to monitor the investment results until the Board determines that removal of probation or termination of the investment manager is warranted. The Retirement Board still reserves the right to terminate investment managers if they violate this investment policy statement, experience personnel or organizational changes, or if the Retirement Board determines that a change of investment managers is in the best interests of the participants.

D. The investment managers must disclose all major changes in their organization or

investment philosophy to the Retirement Board within 30 days. Further, all registered investment advisors must present updated ADV-2 forms on an annual basis to the Retirement Board.

of 7 Pasadena Fire & Police Retirement System Investment Policy Statement VIII. Administrative Practices

A. Communication and Reporting of Investment Managers: The investment managers are responsible

for frequent and open communication in writing with the Retirement Board on all significant matters pertaining to investment policies and the management of the System's assets. Each investment manager must include a copy of its individual portfolio guidelines along with the quarterly report. Investment managers are required to advise the Retirement Board in writing of any violation or any need for changes to the portfolio guidelines.

B. Compensation of Investment Managers: Each investment manager retained by the System shall be

compensated quarterly by a formula contained in the investment management agreement. No investment manager retained by the System shall receive a payment of commission or other fees on a particular investment transaction. Further, each investment manager must disclose to the Retirement Board any indirect compensation received in addition to its fees as a result of servicing the System.

C. Acknowledgment of Fiduciary Responsibility: The investment managers are expected to

acknowledge in writing their recognition and acceptance of full responsibility as a fiduciary under appropriate federal and state legislation and be covered by appropriate and adequate insurance and bonding.

D. Rebalancing: The Retirement Board will periodically review the asset allocation set forth in

this Investment Policy Statement and determine the necessity of rebalancing the System’s assets. The Retirement Board will consider the benefits of maintaining an asset allocation that is consistent with the target asset allocation against the transaction costs associated with rebalancing. While it is considered beneficial to allow the portfolio to moderately change relative to the target allocation, rebalancing should occur prior to the maximum and minimum targets specified above.

E. Cash Liquidity Policy: The following procedures are hereby adopted and will remain in effect

until such time as monthly cash flows of the System support the ongoing benefit and expense payments required by the System.

The Cash Liquidity Policy for the System shall be integrated with the management of the

System’s asset allocation rebalancing policy Cash required for monthly benefit payments and operating expenses shall be distributed

from a cash account. The balance in that account will be monitored on a frequent basis and replenished as necessary, but not less often than quarterly.

When it is determined that there is insufficient cash in the designated cash account to fund upcoming cash withdrawals, transfers will be made from one or more of the investment accounts into the cash account. The determination of which accounts will provide funds to the cash account will be made by the Board in consultation with the investment consultant, with the following objectives:

Rebalance toward the target asset allocation of each account Minimize the transaction costs of providing cash.

IX. Policy Changes


The investment consultant shall advise the Retirement Board of any restrictions within this Investment Policy Statement which may prevent the investment manager(s) from obtaining the objectives and goals set forth herein. Any violation of the investment guidelines or other sections of this Investment Policy Statement discovered by the investment consultant in the preparation of its regular performance review shall be reported immediately to the Retirement Board and discussed at their next regularly scheduled meeting.

X. Review and Revisions

The Investment Policy Statement shall be updated as required and reviewed on an annual basis. The Retirement Board reserves the right to amend the Investment Policy Statement at any time they deem such amendment to be necessary, or to comply with changes in federal law as these changes affect the investment of System assets.

IN WITNESS HEREOF, the Investment Policy Statement has been approved and executed by the Retirement Board on this _____ day of _______________, 20152016.

__________________________________ _________________________________ Chairman Board Member

Market Value % ofPortfolio 1 Mo 3 Mo Fiscal

YTD YTD 1 Yr_

Total Fund 126,265,582 100.0 3.8 1.0 -1.4 1.0 -0.9Policy Index 3.3 0.8 -0.1 0.8 -0.1Total Domestic Equity 26,515,531 21.0 7.2 0.4 -2.5 0.4 -1.4

S&P 500 6.8 1.3 1.5 1.3 1.8Vanguard Growth Index Ins 11,099,474 8.8 7.1 0.3 0.4 0.3 0.2

Spliced Vanguard Large Cap GrowthIndex 7.0 0.2 0.3 0.2 0.1

MSCI US Prime Market Growth 6.7 -0.6 -0.9 -0.6 -0.7Dodge & Cox Stock 10,458,590 8.3 7.0 -1.0 -6.7 -1.0 -4.3

Russell 1000 Value 7.2 1.6 -1.6 1.6 -1.5Atlanta Capital Management Company 4,957,467 3.9 7.5 3.8 0.4 3.8 1.6

Russell 2000 8.0 -1.5 -10.1 -1.5 -9.8Russell 2500 8.3 0.4 -7.0 0.4 -7.3

Total International Equity 21,971,519 17.4 8.2 -3.0 -13.6 -3.0 -13.2MSCI EAFE 6.5 -3.0 -8.8 -3.0 -8.3MSCI ACWI ex USA 8.1 -0.4 -9.7 -0.4 -9.2Dodge & Cox Intl Stock 10,490,562 8.3 9.4 -3.8 -17.9 -3.8 -18.1

MSCI ACWI ex USA 8.1 -0.4 -9.7 -0.4 -9.2American Funds Europacific Growth R6 11,480,957 9.1 7.1 -2.3 -9.3 -2.3 -8.3

MSCI ACWI ex USA 8.1 -0.4 -9.7 -0.4 -9.2Total Domestic Fixed 54,203,197 42.9 1.0 2.4 2.3 2.4 1.3

Barclays Aggregate 0.9 3.0 3.7 3.0 2.0Metropolitan West Core Plus Fixed Income 42,247,177 33.5 0.7 2.3 2.7 2.3 1.4

Barclays Aggregate 0.9 3.0 3.7 3.0 2.0Voya Senior Loan Fund 7,487,930 5.9 2.3 1.4 -0.4 1.4 0.1

S&P/LSTA Leveraged Loan Index 2.8 1.5 -1.9 1.5 -1.3Vanguard Inflation-Protected Securities Ins 4,468,090 3.5 1.9 4.6 2.9 4.6 1.5

Barclays US TIPS 1.8 4.5 2.6 4.5 1.5

Pasadena Fire & Police Retirement System 1

Policy Index as of 3/1/2016: 8% Russell 1000 Value, 8% Spliced Vanguard Large Growth, 4% Russell 2000, 20% MSCI EAFE, 35% BC Agg, 5% BC US TIPS, 5% S&P/LSTA Leveraged Loan, 10% NCREIF-ODCE, 5% CPI + 5%. Pooled Cash not included in Total Fund calculation. CPI LOCAL (LA) includes Los Angeles-Riverside-Orange County. FY: 6/30. Voya Senior Loan funded 6/27/2014. All manager returns shown net of fees. Effective 3/1/2015 Atlanta SMID Cap strategy changed to Atlanta Small Cap Core strategy. First American Treasury funded 12/2/15. First American Treasury Obligation underwent share class change on 2/18/2016. All data is preliminary.

Current % Policy %_

Domestic Equity LargeCap Growth $11,099,474 8.8% $10,101,247 8.0%

Domestic Equity LargeCap Value $10,458,590 8.3% $10,101,247 8.0%

Domestic Equity SmallCap Core $4,957,467 3.9% $5,050,623 4.0%

International Equity $21,971,519 17.4% $25,253,116 20.0%Domestic Fixed IncomeCore $42,247,177 33.5% $44,192,954 35.0%

Domestic Fixed IncomeBank Loans $7,487,930 5.9% $6,313,279 5.0%

Domestic Fixed IncomeReal Return $4,468,090 3.5% $6,313,279 5.0%

Real Estate $17,411,629 13.8% $12,626,558 10.0%Alternative Investment $6,141,761 4.9% $6,313,279 5.0%Cash and Equivalents $21,945 0.0% $0 0.0%Total $126,265,582 100.0% $126,265,582 100.0%

Pasadena Fire & Police Retirement SystemExecutive Summary - Preliminary (Net of Fees) Period Ending: March 31, 2016


Policy Index as of 3/1/2016: 8% Russell 1000 Value, 8% Spliced Vanguard Large Growth, 4% Russell 2000, 20% MSCI EAFE, 35% BC Agg, 5% BC US TIPS, 5% S&P/LSTA Leveraged Loan, 10% NCREIF-ODCE, 5% CPI + 5%. Pooled Cash not included in Total Fund calculation. CPI LOCAL (LA) includes Los Angeles-Riverside-Orange County. FY: 6/30. Voya Senior Loan funded 6/27/2014. All manager returns shown net of fees. Effective 3/1/2015 Atlanta SMID Cap strategy changed to Atlanta Small Cap Core strategy. First American Treasury funded 12/2/15. First American Treasury Obligation underwent share class change on 2/18/2016. All data is preliminary.

Pasadena Fire & Police Retirement SystemExecutive Summary - Preliminary (Net of Fees) Period Ending: March 31, 2016

Market Value % ofPortfolio 1 Mo 3 Mo Fiscal

YTD YTD 1 Yr_

Total Real Estate 17,411,629 13.8 1.2 1.2 6.2 1.2 11.6NCREIF-ODCE N/A N/A N/A N/A 11.2NCREIF Property Index N/A N/A N/A N/A 9.4Invesco Core Real Estate 17,411,629 13.8 1.2 1.2 6.2 1.2 11.6

NCREIF-ODCE N/A N/A N/A N/A 11.2Total Alternatives 6,141,761 4.9 6.8 5.2 -3.9 5.2 -4.1

CPI + 5% N/A N/A N/A N/A 5.0CPI (UNADJUSTED) N/A N/A N/A N/A 0.4CPI LOCAL (LA) N/A N/A N/A N/A 1.1PIMCO All Asset Ins 6,141,761 4.9 6.8 5.2 -3.9 5.2 -4.1

CPI + 5% N/A N/A N/A N/A 5.0HFRI Fund of Funds Composite Index 1.1 -2.5 -5.3 -2.5 -5.1

Cash 21,945 0.0 0.0 0.0 0.1 0.0 0.1Citi 3mth Treasury Bill 0.0 0.1 0.1 0.1 0.1First American Treasury Obligation Z 21,945 0.0 0.0 0.0 0.0 0.0 0.0

Citi 3mth Treasury Bill 0.0 0.1 0.1 0.1 0.1XXXXX


Pasadena Fire & Police Retirement SystemExecutive Summary with Pooled Cash - Preliminary Period Ending: March 31, 2016

Total MarketValue

% ofPortfolio

DomesticEquity LargeCap Growth

DomesticEquity Large

Cap Value

DomesticEquity Small

Cap Core

InternationalEquity

DomesticFixed Income

Core


Bank Loans


Real ReturnReal Estate Alternative

InvestmentCash and

Equivalents_

Total Fund Total Domestic Equity

Vanguard Growth Index Ins $11,099,474 8.7% $11,099,474Dodge & Cox Stock $10,458,590 8.2% $10,458,590Atlanta Capital Management Company $4,957,467 3.9% $4,957,467

Total International Equity Dodge & Cox Intl Stock $10,490,562 8.2% $10,490,562American Funds Europacific Growth R6 $11,480,957 9.0% $11,480,957

Total Domestic Fixed Metropolitan West Core Plus Fixed Income $42,247,177 33.1% $42,247,177Voya Senior Loan Fund $7,487,930 5.9% $7,487,930Vanguard Inflation-Protected Securities Ins $4,468,090 3.5% $4,468,090

Total Real Estate Invesco Core Real Estate $17,411,629 13.6% $17,411,629

Total Alternatives PIMCO All Asset Ins $6,141,761 4.8% $6,141,761

Cash First American Treasury Obligation Z $21,945 0.0% $21,945

Pooled Cash $1,300,000 1.0% $1,300,000Total $127,565,582 100.0% $11,099,474 $10,458,590 $4,957,467 $21,971,519 $42,247,177 $7,487,930 $4,468,090 $17,411,629 $6,141,761 $1,321,945

XXXXX

Asset Class Manager Name Ticker Symbol CUSIP Actual $ Actual % Targets %Above / Under

Target % Target $Re‐Balance Estimate

Re‐Balance Actual New $ New %

Variance to Targets (%)

