ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM BOARD OF RETIREMENT 2223 WELLINGTON AVENUE, SUITE 100 SANTA ANA, CA 92701

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1 ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM BOARD OF RETIREMENT 2223 WELLINGTON AVENUE, SUITE 100 SANTA ANA, CA AUDIT COMMITTEE MEETING 12:30 p.m. MINUTES The Chair called the meeting to order at 12:31 p.m. and read the opening statement into the record. Attendance was as follows: Present: Absent: Also present: Robert A. Griffith, Chair; Shari Freidenrich and Ray Geagan Tom Flanigan Steve Delaney, Chief Executive Officer; Julie Wyne, Assistant Chief Executive Officer, External and Legal Operations; Brenda Shott, Assistant Chief Executive Officer, Finance and Internal Operations; David James, CPA, Director of Internal Audit; Mark Adviento, Internal Auditor; Girard Miller, Chief Investment Officer; Tracy Bowman, Director of Finance; Anthony Beltran, Visual Technician and Marisa Quintero, Recording Secretary Richard Green and Linda Hurley, Macias Gini & O Connell Andy Yeung, The Segal Company A FINANCIAL STATEMENTS AUDIT Presentation by Richard Green, Macias Gini & O Connell Mr. Green informed the Committee that Macias Gini & O Connell (MGO) is performing their third audit at OCERS and that this meeting is the first of two meetings as part of their financial audit. Mr. Green also provided FY 2012 Audit Service Plan to the Committee when contains detail about the process and MGO s responsibilities. Mr. Green informed the Committee of the timing of the audit, it is effectively starting as of April 23 rd, MGO will performed their field work through May 24 th, The report will be issued within the next 1-2 weeks after the end of field work. The Committee will meet again prior to the final report being issued. Ms. Freidenrich arrived at 12:37 p.m. Mr. Delaney asked Mr. Green if MGO will continue to pull their own data to send to the actuary and Mr. Green confirmed they will. Mr. Green met with management concerning the audit preparation and said they are ready for the audit.

2 2 Ms. Shott informed the Committee that a draft of the financial statements will be provided to the auditors by the end of next week (May 3 rd, 2013). The 2012 actuarial valuation will be provided to the auditors as soon as it is available. The valuation is scheduled to be approved by the Board in June Chair Griffith suggested the next meeting should be the first week of June to provide enough time to the Board to review the CAFR. Mr. Delaney asked if there was only one audit or 3 separate audits. Mr. Green and Ms. Shott informed the committee there are three trust funds but only one audit will be performed that encompasses all three trust funds. Test work and audit procedure are developed and performed for each fund separately. Following discussion, a motion was made by Ms. Freidenrich, seconded by Mr. Geagan to receive and file. The motion B. ACTUARIAL AUDIT REPORT FOLLOW-UP Presentation by Andy Yeung, The Segal Company Mr. Yeung provided a follow up on the Actuarial Audit and reviewed The Segal s Company letter dated October 12, 2012 containing the response to Milliman s Audit of the December 31, 2011 Actuarial Valuation. Ms. Freidenrich asked Mr. Yeung to briefly explain their summary of the findings and their responses. Mr. Yeung briefly reviewed his summary on the following topics: The lowering of the Inflation Assumption: Milliman recommended the lowering of the Inflation assumption based on market trends and made an observation that a large amount of public retirement systems that had reduced to 3.25%. The Board adopted the recommended inflation rate on December 5 th, 2012 at the Special Board Meeting. Investment Return Assumption: Segal had recommended to lower the 7.75% investment return assumption to either 7.50% or 7.25%. The Board approved the lowering from 7.75% to 7.25% on December 5 th, 2012 at the Special Board Meeting. Termination Rate Assumption: Mr. Yeung briefly explained the triennial experience study for retirement eligibility and the proportion of terminated members expected to elect refunds versus deferred retirement. Mr. Delaney asked Mr. Yeung to clarify the meaning of deferred vested retirement Mr. Yeung explained that these are the members who have terminated with five years of service and have earned the right to receive a pension benefit. Mr. Yeung also reviewed the discrepancies in rate group assignments for terminated members with vested benefits, the 30-year minimum amortization period and description of actuarial methods.