Domestic EquityLarge Cap Value Dodge & Cox Stock DODGX 256219106 10,350,118$ 8.2% 8.0% 0.2% 9,788,674$ (561,444)$ (1,200,000) 9,150,118$ 7.5% ‐0.5%Large Cap Growth Vanguard Growth Index VIGIX 922908868 11,085,293$ 8.8% 8.0% 0.8% 9,788,674$ (1,296,619)$ (1,900,000) 9,185,293$ 7.5% ‐0.5%Small Cap Core Atlanta Capital Management n/a n/a 4,832,595$ 3.8% 4.0% ‐0.2% 4,894,337$ 61,742$ (200,000) 4,632,595$ 3.8% ‐0.2%Total Domestic 26,268,006$ 20.9% 20.0% 0.9% 24,471,685$ (1,796,321)$ (3,300,000) 22,968,006$ 18.8% ‐1.2%

International EquityInternational Value Dodge & Cox Int'l Stock DODFX 256206103 10,284,396$ 8.2% 10.0% ‐1.8% 12,235,842$ 1,951,446$ 10,284,396$ 8.4% ‐1.6%International Growth American Funds EuroPacific Growth RERGX 298706821 11,392,782$ 9.1% 10.0% ‐0.9% 12,235,842$ 843,061$ 11,392,782$ 9.3% ‐0.7%Total International 21,677,178$ 17.3% 20.0% ‐2.7% 24,471,685$ 2,794,507$ 0 21,677,178$ 17.7% ‐2.3%

Total Equity 47,945,184$ 38.2% 40.0% ‐1.8% 48,943,369$ 998,186 (3,300,000) 44,645,184$ 36.5% ‐3.5%

Fixed IncomeCore Fixed MetWest Core Plus n/a n/a 42,184,662$ 33.6% 35.0% ‐1.4% 42,825,448$ 640,786$ 42,184,662$ 34.5% ‐0.5%Senior Bank Loans Voya Senior Bank Loan CIT n/a n/a 7,503,995$ 6.0% 5.0% 1.0% 6,117,921$ (1,386,073)$ 7,503,995$ 6.1% 1.1%Real Return Vanguard Inflation‐Protected Securities VIPIX 922031745 4,472,251$ 3.6% 5.0% ‐1.4% 6,117,921$ 1,645,670$ 4,472,251$ 3.7% ‐1.3%Total Fixed 54,160,908$ 43.1% 45.0% ‐1.9% 55,061,290$ 900,383$ 0 54,160,908$ 44.3% ‐0.7%

Real EstateReal Estate Invesco Core Real Estate n/a n/a 17,411,629$ 13.9% 10.0% 3.9% 12,235,842$ (5,175,787)$ 17,411,629$ 14.2% 4.2%Total Real Estate 17,411,629$ 13.9% 10.0% 3.9% 12,235,842$ (5,175,787)$ 0 17,411,629$ 14.2% 4.2%

Liquid AlternativesLiquid Alternatives PIMCO All Asset PAAIX 722005626 6,118,758$ 4.9% 5.0% ‐0.1% 6,117,921$ (837)$ 6,118,758$ 5.0% 0.0%

Total Alternatives 6,118,758$ 4.9% 5.0% ‐0.1% 6,117,921$ (837)$ 0 6,118,758$ 5.0% 0.0%

Cash Cash n/a 195998BA6 21,945$ 0.0% 0.0% 0.0% ‐$ (21,945)$ 21,945$ 0.0% 0.0%

Total Assets 125,658,423$ 100% 100% 0% 122,358,423$ (3,300,000)$ (3,300,000)$ 122,358,423$ 100% 0%

Pasadena Fire and Police Retirement PlanApril 11, 2016

JANUARY 2016Active Management Environment

VERUSINVESTMENTS.COM

SEATTLE 206‐622‐3700LOS ANGELES 310‐297‐1777

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Past performance is no guarantee of future results. This document is provided for informational purposes only and is directed to institutional clients and eligible institutional counterparties only and is not intended for retail investors. Nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security or pursue a particular investment vehicle or any trading strategy. This document may include or imply estimates, outlooks, projections and other “forward‐looking statements.” No assurance can be given that future results described or implied by any forward looking information will be achieved. Investing entails risks, including possible loss of principal. Verus Advisory Inc. and Verus Investors, LLC (“Verus”) file a single form ADV under the United States Investment Advisors Act of 1940, as amended.

Table of contents

Introduction 3

Asset class environments 5

Appendix 1: the new approach 21

Appendix 2: supporting documents 32

2

The active management environmentOur work on the active management environment addresses some of the shortfalls of traditional active management analysis, which uses the median manager to describe the active management universe as a whole. We refer here to the traditional method as the old approach.

These new insights have allowed for us to better understand the range of impacts that active management can have on portfolio outcomes. This document marks the 2nd year of the new approach. For first time readers, extensive supporting material has been included in Appendix 1. For those familiar with the new approach, please read on.

— Even without skilled manager selection there are many cases where active management can help investors achieve better portfolio outcomes in risk and return terms.

— Those better portfolio outcomes may come from additional return or lower risk. Not all investors have the same definition of better outcomes, and the trade‐offs facing them vary by universe.

— Adding skilled manager selection to the process can add additional value in portfolio construction.

— Fees remain an important part of the active management conversation. Fees and survivorship bias should be taken into account when analyzing active management universes.

Using the median manager to decide whether active management is appropriate can be misleading. This new tool can help investors make more informed decisions.

January 2016Active Management Environment 3

The true investment opportunity setThe investment opportunity set is often represented in a risk‐return chart, with asset classes represented by single‐point benchmarks, and possibly single‐point median managers to represent active management. In reality the active management universes in each asset class are extensive. Much of the risk‐return surface between 3% and 12% return and between 2% and 28% volatility is covered, and many parts of that space are covered by multiple active management universes.

This represents 10‐year manager performance data and 75% contour areasSource: eVestment, as of 9/30/2014. Universe returns have been adjusted for fees and survivorship bias.


RISK‐RETURN REGIONS ACROSS ASSET CLASSES: 10 YEAR RESULTS

Asset class environments


U.S. LARGE CAP ACTIVE MANAGER PERFORMANCE YTD U.S. LARGE

Equities – U.S. large cap— The evidence suggests that U.S. large cap equity has been a fairly efficient asset class over the trailing 3, 5, 7 and 10‐year time periods. The

benchmark tends to exhibit less volatility than the universe. Some managers have been able to produce better returns even at this lower level of volatility, but most active managers have simply increased their volatility exposure. There seems to be a weak relationship between managers assuming additional volatility and achieving additional return.

— In a negative year for large cap U.S. equity markets (through September 30th), the median large cap value manager generated the largest positive excess return, with about two‐thirds of the managers outperforming the style benchmark.

— In contrast to value, the year‐to‐date relative performance of the median large cap growth manager has been more muted, modestly lagging the style benchmark.

Source: eVestment, as of 9/30/2015, gross of fees Source: eVestment. Universe returns have been adjusted for fees and survivorship bias.

0.2‐0.3

1.45346

68

0

25

50

75

100

‐0.5

0.0

0.5

1.0

1.5

2.0

Core Growth Value

% M

anagers B

eatin

g Be

nchm

ark

Med

ian Manager Excess R

eturn

(vs. Style Ben

chmark)

Median Manager Excess Return % Managers Beating Benchmark


U.S. SMALL

Equities – U.S. small cap— Over the long term it seems clear that there is little relationship between the amount of risk that U.S. small cap managers take relative to

the benchmark and their ability to outperform that benchmark. This can be seen in particular over the 10 year period, where the distribution of manager outcomes is essentially flat, similar to that seen in the large cap U.S. equity space.

— Over longer term time periods fewer managers than in the large cap U.S. space choose to take on greater risk relative to the benchmark. At the same time there appears to be some evidence that managers have been able to produce excess return over most time periods,and to be able to do so more effectively than in the large cap U.S. space.

— Although U.S. small cap equities significantly lagged their larger counterparts in 2015, most active small cap managers outperformed their respective style benchmark, with the median value manager generating the largest positive excess return. Similar to the large cap space, the median small cap value manager generated the most favorable excess return year‐to‐date.

2.2

0.9

3.1

74

57

76

0

25

50

75

100

0.0

1.0

2.0

3.0

4.0

Core Growth Value

% M

anagers B

eatin

g Be

nchm

ark

Med

ian Manager Excess R

eturn

(vs. Style Ben

chmarks)

Median Manager Excess Return % Managers Beating Benchmark

U.S. SMALL CAP ACTIVE MANAGER PERFORMANCE YTD

Source: eVestment, as of 9/30/2015, gross of fees Source: eVestment. Universe returns have been adjusted for fees and survivorship bias.


EXAMPLE OF INTERNATIONAL DEVELOPED MANAGER INTERNATIONAL LARGE

Equities – international developed— In the most recent 3 and 5‐year periods a majority of international developed managers outperformed the benchmark, and more than half did so

with less volatility. While many active managers outperformed the benchmark over longer time periods examined, most managers did so with higher volatility. Despite this, it appears clear that over all of the time periods examined there is in fact a negative relationship between the degree of excess risk taken and the excess return generated. As managers increase the risk in their portfolio they increase the chance of underperformance.

— There is often a significant difference between an active manager’s geographic exposures and the true underlying economic exposures (the country in which a company is domiciled versus the countries the company’s operations are exposure to). A manager’s economic exposure to emerging markets and North America is typically greater than indicated by geographic exposures. On the other hand, a manager’s economic exposure to Europe is often lower than the manager’s geographic exposure to this region. This increasing divergence is a testimony to increasing globalization.

0%

20%

40%

60%

80%

100%

By Domicile By RevenueNorth America Latin America Eastern Europe Western EuropeAfrica Asia Other

Source: sample manager Source: eVestment. Universe returns have been adjusted for fees and survivorship bias.


5‐YEAR ROLLING ANNUALIZED PERFORMANCE INTERNATIONAL SMALL

Equities – international developed small cap— Most active international small cap strategies have displayed higher volatility than the MSCI EAFE Small Cap Index across each time horizon

examined. This is particularly noticeable over the long term. One of the reasons for higher volatility is an allocation to emerging markets, which have exhibited higher volatility than developed markets.

— In most cases it is also clear that active managers in the international developed small cap space have produced better returns than the benchmark. It is important to note that the level of outperformance does not seem related to the level of excess risk taken.

— While over recent years domestic equities outperformed international developed markets, this has not always been the case, as leadership changes over time. The international developed small cap equity asset class continues to be less efficient. As of Q3 2015, the eVestment database listed 121 strategies in the space while there were more than 550 strategies focused on larger cap international companies.

— On average, smaller companies are more tied to their local economies than their larger counterparts, which could provide greater diversification and could potentially improve risk‐return characteristics within an equity portfolio.

‐10

‐5

0

5

10

15

20

25

30

35

Jan‐06 Jan‐07 Jan‐08 Jan‐09 Jan‐10 Jan‐11 Jan‐12 Jan‐13 Jan‐14 Jan‐15

Annu

alize

d Re

turn (%

)

MSCI EAFE MSCI EAFE Small Russell 1000 Russell 2000

Source: MSCI, Russell, as of 9/30/2015 Source: eVestment. Universe returns have been adjusted for fees and survivorship bias.


COUNTRY ALLOCATIONS OF EMERGING MARKET MANAGERS EMERGING MARKETS

Equities – emerging markets— The majority of emerging market equity managers outperformed the index over the most recent 3, 5, and 7‐year periods. Many strategies

experienced greater than benchmark volatility over 7 and 10‐year periods, but this has been less apparent recently. Over all of the time periods observed most active managers achieved excess returns relative to the benchmark. However, there was a clear negative relationship between the amount of risk taken and the amount of return generated – managers who took more risk were likely to produce lower return.

— Active managers in the space employ very different country and sector allocations depending on the type of inefficiency or secular theme they are attempting to exploit.

— In 2014 Russia was likely the most cited emerging markets country ‐ in 2015 it was China. Despite short‐term equity market volatility, China remains a key emerging market economy and the second largest stock market in the world by market cap. China A‐shares, comprised of incorporated Chinese companies in mainland China, account for approximately 75% of combined Chinese market capitalization. China is taking measures to meet MSCI requirements for inclusion of A‐shares into the MSCI Emerging Markets Index. Emerging market managers might also allocate to frontier markets countries, which are often listed on developed market stock exchanges.

0%

5%

10%

15%

20%

25%

Russia Philippines Korea India China Brazil

Value Play Emerging Markets Consumer Play MSCI EM Index

Source: eVestment, sample managers Source: eVestment. Universe returns have been adjusted for fees and survivorship bias.


10 YR TIPS BREAKEVEN U.S. TIPS

Fixed income – U.S. TIPS— Over each time period examined the TIPS asset class has been highly efficient, with active managers producing minimal added value relative to

the benchmark, and with a tight distribution of manager outcomes relative to the benchmark. In most time periods there appears to be a modest upward tilt to the universe, suggesting some small amount of compensation for managers who take extra risk relative to the benchmark. This relationship appears to have reversed over the most recent three years, however.

— US TIPS 10‐year inflation breakeven spreads remain near the lower end of their historical long‐term average. This is likely driven by continued concerns about future global economic growth.

— The expectation of rising inflation contributes to investor demand for TIPS.

— While active management in TIPS has provided little excess return relative to the benchmark, TIPS exposure may still provide some diversification and risk management benefits.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Spreads (%)

Source: Federal Reserve Bank of St Louis, as of 11/1/2015 Source: eVestment. Universe returns have been adjusted for fees and survivorship bias.


U.S. TREASURY YIELDS AND VOLATILITY U.S. TREASURY

Fixed income – U.S. treasury— While the active management universe for U.S. Treasury securities has shown a higher degree of dispersion relative to TIPS, the risk‐reward

tradeoff remains mostly consistent across time periods examined. Active manager returns are highly correlated to volatility. Active managers typically produce lower returns than the benchmark but with less volatility, and there appears to be a positive relationship between volatility and return.

— The Federal Reserve increased interest rates by 25 basis points in December; however, long‐term rates remain well below their historical average. Concerns over future economic growth continue to weigh on rates.

— Managers with biases towards remaining underweight duration in anticipation of higher interest rates have recently underperformed as long‐term rates have been more stable than expected.

— Active management in this space is directly related to the risk environment. The very clear relationship between risk and return over multiple time periods, unlike most other asset classes, leaves the investor with a relatively clear risk management payoff decision to make.

0246810121416

0

1

2

3

4

5

6

U.S. Treasury Vo

latility

(%)

U.S. Treasury Yield (%)

U.S. Treasury 10‐yr Yield U.S. Treasury 10yr Volatility

Source: Bloomberg, as of 11/1/2015 Source: eVestment. Universe returns have been adjusted for fees and survivorship bias.


GLOBAL BOND MANAGER COUNTRY EXPOSURES GLOBAL SOVEREIGN

Fixed income – global sovereign— Evidence suggests that dispersion of global sovereign active manager returns has recently increased due to rising idiosyncratic risks and divergent global

central bank policies. Over most time periods active managers have produced returns similar to the benchmark but with less volatility, and there has been little or no relationship between the level of risk taken and the level of return achieved. Over more recent periods managers have produced excess returns while taking less risk than the benchmark.

— Global bonds have offered interest rate diversification benefits within diversified fixed income portfolios. Developed market yields (ex: Europe & Japan) have remained low, and have been driven by continued bond purchases by the ECB and Bank of Japan. Commonly used benchmarks are tilted towards the largest borrowers (ex: Germany, Japan, the U.K. and the U.S.).

— Many managers use off‐benchmark securities, such as credit and currency, in an attempt to add value relative to a sovereign‐only benchmark. It remains unclear whether the results of these exposures should truly be attributed to benchmark‐relative performance, or should be thought of differently.

‐20%

0%

20%

40%

60%

80%

100%

120%

Manager 1 Manager 2 Manager 3 Manager 4 Manager 5 CitigroupWGBI

Emerging Markets Other Developed Pacific ex‐Japan JapanEurope ex‐UK United Kingdom North America

Source: sample managers Source: eVestment. Universe returns have been adjusted for fees and survivorship bias.


CORE BOND MANAGER SECTOR EXPOSURES U.S. CORE

Fixed income – U.S. core— Over all time periods examined the core fixed income asset class appears to be highly efficient and shows little dispersion between active

managers and the benchmark.

— Core bond portfolios are designed to provide income and return while delivering low correlation to equities. With U.S. Treasury yields remaining below the long‐term historical average, active managers in the space are increasingly taking on exposure to off‐benchmark allocations (ex: high yield, municipal bonds, ABS, and private placement bonds). Managers generally take on these exposures with the intent to achieve excess returns relative to the benchmark.

— The role of active management in the core fixed income space appears limited, due to tight universe dispersion.

0%

20%

40%

60%

80%

100%

Manager 1 Manager 2 Manager 3 Manager 4 Index

Government Agency Investment GradeHigh Yield Non‐Agency ABS Non‐Agency MBSMunicipals Private Placements Mortgage Pass‐throughsYankees Other

Source: sample managers Source: eVestment. Universe returns have been adjusted for fees and survivorship bias.


U.S. CORE PLUS

Fixed income – U.S. core plus— While still relatively constrained, the core plus fixed income manager universe demonstrates higher dispersion than the core bond universe. This

may be because managers have greater ability to implement off‐benchmark allocations to lower quality and non‐U.S. dollar denominated bonds. There appears to be a positive relationship over some time periods between the risk of the portfolio and the return generated, although for longer time periods this effect appears to diminish.

— Over the long‐term, there seems to be a positive trade‐off between risk and return within the space.

— More recently, as market volatility has increased, managers with exposures to higher beta assets have reallocated to higher quality securities in order to minimize potential drawdowns.

— The role of active management in the core plus fixed income space, while generally limited, is predicated on the belief that managers can add value through security selection and sector rotation while minimizing volatility.

0%

20%

40%

60%

80%

100%

Dec‐07 Jun‐09 Dec‐10 Jun‐12 Dec‐13 Jun‐15

Treasury US Agency Investment Grade CorporatesHigh Yield ABS Non‐Agency MBSMunicipals Mortgage Passthroughs

CORE PLUS MANAGER ASSET ALLOCATION SHIFTS

Source: eVestment, sample manager Source: eVestment. Universe returns have been adjusted for fees and survivorship bias.


U.S. HIGH YIELD HIGH YIELD

Fixed income – high yield— Over the long‐term active managers in the high yield space demonstrate greater dispersion around the benchmark than in shorter periods. There

appears to be a limited, though mildly positive, payoff between risk and return. However, it should be noted that over longer time periods little of the universe remains above the benchmark return level and the amount of compensation for risk taken is fairly small.

— More recently, as high yield bond spreads widen because of falling commodity prices, investors’ appetites have remained strong as they continue to search for higher yielding assets. While U.S. corporate balance sheets remain generally healthy, there are increasing concerns regarding greater leverage and continued supply of new issuance as interest rates rise.

— High yield bond market volatility is highly correlated to the economic business cycle. Avoiding idiosyncratic risks resulting from ratings downgrades or defaults is an important consideration for active management.

0

5

10

15

20

25

Yield (%

)

High Yield Spreads High Yield Rates

Source: Federal Reserve Bank, Bank of Merrill Lynch, as of 11/1/2015 Source: eVestment. Universe returns have been adjusted for fees and survivorship bias.


GLOBAL CREDIT VOLATILITY GLOBAL CREDIT

Fixed income – global credit— Over all time periods examined the global credit active manager universe has demonstrated a high degree of dispersion relative to the benchmark.

Over longer periods few managers have provided excess returns with lower volatility than the benchmark. However, as volatility has come down, dispersion has decreased with fewer managers successfully adding value. Over longer time periods there appears to be little to no relationship between risk and return.

— More recently active managers have sought to limit their exposure to volatility in order to reduce potential drawdowns.

— Interest rates in developed markets remain below their long‐term historical average due primarily to continued global central bank monetary policy. In an effort to provide excess returns, active managers continue to take off‐benchmark exposures.

— During periods of heightened market volatility, managers with flexible investment mandates often take on exposure to lower quality bonds providing liquidity to the market. These managers have benefited as markets and spreads normalize.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Dec‐10 Jun‐11 Dec‐11 Jun‐12 Dec‐12 Jun‐13 Dec‐13 Jun‐14

Trailing 1m

o Inde

x Re

turn

Volatility

Global High Yield Global IG Credit

Source: Bloomberg, as of 11/30/15 Source: eVestment. Universe returns have been adjusted for fees and survivorship bias.


EMERGING MARKET DEBT CDS SPREADS EMERGING MARKET DEBT (HARD)

Fixed income – emerging market debt (hard)— Managers in the emerging market debt (EMD) hard currency universe have struggled to produce excess returns relative to the benchmark.

While over short time periods there has been a negative relationship between risk and return, over longer periods this relationship has flattened out, with little apparent relationship between the returns generated and the risk taken.

— Managers in the universe have historically included off‐benchmark exposures to quasi‐sovereign and hard currency corporate credits in an effort to increase returns.

— EMD hard currency spread volatility has increased recently due primarily to low commodity prices and concerns about future global economic growth. In addition, concerns over geopolitical risks remain. Concerns also remain regarding the impact from continued rate hikes by the Federal Reserve, and continued U.S. dollar strength.

0

100

200

300

400

500

600

700

Dec‐13 Jun‐14 Dec‐14 Jun‐15

CDS Spreads (bp

s)

Malaysia Brazil Chile ColumbiaIndonesia S. Africa Turkey PhilippinesRussia Mexico

Source: JPMorgan, eVestment Analytics, as of 11/30/15 Source: eVestment. Universe returns have been adjusted for fees and survivorship bias.


EMERGING MARKET DEBT COUNTRY RETURNS YTD EMERGING MARKET DEBT (LOCAL)

Fixed income – emerging market debt (local)— Over longer time periods there has been a slightly positive relationship between risk and return in the emerging market debt local universe.

However, over recent periods managers appear to have reduced risk relative to the benchmark, and have managed to generate excess returns while doing so.

— There remain concerns in this marketplace over rising default risk, the recent appreciation of the U.S. dollar, and timing of Federal Reserve rate hikes.

— Recent performance of the sector has been negatively impacted by the relative weakness in emerging market currencies, continued low commodity prices, and concerns over dampening global economic growth.

— Managers in the space who in the past benefited from taking large exposures to off‐benchmark allocations have been negatively impacted as EMD spreads widen.

‐40

‐30

‐20

‐10

0

10

20

30

Brazile

Chile

Columbia

Hungary

Indo

nesia

Malaysia

Mexico

Peru

Philipp

ines

Poland

Russia

S. Africa

Turkey

Return (%

)

Hedged Unhedged

Source: JPMorgan, GBI‐EM Global Diversified Index, as of 9/30/15 Source: eVestment. Universe returns have been adjusted for fees and survivorship bias.


SHARE PRICE PREMIUM TO NAV U.S. REITS

U.S. REITs— Active managers have been able to add value and/or reduce volatility over the long term. There remains a relatively flat relationship between

risk and return, however, with little evidence that increased risk has generated excess return. In some cases (over the longest time periods) the relationship is in fact inverted. Over shorter time periods, however, managers appear to have been able to generate greater return when taking above market risk.

— Macro forces have recently been a major driver of performance while fundamentals remain generally positive. Uncertainty surrounding rising U.S. interest rates has fueled volatility. However, over long periods of time managers have been able to take advantage of high volatility in REIT valuations, which tend to fluctuate rapidly.

— REITs are typically used to gain liquid exposure to real estate.

‐50%

‐30%

‐10%

10%

30%

50%

1‐90

1‐91

1‐92

1‐93

1‐94

1‐95

1‐96

1‐97

1‐98

1‐99

1‐00

1‐01

1‐02

1‐03

1‐04

1‐05

1‐06

1‐07

1‐08

1‐09

1‐10

1‐11

1‐12

1‐13

1‐14

1‐15

Average since '93: 5.1%

Source: Greenstreet, Deutche Asset & Wealth Management, as of 11/30/15 Source: eVestment. Universe returns have been adjusted for fees and survivorship bias.