3 3 Following discussion, a motion was made by Ms. Freidenrich to receive and file, seconded by Mr. Geagan. The motion C. AUDIT REPORT OF OCERS PRACTICES AND PROCEDURES FOR THE RECONCILIATION AND THE RECORDING OF INVESTMENTS Mr. James briefly reviewed the investments reconciliation audit results and informed the committee that the conclusions were that adequate procedures are in place for investment reconciliations and there are adequate controls in place for the creation and posting of journal vouchers to record investment activity. Mr. James also reviewed the objectives of the audit, to determine adequacy and timeliness of reconciliations between the general ledger, the custodian bank, and investment managers, and to determined the accuracy and efficiency of the investment journal vouchers process and their support. Mr. James also briefly reviewed the six findings, recommendations and management Responses: 1. Monthly Investment Journal Voucher Process; Automate the process for efficiency and to reduce the likelihood of data input errors. 2. Timeliness of Investment Manager Reconciliations; Finance should establish due dates for when reconciliations are to be completed, and the policy should be updated accordingly. 3. Frequency of Investment Manager Reconciliations; Management should revise its procedures to reflect the current practice of performing quarterly reconciliations. 4. General Ledger Reconciliation; Finance should revise its procedures to require management s signoff on reconciliations to evidence review and approval, and should consider performing these reconciliations on a monthly basis to help ensure that reconciling items between OCERS general ledger and the custodian bank s trial balances are resolved in a timely manner. 5. State Street Customer Service Concerns; OCERS staff is to continue working with appropriate staff at the custodian bank to avoid errors or discrepancies in the reporting of information to OCERS. Management concurred with all recommendations in the report. Mr. Griffith requested that the disposition of the report s recommendations should be brought to the Committee in a future meeting. A motion was made by Mr. Geagan for management to follow recommendations of the audit report, seconded by Ms. Freidenrich. The motion D. ANNUAL INTERNAL CONTROL SELF-ASSESSMENT BY MANAGEMENT Mr. James informed the Committee that he has met with OCERS management from Finance, Member Services, Investments, and Information technology, and reviewed the Risk and Control

4 4 Matrices (RACM). They discussed business objectives, risks, and controls in place to mitigate such risks. He stated that some controls are still under development. Ms. Freidenrich stated that she will follow up with more detailed questions to Mr. James regarding some of the controls. A motion was made by Mr. Geagan to receive and file, seconded by Ms. Freidenrich. The motion E. FOLLOW-UP TO AUDIT OF THE BENEFIT SETUP PROCESS Mr. James informed the Committee that this memo is a follow up to the benefit setup process audit report that was presented in December 12, 2012, in which there were some errors found in individual records during test work. The Committee members had requested a clarification on the findings of each record and how the errors were resolved. Mr. James reviewed the specific outcomes: 1. An overpayment of $9,966 was made due to a duplicate salary record that was received in Pension Gold from OCTA. In addition, Member Services found a credit (holiday) that the member did not received. The member s account will be deducted $48 monthly beginning in August 2013 and ending May 2022 (total of 109 payments). 2. An underpayment of $4,796 was made that was the result of an incorrect entry of pensionable pay item. Member Services did not include all of the member s shift differential pay when calculating the final average salary. The member received a one-time pension recalculation credit of $4, in addition to a COLA recalculation credit of $1, in March An overpayment of $53 was made to two members. Due to the small amount of the overpayment, a recommendation is pending with the CEO to write off the amounts rather than retroactively correct the accounts to recover amounts considered immaterial. 4. An additional six other documentation exceptions with no dollar effect were noted, and these were all corrected by Member Services. Mr. Griffith asked what the reaction of the member on the overpayment was. Mr. James responded that the member agreed to the payment plan to pay back the overpayment. Ms. Wyne stated OCERS has the legal right to collect the overpayment. OCERS worked with the member and was given options for repayment. Ms. Freidenrich left at 1:53 p.m. Mr. Griffith asked if there is a means for these errors to be eliminated as much as possible. Mr. Delaney informed Chair Griffith that the V3 project should be taking care of these concerns.

5 5 A motion was made by Mr. Geagan to receive and file, seconded by Mr. Griffith. The motion F. HOTLINE USAGE REPORT, POLICIES AND PROCEDURES Mr. James provided an update on the hotline usage. Since the last meeting in December 2012, there was a second report filed on the hotline alleging a conflict of interest by an employee. Internal Audit conducted an investigation and concluded that the accusation could not be substantiated, and the report will be given to the CEO once completed. Mr. James also stated the Committee had requested policies and procedures concerning the Hotline usage and presented drafts of the Ethics, Compliance, and Fraud Hotline Policy as well as the procedures. Mr. Griffith considered the current presented documents as drafts and asked for these items to be brought back for a final approval in the next Audit Committee meeting in June, as this will allow the Committee more time to review the policy and the procedure. Mr. Geagan questioned item 9 in the policy about bringing each report to the Committee. He asked if the accusation is not warranted, would it be brought to the Committee. Mr. James stated that reports pertaining to personnel matters would not be brought to the Committee. Reports regarding investigations will be brought to the Committee depending on the seriousness of the complaint and if the Committee needs to take action. A motion was made by Mr. Geagan to receive and file, seconded by Mr. Griffith. The motion G. STATUS OF CURRENT AUDITS Mr. James provided the current status of audits and an overview the revised Audit Plan for Mr. James described the current audits in progress; actuarial data, TCA, and the Pension Administration System. Mr. Delaney asked what was the difference between the previous report presented concerning actuarial data. Mr. James stated this audit report is more in depth from the previous report. A motion was made by Mr. Geagan to receive and file, seconded by Mr. Griffith. The motion

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