Appendix 1: the new approach


The active/passive question The decision of active or passive management is faced by every investor. This problem is characterized by:

— A desire to boil the question down to a simple yes/no decision

— A desire to quantify where possible

— Lots of data to analyze and limited computing power to use

— Difficulties in determining whether manager outperformance was skill or luck

— Identifying the “best” manager is easy, when looking back through time


Traditional approach to managersThe traditional approach to analyzing active management often involves the following:

— Rank the managers on a single metric (return, for example)

— Pick the manager in the middle of the rank (the median manager)

— Use the properties of that manager to describe the universe


Asset ClassCommingled Fund Fee

Mutual Fund Fee

Median Manager Excess Return

Median Excess Returns NET of Commingled Fund Fees

Median Excess Returns NET of Mutual Fund Fees

US Large 0.65 0.85 0.56 (0.09) (0.29)US Small 0.87 1.08 1.26 0.39 0.18 International Developed 0.76 0.96 1.13 0.37 0.17 International Developed Small 0.96 1.09 2.00 1.04 0.91 Emerging Markets 0.95 1.19 1.36 0.41 0.17 Cash 0.11 0.23 0.30 0.19 0.07 TIPS 0.21 0.47 0.07 (0.14) (0.40)US Treasury 0.5 0.46 ‐1.44 (1.94) (1.90)Global Sovereign 0.5 0.65 1.18 0.68 0.53 Core Fixed Income 0.33 0.54 0.45 0.12 (0.09)IG Corp Credit 0.26 0.6 0.65 0.39 0.05 High Yield 0.62 0.73 ‐0.15 (0.77) (0.88)Global Credit 0.54 0.5 0.97 0.43 0.47 EM Debt Hard 0.65 0.79 0.42 (0.23) (0.37)EM Debt Local 0.73 0.86 0.09 (0.64) (0.77)US REIT 0.67 0.92 1.22 0.55 0.30

Traditional approach to managersMedian manager excess return minus expected fees is an oversimplified approach to analyzing managers.

Source: eVestment, 10 years ending 9/30/2015


‐100

0

100

200

300

400

Basis

Points Excess Return

Managers In Return Rank Order

Universe A

‐100

0

100

200

300

400

Basis



Universe B

‐100

0

100

200

300

400

Basis



Universe C

UNIVERSE B UNIVERSE C

The problem with mediansUsing the median manager to describe the universe can be very misleading. To show why we can create three imaginary universes.

— Each universe has 100 managers

— Each universe has an average excess return of 50 basis points

— Each universe has a median excess return of 25 basis points

Simply using the median manager as a description of the universes would be highly misleading – the median manager in each case would be the same even though the behavior within each of these universes is very different.

Representative Data Only

UNIVERSE A


Also, investors have different needs

The standard approach effectively assumes all investors behave in the same way towards risk and return. This assumption is flawed.

In reality, investors have different…

— Levels of funding

— Propensity of sponsor to add funds where needed

— Areas of legal authority

— Investment histories

— Board member experience

— Theoretical and practical opinions about investment management

These wide range of differences will by definition mean that investors should approach active management analysis in different ways.


Alternative approach to managers

The alternative approach to thinking about managers:

— Use the risk and return characteristics of all of the managers in the universe to calculate properties of the universe as a whole

— Plot the output of this analysis to demonstrate the behavior of the universe over time visually

Our goal is, where possible, to move away from using the median manager to describe active management behavior.


The active management environmentOur work on the active management environment addresses some of the shortfalls of traditional active management analysis. These new insights allow for us to better understand the range of impacts that active management can have on portfolio outcomes.

— Even without skilled manager selection there are many cases where active management can help investors achieve better portfolio outcomes in risk and return terms.

— Those better portfolio outcomes may come from additional return or lower risk. Not all investors have the same definition of better outcomes, and the trade‐offs facing them vary by universe.

— Adding skilled manager selection to the process can add additional value in portfolio construction.

— Fees remain an important part of the active management conversation. Fees and survivor bias should be taken into account when analyzing active management universes.

Using the median manager to decide whether active management is appropriate can be misleading. This new tool can help investors make more informed decisions.


How to read a universe chartThe line represents the area where we would expect to find 75% of all of the managers in the universe for the time period covered.

All universe data has been adjusted downwards to reflect the effect of fees and of survivorship bias.

The dot represents the behavior of the benchmark over the period concerned.

The relative positioning of the benchmark compared to the universe area tells us about the

possible benefits of active management.

The shape of the probability density function will not be oval in most cases. The size and shape of the area calculated contains important information about the behavior of active managers and the outcomes achieved.


Some possible scenariosActive managers were able to add volatility, but rarely were able to generate compensation for that volatility.

Active managers who reduced volatility had to give up significant return to do so.

Active managers were rarely able to produce much more return than the benchmark in absolute terms.

Active managers had opportunities to add return, both at similar levels of volatility to the benchmark and incrementally at higher volatility levels.

Active managers had significant ability to add return relative to the benchmark at similar and lower levels of volatility.

Volatility reduction by active managers resulted in little or no return reduction.

Few managers took advantage of the opportunities available to reduce volatility

relative to the benchmark.

Most of the active manager universe chose to reduce volatility relative to the benchmark.


Tracking universes through timeTracking the behavior of a single universe through time can provide insight into the way that active management has changed in that space over those time periods.

The number of products included in the analysis provides insight into the robustness of the analysis.

The relative position of the benchmark relative to the universe may also change through time, representing dynamic structure changes through time.

The movement of the universe, the change in shape and of size all provide information about active manager behavior.

Throughout this report each asset class universe chart is placed at the same position on the page, at the same size and with the scales of the axes identical. This allows for easy comparison between universes.


Appendix 2: supporting documents


Possible investor behaviorsInvestors with high risk tolerance and a need for high return might consider significant volatility increase.

Other investors would be more likely to be best served by passive approaches.

Investors prepared to run some downside risk might consider active managers offering modest risk reduction although passive management a good alternative.

Investors with high risk tolerance might consider active managers with markedly higher risk investment styles.

Investors with at or above market levels of risk tolerance might hire active managers with those strategies in the expectation of higher return.

Other investors might well choose passive approaches to this universe.

Investors who would normally invest passively might think about active managers with volatility

levels similar to the benchmark.

Other investors might hire active lower volatility managers. Passive management is unlikely to be

appropriate.


Methodological note

As a means of describing the distribution of managers in risk‐return space, we estimate joint probability distribution functions (PDF) using manager reported performance. The joint PDF is a mathematical description of the probability of observing a given outcome within some region of risk‐return space, such that the integral of the function over all possible outcomes is one.

To estimate the PDF, we assume the reported manager performance numbers represent an independent, random sampling of outcomes from the opportunity set within the asset class considered. While this is not perfectly true, as commonalities in strategy and imitation will lead to clustering, it is a reasonable approximation. We apply multivariate kernel density estimation, which effectively smooths the point‐wise sampling of outcomes. We choose the Gaussian kernel density estimator implemented in Python within the SciPy library1, where the bandwidth (a parameter governing the smoothing) is estimated by Scott’s Rule2. This approach is non‐parametric and makes no specific assumption about the underlying probability distribution (as opposed to fitting e.g. a multivariate normal distribution).

Probability contours are defined as curves enclosing the designated percentage of most likely outcomes (e.g. the 75% probability contour encloses the outcomes most likely to be observed 75% of the time). We determine these using Monte Carlo integration by resampling the kernel density estimate and iteratively converging the result using the Newton‐Rhapson method.

1) http://www.scipy.org/

2) D.W. Scott, “Multivariate Density Estimation: Theory, Practice, and Visualization”, John Wiley & Sons, New York, Chicester, 1992.


Manager behavior as sampling

THE TRADITIONAL APPROACH

The concentration on the median manager behavior has historically forced us to throw useful information about universes away. More than that, it has forced us to focus too hard on the specific results that specific products achieved over the particular time period we are measuring.

Doing this forces us to discard almost all the information about all of the products other than those at the median and quartile breaks, and to concentrate in detail on the characteristics of those specific products which happen to fall on those break lines. Those products, however, may provide little useful insight for us to help guide the decision process about use of active management.

This combination of too little information being used about most products in a universe and too much being used about a very small number of products selected simply because of their rank order in the universe is likely to lead to misunderstandings about the nature of active management.

THE UNIVERSE AS A WHOLE

The alternative approach that we propose in this document, and which will be covered more fully in an upcoming paper, takes a different approach, and uses a tool which is broadly used in the scientific community – the joint probability density function. Details of the

calculation methodology used can be found on page 31 of this document.

What we are trying to do is to produce a description of the universe as a whole: we regard individual products as having no particular value on their own, but simply as random samples from the true universe. No particular portfolio is important in itself, but each portfolio adds a small amount of information about the likely true characteristics of the universe that they represent. Each portfolio is simply a random draw from an infinite universe of active managers in that asset class.

A GRAPHICAL ANALYSIS

We use this information to plot an area representing the characteristics of the universe on a standard risk‐return chart. This area represents the true characteristics of the active management universe – not simply the behavior of one product in that universe. It uses information about all of the managers in the universe and avoids concentrating on any single portfolio. It allows us for the first time to describe manager universes in their own terms, clearly, visually and in a robust fashion.

Maybe the most important characteristic of these ranges is that it provides us with a much clearer view of the investment opportunity set available to investors as a whole. That opportunity set is not a single point on the chart, as represented by a benchmark or a median: it is in fact an area, and for many universes quite an extensive one.


Notices & disclosuresPast performance is no guarantee of future results. This report or presentation is provided for informational purposes only and is directed to institutional clients and eligible institutional counterparties only and should not be relied upon by retail investors. Nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security or pursue a particular investment vehicle or any trading strategy. The opinions and information expressed are current as of the date provided or cited only and are subject to change without notice. This information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. Verus Advisory Inc. and Verus Investors, LLC expressly disclaim any and all implied warranties or originality, accuracy, completeness, non‐infringement, merchantability and fitness for a particular purpose. This report or presentation cannot be used by the recipient for advertising or sales promotion purposes.

The material may include estimates, outlooks, projections and other “forward‐looking statements.” Such statements can be identified by the use of terminology such as “believes,” “expects,” “may,” “will,” “should,” “anticipates,” or the negative of any of the foregoing or comparable terminology, or by discussion of strategy, or assumptions such as economic conditions underlying other statements. No assurance can be given that future results described or implied by any forward looking information will be achieved. Actual events may differ significantly from those presented. Investing entails risks, including possible loss of principal. Risk controls and models do not promise any level of performance or guarantee against loss of principal.

“VERUS ADVISORY™ and VERUS INVESTORS™ and any associated designs are the respective trademarks of Verus Advisory, Inc. and Verus Investors, LLC. Additional information is available upon request.


TO:

FROM:

DATE:

Pasadena Fire ~ Police Retirement System

AGENDA REPORT

Jill Fosselman, Secretary to the Board

April 20, 2016

DATE 4/ZD/fb ITEM #_...._{ ....... I __

ITEM: Draft Policy for Domestic Relations Orders Procedures, as prepared by System Counsel Best Best & Krieger LLP

RECOMMENDATION

Upon review and discussion of the information presented, the Board may:

1. Adopt the Draft Policy on Domestic Relations Orders Procedures, as prepared by System Counsel Best Best & Krieger LLP, or

2. Other action as determined by the Board.

BACKGROUND

Upon hiring Best Best & Krieger LLP ("BBK") last February, staff requested a legal review and update of the System's Model Domestic Relations Order and review of the System's administrative implementation practices of each of the existing 25 Domestic Relations Orders ("DROs") for conformity with applicable laws. This project was formerly initiated but not completed by prior counsel, Seyfarth Shaw, when BBK was retained. Of concern has been the administrative interpretation of survivor rights for former spouses of FPRS members when not specifically clarified in such DRO (i.e., alternate payees recognized by a DRO as having a right to receive all or a portion of the benefits payable under the SystemL including the payment of community property benefits upon either party's death. Historically, each DRO has been interpreted by System staff and Counsel on an individual basis, as no default policy has been adopted by the Board for such interpretation.

The Draft Policy (Attachment 1) formalizes the procedures, including the role for the Board in reviewing and interpreting DROs, and the default terms in the event a current or future DRO does not address benefits payable upon death and alternate payee designation. The default terms will establish the treatment of alternate payee benefits upon death (when the member or alternate payee predecease each otherL and beneficiary designation by the alternate payee (which shall be the alternate payee's estate). The Draft Policy includes the following documents to aid in the review and development process of DROs:

• Appendix A, Checklist

April 20, 2016 Draft Policy on Domestic Relations Orders Procedures Page 2 of 2

• Appendix B, Notice of Hold on Benefit Payments • Appendix C, Notice of Domestic Relations Order Determination • Appendix D, Notice of Accrued Benefit • Appendix E, Sample Order

Staff also asked counsel to evaluate the potential exposure to the System for implementing the Draft Policy and if there was an obligation to retroactively correct the administration of existing DROs that are not consistent with the Draft Policy. BBK has concluded that existing DROs would not be subject to administration in accordance with the Draft Policy, thus no changes will be required of the existing DROs upon Board adoption. Further, BBK has concluded that the System has reasonably administered survivor benefits under existing DROs that do not allocate benefits in the event of the death of the member or alternate payee. Attachment 2 provides further background, answers and analysis regarding the application of the Draft Policy and interpretation of the System's existing DROs.

FISCAL IMPACT

There is no cost to the System from this action. Consistent administration and interpretation of DROs are important fiscal tools to limit liability exposure and to reduce the risk of under- or over-payment of benefits. DROs are enforceable until paid in full. The System is obligated to correctly administer the terms and ensure that there are no erroneous overpayments to members or alternate payees.

ATTACHMENTS

1. Draft Policy on Draft Policy on Domestic Relations Orders Procedures (dated March 29, 2016) 2. Memorandum from System Counsel, BBK, on the Application of DRO Policy & Interpretation of

Existing DROs (dated March 29, 2016)

April 20, 2016 Draft Policy on Domestic Relations Orders Procedures Page 2 of 2


24924.00002\21186794.3

DOMESTIC RELATIONS ORDER (DRO)

PROCEDURES

Approved by the Board: ____ _

1

DOMESTIC RELATIONS ORDER PROCEDURES for the

PASADENA FIRE AND POLICE RETIREMENT SYSTEM

I. Scope of Procedures.

These domestic relations order procedures ("DRO Procedures") are adopted pursuant to Section 414(p) of the Internal Revenue Code of 1986, as amended, and California law. These procedures are adopted to facilitate administration and compliance with applicable law, and are not intended to expand on or restrict the requirements of applicable law for the Pasadena Fire and Police Retirement System (the "System").

II. Definitions.

For purposes of these DRO Procedures, the following terms shall have the following meanings:

1. "Alternate Payee" means any spouse, former spouse, child, or other dependent of a Member who is recognized by a Domestic Relations Order as having a right to receive all or a portion of the benefits payable under the System with respect to such Member.

2. "Board" means the Retirement Board of Pasadena Fire and Police Retirement System.

3. "Code" means the Internal Revenue Code of 1986, as amended.

4. "Domestic Relations Order" or "DRO" means any judgment, decree, or order (including approval of a property settlement agreement) that:

a. relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child, or other dependent of a Member, and

b. is made pursuant to a state domestic relations law (including a community property law).

5. "Member" means the individual participating in the System who is identified in the DRO as having a benefit to which the Alternate Payee is assigned certain rights.

6. "System" means the Pasadena Fire and Police Retirement System, as amended from time to time.

7. "Spouse" means an individual to whom a Member is legally married under applicable law.

- 2-24924.00002\21186 794.3

III. Role of Board

The Board may delegate the day-to-day DRO administration (including the determination of whether a DRO satisfies the requirements herein) for the System. References in these DRO Procedures to the Board are to be interpreted to include the Board's delegates for day-to-day System administration. Any DRO that purports to create or recognize the existence of an Alternate Payee's right to, or assigns to an Alternate Payee the right to, receive all or a portion of the benefits payable with respect to a Member under the System should be delivered to the Board at the following address:

Retirement Administrator Pasadena Fire and Police Retirement System 100 N. Garfield A venue, Rm N204 Pasadena, CA 91101-1726

Telephone: (626) 744-4320 Fax: ( 626) 396-7908

IV. Provision ofDRO Procedures and Model DRO

The Board shall furnish the Member and each Alternate Payee (or the appropriate representative of the Member and/or the Alternate Payee) with a copy of the System's DRO Procedures and Model DRO upon any of the following events:

• Receipt of a written or telephone request for a copy of the System's DRO Procedures and/or Model DRO.

• Receipt of a draft DRO, or final court-entered DRO, if the materials have not previously been furnished to the parties.

• Receipt by the System of a written request for a statement of a Member's benefits, submitted by a prospective Alternate Payee (or his/her representative), if the materials have not previously been furnished to the parties.

• Receipt by the System of a "Request for Joinder of Employee Benefit Plan and Order," if the materials have not previously been furnished to the parties.

Note: The Model DRO is provided solely for the convenience of the parties. It is not intended to suggest or recommend any particular division of benefits.

V. Request for a Statement of a Member's Accrued Benefit

Upon any of the following events, the Board will (1) send a written acknowledgement of receipt of the written request or other documents to the Alternate Payee (or his/her representative) and the Member (or his/her representative), using the form letter provided in Appendix B; (2) furnish the Alternate Payee (or his/her representative) with a statement of the Member's accrued benefits; and (3) send a copy of such statement to the Member (or his/her representative):

- 3-24924.00002\21186794.3

• Receipt of a written request for a statement of accrued benefit submitted by an Alternate Payee (or his/her representative), which may be accompanied by:

- a subpoena ordering that a hold be placed on a Member's benefit payments in connection with a pending domestic relations proceeding,

- a draft or final court-entered DRO, or

- a "Request for Joinder of Employee Benefit Plan and Order."

• Receipt of a written request submitted by a Member (or his/her representative), directing that the Board provide the Alternate Payee with a statement of the Member's accrued benefits.

In the event that the Board receives a telephone request from an Alternate Payee (or his/her representative) for a statement of the Member's accrued benefits, the Board will inform the requesting individual that all requests for accrued benefit information must be made m writing and submitted to the Board at the address provided above or via fax.

VI. Notice of Receipt of DRO

Upon receipt of any draft or final court-entered DRO, the Board shall promptly notify the Member and each Alternate Payee of the receipt of such DRO, using the form letter provided in Appendix B. The Member and each Alternate Payee shall be permitted to designate a representative for receipt of copies of notices that are sent by the Board with respect to a DRO.

VII. Hold on Benefit Payments Following Receipt of DRO or Subpoena Requesting a Hold to be Placed on Member's Benefit Payments

Upon receipt of any draft or final court-entered DRO, the Board will take the following steps to protect the rights of the Alternate Payee:

1. Determine whether the Member's benefits are in pay status.

2. If the benefits are not in pay status:

a. Place a hold on the Member's benefits until such time as the Board determines whether the DRO meets applicable legal requirements.

b. Ensure that no benefit payments commence during the period for which the hold is in effect.

3. If the benefits are in pay status, or if the benefits enter pay status while the DRO is under consideration:

a. Determine the amount of the Member's accrued retirement benefit that would be payable to the Alternate Payee.

b. Continue to pay the accrued retirement benefit to the Member reduced by the amount which would be payable to the Alternate Payee.

- 4-24924.00002\21186794.3

4. If a subpoena is received relating to the payment of the Member's retirement benefits, the Board should comply with the terms of the subpoena unless and until it is withdrawn.

5. Notify the parties that a hold has been placed on the share of the Member's benefits which would be payable to the Alternate Payee, or or the amount subject to a subpoena, as applicable.

VIII. Response to Receipt of a "Request for Joinder of Employee Benefit Plan and Order"

Under California law, a Member or Alternate Payee may request that the System be joined as a party to a proceeding for dissolution of marriage. In the event that the System receives such a "Request for Joinder of Employee Benefit Plan and Order," the Board will follow the steps outlined in Section VII.l- VII.4 above. The Board will also contact the System's legal counsel to request that counsel enter an appearance for the System as necessary.

IX. Procedures for Determining Whether a DRO Meets Applicable Legal Requirements

A. DraftDRO

Within a reasonable period after receipt of a draft DRO, the Board shall:

1. Review the DRO, using the checklist provided in Appendix A for reference.

2. Determine whether the DRO meets the applicable legal requirements.

3. Notify the Member and each Alternate Payee whether the DRO, if entered by a court, would meet the applicable legal requirements, using the form letter provided in Appendix C.

A DRO submitted to the Board in draft form may only be conditionally approved before it is entered with a court. Once the Board notifies the Member and each Alternate Payee that the DRO satisfies the applicable legal requirements, the Member or Alternate Payee must deliver a court-entered DRO to the Board within 90 days. If the Board does not receive a court-entered DRO by the end of this 90-day period, any hold placed on the Member's benefits shall be removed. If the Member was in pay status, any amounts that had been withheld from the Member's benefits will be paid to the Member (or his or her beneficiary, as applicable).

If the Board determines that the DRO does not satisfy the applicable legal requirements, he or she will notify the Member and each Alternate Payee accordingly, using the form letter provided in Appendix C. The Member or Alternate Payee must deliver a revised draft DRO to the Board within 90 days of the notification. If the Board does not receive a revised draft DRO by the end of this 90-day period, any hold placed on the Member's benefits shall be removed. If the Member was in pay status, any amounts that had been withheld from the Member's benefits will be paid to the Member (or his or her beneficiary, as applicable).

If a revised draft DRO or a court-entered DRO is received after the close of the 90-day period, the Board will apply these DRO Procedures as of the date of receipt of such revised draft DRO or court-entered DRO.

- 5-24924.00002\21186794.3

B. Court-Entered DRO

Within a reasonable period after receipt of a court-entered DRO, the Board shall:

1. Review the DRO, using the checklist provided in Appendix A for reference.

2. Determine whether the DRO meets the applicable legal requirements.

3. Notify the Member and each Alternate Payee whether the DRO meets the applicable legal requirements, using the form letter provided in Appendix C.

If, within a reasonable period after receipt of a court-entered DRO, the Board determines that the DRO satisfies the applicable legal requirements, the Board shall do one of the following:

1. If the Member is not in pay status:

a. Divide the Member's accrued benefit in accordance with the ORO; and

b. Remove the hold from the Member's remaining benefit, if any, following the division.

2. If the Member is in pay status, cause the amounts that had been withheld (including interest) to be paid to the Alternate Payee in accordance with the DRO.

If, within a reasonable period after receipt of a court-entered DRO, the Board determines that the DRO does not satisfy the applicable legal requirements, the Board shall notify the parties using the form letter provided in Appendix C. The notice will state the reasons for the determination, including specific reference to the provisions of Code Section 414(p), the terms of the System and/or the facts on which the determination is based; and will describe any additional material or information required for the DRO to meet the applicable legal requirements. The notice will also advise the parties to submit a revised draft DRO within 90 days following receipt of notice that the DRO does not meet the applicable legal requirements.

If the Board does not receive a revised draft ORO or revised court-entered ORO by the applicable date, any hold placed on the Member's benefits shall be removed. If the Member was in pay status, any amounts that had been withheld (including interest thereon) will be paid to the Member (or his or her beneficiary, as applicable).

If a revised draft DRO or a court-entered DRO is received after the close of the 90-day period, the Board will apply these DRO Procedures as of the date of receipt of the revised draft DRO or court-entered ORO.

C. Administrative Practices

1. In General. The Board shall review each draft and court-entered DRO received to determine factual accuracy, consistency with System administrative practices and compliance with the criteria set forth in the checklist provided in Appendix A.

- 6 -24924.00002\21186794.3

As reasonably necessary, the Board shall work with Members, Alternate Payees and/or their representatives, both before and after an DRO is submitted, to assist in preparing the DRO so that it meets applicable legal requirements and is consistent with the System's administrative practices.

2. Involvement of Legal Counsel and/or Consultants. The Board may, in its discretion, forward draft and court-entered DROs to the System's legal counsel and/or consultant for review and comment as to whether the DRO satisfies applicable legal requirements.

The System's legal counsel and/or consultant shall review the DRO as requested and shall make every good faith effort to provide comments to the Board within five (5) business days after receipt of the DRO from the Administrator.

The Board shall review the recommendations of the System's legal counsel and/or consultant, if any, and shall make a determination as to whether the DRO satisfies applicable legal requirements.

3. Resubmission of DROs. To facilitate the review process, when a revised DRO is required, the parties are encouraged to submit a redlined version of such revised DRO that compares the initial DRO to the revised DRO, as well as a copy of the Notice of DRO Determination that the parties received.

4. Processing Timetable. Members, Alternate Payees and their representatives should keep in mind that the foregoing review process takes several weeks to complete. The review process will take longer if revisions to the DRO are required, if an amended DRO must be submitted to a court for entry, or if there are issues with the calculation of the assigned benefits. The parties are advised to keep these timeframes in mind.

The Board will make a good faith effort to process all DROs received m an expeditious manner.

5. Payment of Taxes Due Upon Benefits Assigned to Alternate Payee. To the extent permitted by law, the Form(s) 1099-R issued to the Alternate Payee shall include in his or her gross income for his or her taxable years of receipt all taxable benefits received pursuant to the DRO. To the extent permitted by law, the Form(s) 1099-R issued to the Member shall not include benefits paid to the Alternate Payee in the Member's gross income for such taxable years.

To the extent permitted by law, the Alternate Payee shall also be treated as the distributee under Code Sections 72 and 402 of any payment or distribution made to the Alternate Payee pursuant to the DRO. To the extent permitted by law, the Member's investment in the System will be shared proportionately by the Alternate Payee and the Member as provided in Code Section 72(m)(10).

- 7-24924.00002\21186794.3

D. Default Terms

For administrative purposes, the DRO should address certain issues. The Model DRO attached for reference as Appendix E includes several default rules that will be used to implement a DRO in the event that the DRO does not address the issues outlined below. These default terms may be modified, to the extent permitted by law, by the party preparing a DRO for review. If the parties do not choose to make such modifications, the default rules will apply. In the event that any of the issues outlined below is not addressed in the DRO, the Board will follow the applicable default rule in administering the DRO, even if the applicable default rule has been deleted from the text of the DRO.

1. Treatment of Alternate Payee Benefits upon Death.

a. If Member Predeceases Alternate Payee: The Alternate Payee shall be entitled to a portion of any surviving spouse benefits available with respect to Member's benefit earned under the System, to the extent necessary to enable the Alternate Payee to receive his or her full community property interest in the Member's benefit. Such survivorship benefits shall continue until the subsequent death of the Member's surviving spouse. Should the Alternate Payee predecease the Member's surviving spouse, the Alternate Payee's share of any survivorship benefits shall be paid to his or her estate until the surviving spouse's subsequent death.

b. If Alternate Payee Predeceases Member: Payments previously paid to the Alternate Payee shall be paid to the Alternate Payee's estate until the Member's subsequent death. The Alternate Payee's estate will not be entitled to any survivorship benefits that may otherwise be available under the System.

2. Beneficiary Designations by Alternate Payee. The Alternate Payee is not permitted to designate a beneficiary with respect to his or her benefit award. In the event that the Alternate Payee dies before receiving his or her full community property interest in the Member's benefit, his or her benefit award will be paid to his or her estate.

Draft policy presented to the FPRS Board: April 20, 2016

- 8-24924.00002\21186794.3

Appendix A


DOMESTIC RELATIONS ORDER PROCEDURES

CHECKLIST

The following determinations will be made with respect to any domestic relations order ("DRO") submitted to the Board for approval. If each of the items in numbers one through four below is satisfied, then the DRO is sufficient under Code Section 414(p), California law, and the System's administrative practices.

1. The document is a judgment, decree, or order (including approval of a property settlement agreement) that

a. _ relates to the provision of child support, alimony payments, or marital property rights;

b. _ grants such rights to a spouse, former spouse, child or other dependent of the Member ("Alternate Payee");

c. _ is made pursuant to applicable state domestic relations law (including a community property law); and

d. _ creates or recognizes the existence of an Alternate Payee's right, or assigns to an Alternate Payee the right, to receive all or a portion of the benefits payable with respect to a System Member ("Member").

2. The DRO clearly specifies:

a. _ the correct name of the System to which the DRO applies: Pasadena Fire and Police Retirement System;

b. _ the name, last known mailing address, Social Security Number, and date of birth of the Member and each Alternate Payee covered by the DRO; provided, however, that the Social Security Number may be provided to the Board and the court under separate cover;

c. _ a description, that is sufficient for the Board to administer, of how the amount or percentage of the Member's benefits to be paid by the System to each Alternate Payee is to be determined, such as:

1. a percentage of the Member's benefits accrued under the System as of a specific benefit calculation date,

- 9 -24924.00002\21186794.3

2. a specific dollar amount to be paid by the System, or

3. a percentage of the benefits accrued by the Member between two specific dates; and

d. _ the number of payments or the period to which the DRO applies.

3. It is clearly stated in the DRO that the DRO does not:

a. _require the System to provide any type or form of benefit, or any option, not otherwise provided under the System, except that the DRO may provide for benefits to be paid:

1. within a reasonable time after the DRO is determined to comply with applicable law, and/or

2. in any form in which such benefits may be paid under the System to the Member (other than in the form of a joint and survivor annuity with respect to the Alternate Payee and his or her subsequent spouse);

b. _require the System to provide increased benefits (determined based on actuariall y equivalent value); or

c. _require the payment to the Alternate Payee of benefits that are required to be paid to another alternate payee under another DRO.

4. The Member's vested accrued benefit is sufficient to satisfy the assigned portion as set forth in the DRO.

The Board will also review the DRO for the additional provisions listed below. These provisions are needed to assist the Board in implementing the DRO. To the extent that the DRO does not address any of the following issues, the Board will follow the applicable default rule (as specified in Section IX.D of the DRO Procedures) in administering the DRO, even if the applicable default rule has been deleted from the text of the DRO.

1. The DRO provides that, if the Member predeceases the Alternate Payee, the Alternate Payee shall be entitled to a portion of any surviving spouse benefits available with respect to Member's benefit earned under the System, to the extent necessary to enable the Alternate Payee to receive his or her full community property interest in the Member's benefit.

-OR-

___ The DRO provides that, if the Member predeceases the Alternate Payee, the Alternate Payee shall not be entitled to any surviving spouse benefits with respect to the Member's benefit earned under the System.

- 10-24924.00002\21186794.3

2. The DRO provides that, if the Alternate Payee predeceases the Member, payments previously paid to the Alternate Payee shall be paid to the Alternate Payee's estate until the Member's subsequent death. The Alternate Payee's estate will not be entitled to a portion of any survivorship benefits that may otherwise be available under the System.

-OR-

___ The DRO provides that, if Alternate Payee Predeceases Member, payments previously paid to the Alternate Payee shall be paid to the Alternate Payee's estate. The Alternate Payee's estate will be entitled to a portion of any survivorship benefits that may otherwise be available under the System.

3. The Alternate Payee is not permitted to designate a beneficiary with respect to his or her benefit award. In the event that the Alternate Payee dies before receiving his or her full community property interest in the Member's benefit, his or her benefit award will be paid to his or her estate.

-OR-

___ The Alternate Payee is permitted to designate a beneficiary with respect to his or her benefit award. In the event that the Alternate Payee dies before receiving his or her full community property interest in the Member's benefit, his or her benefit award will be paid to his or her designated beneficiary.

-11-24924.00002\21186794.3

Appendix B


NOTICE OF HOLD ON BENEFIT PAYMENTS

[Send a separate letter to both the Member and the Alternate Payee.]

[Member's Name[ !Alternate Payee's Name[ [Address[ {Address/

Dear [Member] [Alternate Payee]:

You are hereby notified that on [date] , the Pasadena Fire and Police Retirement System ("System") received the following:

___ An order that appears to be a domestic relations order ("DRO") with respect to benefits under the System. The DRO will be reviewed to determine whether it satisfies the requirements that apply to domestic relations orders under Section 414(p) of the Internal Revenue Code and California law.

___ A subpoena requesting that a hold be placed on the Member's benefit payments under the System.

___ A "Request for Joinder of Employee Benefit Plan and Order."

In response to the System's receipt of the above materials, the Board has placed a hold on the Member's benefit payments under the System and/or established a separate interest on behalf of the Alternate Payee.

If you wish, you may designate a representative to receive copies of notices that are sent to you with respect to the DRO. Please send the relevant information in writing to the address included in the DRO Procedures.

A copy of the Plan's DRO Procedures is enclosed for your reference. If you have questions regarding the enclosed procedures, contact the Retirement Administrator via the contact information listed in the DRO Procedures.

24924.00002\21186794.3

Very truly yours,

[Name] [Title] [Department]

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Appendix C


NOTICE OF DOMESTIC RELATIONS ORDER DETERMINATION


[Member's Name/ [Alternate Payee's Name/ [Address/ [Address/


You are hereby notified that the domestic relations order ("DRO") dated _______ , __ , submitted with regard to the Pasadena Fire and Police Retirement System, has been determined [to be] [not to be] a compliant with applicable law.

[If the DRO was approved, add the following andfill in the blanks from the DRO:]

The assigned benefit is described as follows: _______________ _ ______________ ,to be distributed as follows: __________ _

Please be aware that, if the DRO has not yet been entered by a court, you will need to submit the draft DRO to a court for entry, and return the court-entered DRO to the Board within 90 days of the date of this notice. If you do not return an entered DRO to the Board by this deadline, the Board will not be able to process the Alternate Payee's benefit.

[If the DRO was not approved, add the following and fill in the blanks from the DRO:]

The DRO cannot be approved for the following reasons:

1.

2.

3.

You must revise the DRO as needed to address these issues and resubmit it to the Board at the address below by [ (Add the date that is 90 days from the date of the notice)]. If you return a revised DRO to the Board after this deadline, the Board will treat the revised DRO as an initial DRO and will apply the DRO Procedures as of the date the revised DRO is received.

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If your address changes, please notify us in writing at the following address:

Retirement Administrator Pasadena Fire and Police Retirement System 100 N. Garfield Avenue, Rm N204 Pasadena, CA 91101-1726

Telephone: (626) 744-4320 Fax: (626) 396-7908

If you have questions regarding this letter, contact me by mail or telephone using the contact information listed above.

Very truly yours,


cc: [Designated Representative of Member or Alternate Payee (w/enclosure, if applicable)]

- 14-24924.00002\21186794.3

Appendix D


NOTICE OF ACCRUED BENEFIT


!Member's Name[ !Alternate Payee's Name[ [Address[ !Address[


You are hereby notified that on [date[ , the Pasadena Fire and Police Retirement System (the "System") received a written request for a statement of accrued benefit, in connection with a domestic relations proceeding. In response to a written request, the Board will provide parties to a domestic relations order reasonable access to "System and Member benefit information sufficient to prepare a DRO," which may include:

• A statement of Member's benefit entitlements • A statement of Member's accounts • DRO Procedures

In response to the written request, the following information has been provided to !Name of Alternate Payee[

D Pasadena Fire and Police Retirement S

24924.00002\21186794.3

Very truly yours,


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APPENDIXE

1 INSERT NAME OF ATTORNEY & BAR NUMBER]

2 [INSERT ADDRESS] [INSERT ADDRESS]

SAMPLE ORDER

3 Attorneys for [INSERT Respondent or Petitioner]

4 [NOTE: This sample order is provided solely as a courtesy. Neither the Pasadena Fire

5 & Police Retirement System nor its agents are authorized to give legal advice. They make no representation as to this order's sufficiency under applicable state law or as to its

6 appropriateness for particular parties or as to its legal consequences.]

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SUPERIOR COURT OF CALIFORNIA

COUNTY OF LOS ANGELES

IN RE THE MARRIAGE OF ) )

PETITIONER:--------- )

and l RESPONDENT: _________ l

CLAIMANT: PASADENA FIRE & POLICE RETIREMENT SYSTEM

) ) ) )

Case No. [INSERT]

DOMESTIC RELATIONS ORDER WITH RESPECT TO THE DIVISION OF THE COMMUNITY PROPERTY INTEREST IN THE PASADENA FIRE & POLICE RETIREMENT SYSTEM

1. Intent of Order. This Order is intended to be in compliance with the

18 requirements of the Pasadena Municipal Code, Article VI, Chapter 2.250 (the "Code") and the

19 Pasadena City Charter, Article XV (the "Charter") (collectively, the "Statutes"). The parties

20 acknowledge that this Order is not subject to the federal Employee Retirement Income Security

21 Act of 1974 ("ERISA") or any amendments to ERISA, such as the Retirement Equity Act of

22 1984. This Order is entered pursuant to the California Family Code.

23 2. Claimant. The name of the claimant to which this Order applies is the

24 Pasadena Fire & Police Retirement System ("System"). The parties acknowledge that only the

25 benefits provided by the System are affected by this Order and that this Order cannot and does not

26 create benefits or rights not provided by the System.

27

28 3. Joinder. At Petitioner's request, the court made an order on ___ _ 24924.00002\19286872.1 - 16 -24924.00002\21186794.3

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joining the System as a party Claimant to this proceeding. A copy of said order was served on

Claimant by mail on ______ . Claimant has filed an Acknowledgment of Receipt with the

court.

4. Names of Parties. The names, last known mailing addresses, and related

information of the Member and the Non-Member (collectively referred to as the "Parties"), are as

follows:

a. Employee (Member): Name:

Address:

Social Security No.: ____________ _

Birth date:----------------

b. Spouse (Non-Member): Name: _________________ _

Address: ________________ _

Social Security No.: ____________ _

Birth date: ________________ _

5. Period of Marriage. It is agreed that the period of marriage was from the date

of marriage specified below to the date of separation specified below:

a. Date of Marriage: _____________ _

b. Date of Separation:

6. General Provisions. The parties agree that:

a. The System will not make any payments to the Non-Member until the

Member is entitled to distributions from the System;

b. If the Non-Member remarries, the Non-Member's new spouse shall not be

considered a surviving spouse for any purpose under the System; and

c. If the Non-Member remarries, the Non-Member's new spouse shall not be

entitled to receive any form of disability retirement, although the Non-Member is entitled to a

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community property share of the Member's disability retirement, when applicable.

7. Community Property Interest. The Member has earned certain benefits under

the System which are the community property of the Member and the Non-Member and in which

the Non-Member possesses a [INSERT FRACTION OR PERCENTAGE (for example, "one

hair' or "fifty percent")] interest. The community share of the Member and the Non-Member in

the Member's retirement benefits shall be determined by a fraction. The numerator of the fraction

shall be the total number of months of service credited by the System to the Member from the

date of marriage through the date of separation or the date the Member ceased to accrue service

under the System, if earlier. The denominator of the fraction shall be the total number of months

of service credited by the System to the Member.

8. Retirement Allowance.

a. The community property interest in the Member's retirement allowance

shall equal the product of:

1) the Member's retirement allowance as of the date of the Member's

retirement; and

2) the fraction set forth in paragraph 7 of this Order.

b. The community property interest in the Member's retirement allowance is awarded

___ %to the Member and %to the Non-Member.

9. Duration of Payment. Payment shall continue until the Member's death unless

the Non-Member is entitled to survivorship benefits described in paragraph 10 of this Order or is

otherwise named by the Member as the beneficiary of an optional settlement form of benefit. In 22

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the event the Non-Member predeceases the Member, the payments previously paid to the Non-

Member shall be paid during the lifetime of the Member to the Non-Member's estate [This is a

default provision, which may be changed]. The Non-Member understands that, if Non-Member

predeceases the Member, such benefits to the Non-Member's estate will cease upon Member's

death and that no survivorship benefits under section 1509.6 of the Charter will become be

payable to the Non-Member's estate.

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10. Survivorship Benefits. In the event that survivorship benefits are payable

under section 1509.6 of the Charter to an eligible surviving spouse, then the community property

interest in that survivorship benefit shall equal the product of the monthly survivorship benefit

and the fraction set forth in paragraph 7 of this Order, with_% of the community property

interest in the survivorship benefit awarded to the Member's eligible surviving spouse, and_%

to the Non-Member. The Non-Member shall be paid the Non-Member's share until the

termination of the survivorship benefits to the eligible surviving spouse. In the event the Non

Member predeceases the eligible surviving spouse, the portion of the survivorship benefits

previously paid to the Non-Member shall be paid during the lifetime of the eligible surviving

spouse to the Non-Member's estate. The Non-Member recognizes that the right to any portion of

the survivorship benefits shall be based on the lifetime of the eligible surviving spouse. In the

event there is no eligible surviving spouse at the time of Member's death, then the Non-Member

shall not be entitled to any survivorship benefits.

11. Adjustments. Any adjustments for cost of living, plan amendment or

revision, or other changes in benefits hereinafter applicable to the Member's benefit if the

dissolution had not occurred shall be applied to the benefits received by the Member and Non

Member, in the same proportions as those set forth in paragraphs 7 and 8.

12. Time of Payment. The System shall not begin making payments to the Non-

Member earlier than the date on which the System first begins making payments to the Member

in the nature of retirement benefits.

13. Member's Separate Property. Any retirement benefit or allowance, or any

portion of a retirement benefit or allowance, that is not awarded in this Order to the Non-Member

shall be the sole and separate property of the Member, including any tax benefit related to the

Member's disability, if applicable.

14. Taxes. Each party shall be responsible for and pay any taxes due in

connection with his or her receipt of distributions from the System, except Member shall be liable

for taxes in the event Non-Member's share is paid to the Non-Member's estate.

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15. Cooperation. Each party shall, upon receiving a request, perform any act

reasonably necessary to carry into effect the terms of this Order.

16. Statutory Limits. In no event shall this Order be interpreted to require the

System to:

a. Provide benefits with a greater actuarial value than it would otherwise pay;

or

b. Make payments to the Non-Member which are already required to be paid

to another spouse under a prior order; or

c. Provide any form of benefit or option not provided by the System.

17. Notice. If either party fails to keep the System notified of that party's current

mailing address and if the System is thereby unable to make payment under this Order, payments

shall not be made by the System until a claim is made by the party; when a claim is made,

retroactive payments shall be paid but without interest.

18. Continuing Jurisdiction. The court retains jurisdiction to make such further

orders as appropriate to enforce and clarify the provisions of this Order, and to make this Order

consistent with any future amendments to the Statutes.

Dated: ________ _

JUDGE OF THE SUPERIOR COURT

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STIPULATION

The parties hereby stipulate and agree that the court may forthwith make the foregoing order in this proceeding.

Dated: _________ _

PETITIONER

Dated: _________ _

RESPONDENT

APPROVED BY:

Dated: _________ _

RETIREMENT ADMINISTRATOR

24924.00002\21186794.3 - 21-

To:

From:

Date:

Re:

BEST BEST & KRIEGER~ ATTORNEYS AT LAW

Memorandum

Jill Fosselman, Administrator PASADENA FIRE AND POLICE RETIREMENT SYSTEM

Isabel C. Safie

March 29, 2016

Application of DRO Policy & Interpretation of Existing DROs

BACKGROUND

As requested, we have reviewed the terms of the Pasadena Fire and Police Retirement System's (the "System") existing domestic relations orders ("DROs") and made recommendations regarding default administration of any survivor benefits due under the DROs upon the death of the member or the alternative payee. Consistent with those recommendations, we have also recommended that the Retirement Board of the System (the "Board") adopt a policy establishing default provisions for administering survivor benefits ("Proposed Policy"). We have been asked whether upon adoption of the Proposed Policy, the System has an obligation under the City of Pasadena Municipal Code ("Municipal Code), the City Charter ("Charter"), and/or California law to retroactively apply the terms of the Proposed Policy to any existing DROs.

Additionally, while there is no indication that the System has erroneously administered specific survivor benefit provisions under existing DROs, you have asked us to provide the System with guidance on its obligation to retroactively correct any mistakenly paid benefits.

QUESTIONS PRESENTED

1. Does the System have an obligation under the Municipal Code, the Charter, and/or C<ilifornia law to retroactively correct the administration of existing DROs that are not consistent with the Proposed Policy that the Board is considering for adoption?

2. What obligations would the System have under the Municipal Code, the Charter, and/or California law to retroactively correct any deficiencies if it were to find that there has been an improper administration of a provision in an existing DRO? If so, what are the risks of not correcting?

3. Is there a statute of limitations applicable to potential lawsuits against the System for the improper administration of a provision in an existing DRO?

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SHORT ANSWERS

1. No. The adoption of the Proposed Policy would represent a new approach by the System in order to streamline the administration of future DROs, including those that are silent regarding the payment of survivor benefits in the event of the death of a member or alternate payee. Therefore, if the Board determines that it is appropriate to adopt the Proposed Policy, its implementation would be a prospective change to the System's administration of DROs. Existing DROs would not be subject interpretation, implementation or administration in accordance with the Proposed Policy.

With respect to existing DROs, we have concluded that the System has reasonably administered survivor benefits under DROs that do not address the allocation of benefits in the event of the death of a member or alternative payee. Therefore, such existing DROs would not be impacted by the Proposed Policy. Rather, the Proposed Policy is intended to allow the System to consistently interpret the implied terms of future DROs.

2. The System has an obligation to correct the administration of existing DROs whose terms have been interpreted, implemented and administered incorrectly. The Board has a fiduciary duty under the California Constitution to prudently administer the System solely in the interest of its members and their beneficiaries. This fiduciary duty includes the duty to administer DROs in accordance with their terms in order to properly pay out benefits to members and non-members. In addition, if the System was joined as a party to the existing DROs, it has an obligation to satisfy the judgment in the DRO.

If the System does not correct the administration of any improperly implemented DROs, it may be subject to lawsuits by members and/or non-member to enforce the terms of the DRO. If the System can no longer recover any erroneously paid benefits by adjusting the member's and/or non-member's remaining benefits in the System, the System may be required to make whatever payments are necessary to correct the mistake and subsequently seek reimbursement from the party who benefited from the mistaken administration. Additionally, the Board may be subject to suits by members and/or non-members for breach of fiduciary duty. The Board will need to evaluate these risks only if the terms of any existing DROs have not been administered correctly.

3. There is no statute of limitations applicable to enforcement of DROs. DROs are enforceable until paid in full and are not required to be renewed in order to enforce the judgment. However, there is a 3 year statute of limitations on claims for breach of fiduciary duty.

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ATTORNEYS AT LAW

ANALYSIS

I. Legal Background

A. Compliance with DRO Terms

Under the California Family Code, courts are empowered to "make whatever orders are necessary or appropriate to ensure that each party receives the party's full community property share in any retirement plan, whether public or private, including all survivor and death benefits."1 The California Court of Appeal has interpreted this statute as requiring provision of an interest in survivor benefits to ex-spouses? A DRO must "provide an avenue though with [the ex-spouse] can receive [his or] her full community share of the benefits in the plan," including survivor benefits, either by (1) allocating a prorated share of survivor and death benefits in accordance with the time rule formula, or (2) determining the present value of survivor and death benefits and awarding the interest to the employee spouse, and compensating the ex-spouse with property of equal value.3

The System should also be joined as a party to a member's divorce proceedings.4

As a party to the proceedings, the System is bound by any judgments entered by the Court, including a DRO. If the System was not joined as a party to proceedings related to any existing DROs, it may still be required to comply with California community property laws by garnishing a member or non-member's benefits in order to fulfill a support order. 5

B. Fiduciary Duties

Neither the Municipal Code nor the Charter contain any requirements specifically mandating particular administration of DROs or correction of administrative errors. However, the System's governing law and California law impose certain fiduciary duties upon the Board related to administration of the System. The California Constitution states, "the retirement board of a public pension or retirement system shall have plenary authority and fiduciary responsibility for investment of moneys and administration of the system. "6 As part of these fiduciary requirements, "[t]he retirement board shall also have sole and exclusive responsibility to

1 Cal. Fam. Code §261 0. 2 In reMarriage of Higinbotham ( 1988) 203 Cal.App. 3d 322, 335 (Because predecessor of §2610 was passed in the midst of divorce proceeding but after DRO was entered, Court of Appeal remanded to trial court to determine the survivor or death benefits to which ex-spouse was entitled). 3 In reMarriage of Cheryl & Robert Carnal! (1989) 216 Cal.App. 3d 1010, 1025-26. 4 Cal. Fam. Code§§ 2060, 2337(d). 5 Cal. Fam. Code §51 03. 6 Cal. Con st. Art. XVI, §I 7.

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ATTORNEYS AT LAW

administer the system in a manner that will assure prompt delivery of benefits and related services to the participants and their beneficiaries."7

Furthermore, the Board must administer the System solely in the interest of members and their beneficiaries, including any non-member beneficiaries entitled to payment under a DRO. Specifically, the California Constitution requires:

The members of the retirement board of a public pension or retirement system shall discharge their duties with respect to the system solely in the interest of, and for the exclusive purposes of providing benefits to, participants and their beneficiaries, minimizing employer contributions thereto, and defraying reasonable expenses of administering the system. A retirement board's duty to its participants and their beneficiaries shall take precedence over any other duty. 8

The Municipal Code echoes this exclusive purpose rule, stating:

It shall be impossible at any time prior to the satisfaction of the retirement system's liabilities, for any part of the retirement system's funds to be diverted for any purpose other than for the exclusive purpose of providing benefits to members and their beneficiaries, including payment of the reasonable administrative expenses of the retirement system.9

The Board's fiduciary duties must be discharged "with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with these matters would use in the conduct of an enterprise of a like character and with like aims."10

Although the System is not subject to the Employee Retirement Income Security Act ("ERISA"), the Board's fiduciary duties under California law are substantially similar to those imposed by ERISA. The law related to ERISA fiduciary duties is more developed than California pension law, and may be helpful in evaluating the Board's obligations with respect to administration of DROs. Department of Labor guidance regarding DROs qualified under ERISA clarifies that a plan administrator has "a fiduciary duty to pay out benefits in accordance with the terms ofthe QDR0." 11

7 Cal. Const. Art. XVI, §17(a). 8 Cal. Const. Art. XVI, § 17(b) 9 Muni. Code §2.250.1 OO(G). 1° Cal. Const. Art. XVI, § 17( c). 11 "QDROs: The Division ofRetirement Benefits Through Qualified Domestic Relations Orders," Chapter 2-12, http://www.dol.gov/ebsa/publications/qdros.html.

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II. System's Obligations Regarding Existing DROs

A. Existing DROs that are Silent Regarding Survivor Benefits

To comply with the legal requirements discussed in Section I above when presented with a DRO that is silent as to the specific allocation of survivor benefits, the System must reasonably interpret the terms of the DRO in order to administer survivor benefits in accordance with California law and fulfill the Board's fiduciary duties. Based on our review of the existing DROs and the System's administration thereof we have concluded that the System has administered existing DROs that do not have express terms regarding survivor benefits consistent with its duties under applicable law. Additionally, the Proposed Policy is a prospective change to the System's administration of future DROs that do not have survivor benefit terms. Therefore, the System has correctly administered existing DROs that are silent as to survivor benefits and is not obligated to apply the Proposed Policy to or correct its proper administration of such DROs.

Furthermore, the parties subject to the existing DROs have relied on the System's standing interpretation of the terms applicable to survivor benefits, such that retroactive adjustment of the survivor benefits under the DROs may cause harm to the parties.

B. Existing DROs for which the System Improperly Administered Terms

The System has an obligation to correct administration of any existing DROs whose terms have been interpreted, implemented and administered incorrectly. Under California law, the System must allocate survivor benefits consistent with the terms of each DRO in order to facilitate proper division of community property interests. If the System has not administered a member's benefits in accordance with the DRO's terms, it may have improperly allocated community property interests such that the judgment of the DRO is not satisfied.

Additionally, incorrect payment of benefits may violate the Board's duties to provide benefits exclusively to members and their beneficiaries in accordance with the terms of the System, as modified by the terms of the DRO. Therefore, failure to correct administrative errors with respect to payment of benefits may further violate this exclusive purpose rule.

Failure to follow the terms of a DRO may also constitute a breach of fiduciary duty with respect to the party who was deprived of his or her interest in System benefits if the administration of such benefits was not performed in accordance with the required fiduciary standards. Consequently, if administrative mistakes are not corrected, the Board may be subject to fiduciary liability.

1. Risks ofNot Correcting

If the System improperly administered benefits pursuant to the terms of any existing DRO, and fails to correct such mistake, then it may be liable to the member and/or

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BEST BEST & KRIEGER::! ATTORNEYS AT LAW

non-member for breach of fiduciary duty. Additionally, the member and/or non-member may bring suit to enforce the DRO if the System was joined as a party to the proceeding. The remedies for such suits may include compensatory or equitable damages. 12 The members of the Board may also be personally liable for damages related to breach of fiduciary duty. 13 With respect to enforcement of the DRO, remedies may include "execution [of the correct terms], the appointment of a receiver, or contempt," or remedy by any other necessary order. 14

To retroactively correct any mistakenly paid benefits, the System may choose to adjust future payments to members and non-members receiving benefits under an existing DRO. If it is unable to adjust future benefit payments in order to recover incorrect payments, the System may be directly liable to either party for unpaid benefits. Case law supports this outcome. For example, in In re Marriage of Baker, 15 a pension plan paid out a lump sum benefit to the employee after receiving a DRO that gave the employee's ex-spouse an interest in his benefit. The California Court of Appeal found that the pension plan was liable for paying the benefit due to the ex-spouse:

[W]hen a pension plan has been joined as a party in a marital dissolution action and thereafter, despite receipt of a court order warding the employees' spouse her community property interest in the plan, pays the entire benefit due under the plan to the employee in a lump sum, the plan must pay the employee's spouse her community interest. 16

Because the entire benefit had been paid out from the plan, the plan then had a duty to seek reimbursement from the employee. The court clarified that if the plan has "'inadvertently and wrongfully paid' [employee the spouse's] share, the remedy for its error is to bring an action against [employee~ for the overpayment to him, not to continue to withhold from [spouse] what is rightfully hers." 7 The court went on to state that a plan has "fiduciary duties to be discharged solely in the interests of the employee and beneficiaries, including former spouses," and that joining the plan as party informs it of those duties to the non-employee spouse. 18 Therefore, in correcting the improper administration of any DROs for which benefits have been fully (but wrongly) distributed, the System may be required to make direct payment to the affected party and seek reimbursement in order to properly fulfill its obligations.

In a similar case in the Texas Court of Appeals, Jones v. Am. Airlines, Inc., 19 the court confirmed that pension plans are entitled to reimbursement of overpaid benefits, even if the

12 Cal. Civ. Code §§3274. 13 Cal. Civ. Code §3281. 14 Cal. Fam. Code §290. 15 In reMarriage of Baker (1988) 204 Cal.App. 3d 206. 16 /d. at 209. 17 /d. at 214. 18 !d. at 219. 19 Jones v. Am. Airlines, Inc. (Tex. 2004) 131 S.W.3d 261.

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plan breached its duties by making the overpayment. Although the court found that the pension plan was "negligent in paying [the ex-spouse] those benefits," that was not "a reason for denying [it] equitable reimbursement."2° Consequently, the System could recover mistakenly paid benefits through reimbursement from the party who benefited from the mistaken administration even if a court finds that it breached its fiduciary duties or other legal obligations under California law.

III. Statute ofLimitations

A. Enforcement of DROs

Generally, the statute of limitations on enforcement of judgments in California is ten years? 1 However, that statute of limitations "does not apply to a judgment or order made or entered pursuant to the Family Code."22 As such, DROs remain enforceable without renewal "until paid in full or otherwise satisfied."23 Therefore, the System may be subject to lawsuits for enforcement of a DRO that has been erroneously administered until benefits are fully paid out in accordance with the terms of the DRO.

B. Breach of Fiduciary Duty

California has many different statutes of limitation on various types of actions, and the determination of which statute of limitations applies is fact-based. The System's fiduciary duties are not promulgated by contract, so claims for breach of fiduciary duty are likely not subject to the four year statute of limitations for actions upon contracts.24 Instead, claims for breach of fiduciary duty against the System are more likely subject to a three year statute of limitations for actions upon a liability created by statute,25 since the System's fiduciary duties are set out in the California Constitution and the Municipal Code.

20 !d. at 263-64. 21 Cal. Code ofCiv. Proc. §683.020. 22 Cal. Code of Civ. Proc. §683 .31 0. 23 Cal. Fam. Code §291. 24 Cal. Code ofCiv. Proc. §337. 25 Cal. Code ofCiv. Proc. §338.

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Fire and Police Retirement Board Administration and Operating Expenses

FY 2016 Comparison of Actual to Budget

For the Month and Year Ended March 31, 2016

A B c D E Actual Budget Variance

For For For Descriptions Month Month Month

1 System Revenue:

2 751000 Concord Asset Income 0 0 0

3 668900 Miscellaneous Cash/Income 0 0 0 4 703200 Citv Cash Contributions 0 0 0

5 Total System Revenues 0 0 0 6 7 Expenses: 8 800500/5800 Personnel Costs 15,833 15,833 -9 802200 Retiree Payroll 1,111,906 1,133,333 21,428 10 Subtotal Pers./Retiree Payroll 1,127,739 1,149,167 21,428 11 12 Services & Supplies: 13 810100 Materials and Supplies 45 208 163 14 810900 Small Equipment Purchases - - -15 811000 Outside Printina & Duplication 289 - (289) 16 811300 Equip. Lease Payments 158 185 27 17 810800 Computer Related Supplies - Software - - -18 813500 Reference Materials - Subscriptions - - -19 813900 Water 33 29 (4)

20 812400 Dues and Memberships - - -21 812700/2900 Conferences/Meetings - Board/Staff - 500 500 22 815600 Insurance - - -23 811400 Contract Services - - -24 811400 Misc Services - - -25 811400 Actuarial Services - - -26 811400 Asset Managers - - -27 811400 Auditina Services 13,300 - (13,300) 28 811400 PensionGold Svs 7,829 - (7,829) 29 811400 Custodial Bank Svs - - -30 811400 Investment Consultant Svs - - -31 811400 Outside Leaal Counsel - 833 833 32 860700 Berwyn Group - - -33 Contract Services 21, 129 833 (20,295)

34 814800 Investment Expenses

35 814800 Misc/Other Fees - - -36 814800 Custodial Bank Svs 1,845 11,250 9,405

37 814800 Investment Consultant Svs 8,750 8,750 -38 814800 Subtotal Investment Expenses 10,595 20,000 9,405

39 Subtotal Services & Supplies 32,248 21,756 (10,492) 40 41 Internal Service Charges: 42 860700 Printing - 17 17

43 814400 Postage 200 225 25

44 862600 Mail Services - 8 8

45 861100 IS-Applic. Devel. & Support - 17 17

46 861200 IS-PC Network Sunnort - 21 21

47 Subtotal Int. Service Charges 200 288 88

48 49 Equipment:

50 850400 Equipment/Furniture - - -51 850600 Computer Equipment - - -52 Subtotal Equipment - . .

Page 1 of 2

DATE 4- /ZOI 1-b 1-rr-•• # I?°'--..

F G H Actual Variance

Year To Budget Year To Date Year To Date Date

0 0 0

23 0 23 0 0 0

23 0 23

139,020 142,500 3,480 10,110,375 10,200,000 89,625 10,249,396 10,342,500 93,104

946 1,875 929 - - -740 800 60

1,448 1,665 217 - - -- - -278 263 (16) 750 750 -

59 4,500 4,441 18,462 18,462 -

- - -14 - (14)

17,240 18,000 760 - - -

48,655 50,580 1,925 7,829 7,830 1

- - -- - -- 7,500 7,500 300 300 -

74,037 84,210 10, 173

- - -18,312 33,750 15,438 83,750 78,750 (5,000)

102,062 112,500 10,438 198,783 225,025 26,242

- 83 83 1,822 2,025 203

- 75 75

- 150 150

- 188 188 1,822 2,521 699

- - -- - -. . .

4/4/2016 11 :49 AM FPRS Adopted Budget FY 2016 linked

March

A

53 54

55 860100/2000/3400

56 860400

57 860500

58 862200

59 863600

60 864300

61

62

63 64

65

66

67

Fire and Police Retirement Board Administration and Operating Expenses

FY 2016 Comparison of Actual to Budget

For the Month and Year Ended March 31, 2016

B c D E F G H

Actual Budget Variance Actual Variance

For For For Year To Budget Year To

Descriptions Month Month Month Date Year To Date Date

City Service Charges:

Struct Maint/Prev Maint/Sec 408 407 (1) 3,665 3,667 2

Utilities and Insurance 163 163 (0) 1,465 1,466 1 Housekeeping 136 136 0 1,225 1,225 (0)

Telephones 15 13 (3) 58 113 54 DolT Desktop Replacement Prog 24 24 (0) 212 213 1 FY 2014 Cost Allocation PrOQ - - - - - -Subtotal City Serv Charges 746 743 (4) 6,625 6,683 57

Subtotal FPRS Admin Expenses $ 49,027 $ 38,619 $ (10,408) $ 346,250 $ 376,728 $ 30,478

Total FPRS Operating Expenses $ 1,160,933 $ 1,171,953 $ 11,020 $ 10,456,625 $ 10,576,728 $ 120,103

City Legal Expenses (I. Safie) 0.00 $ 61,747

Balance of FPRS Funds Actual for Actual for

US Bank Funds-Beg. Of Month 121,535,009 Investment Expenses Month YTD

Receipts 0 Atlanta Cap Qtlv (NT) 0 18,701

Investment Income 0 MetWest Qtlv (NT) 0 68,803

Disbursements 0 Invesco (NT) 47, 141 144,661

Fees & Expenses 0 Voya (NT) I 2,615 26,643

Net Cho in Unrealized Gain/Loss 0 Class Action Fees (NT) 0 211

Realized Gain/Loss 0 Northern Trust (Nn 0 15,050

US Bank Funds-End. Of Month 125,569,412 Northern Trust 0 12,663

Equity in Pooled Cash (100100) 1,379,781 US Bank 1,845 5,649

Concord Investment 0 Verus Investments 8,750 83,750

Total FPRS Funds on Deposit 126,949, 193 Total Investment Exp $ 60,351 $ 376, 131

Notes:

US Bank Funds-End of Month reflect preliminary balance as of 4/4/16. YTD Admin personnel includes actual expenses through 1/31/16 and estimates for February and March.

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