SACRAMENTO COUNTY EMPLOYEES RETIREMENT SYSTEM REQUEST FOR PROPOSALS FOR PROFESSIONAL AUDITING SERVICES

SACRAMENTO COUNTY EMPLOYEES RETIREMENT SYSTEM REQUEST FOR PROPOSALS FOR PROFESSIONAL AUDITING SERVICES SACRAMENTO, CALIFORNIA Issue Date: March 21, 2008 1

SACRAMENTO COUNTY EMPLOYEES RETIREMENT SYSTEM REQUEST FOR PROPOSALS AUDIT SERVICES Section Table of Contents I. Introduction II. III. IV. Description of Entity and Records to be Audited Nature of Services Required Reports to be Issued V. Time Requirements VI. VII. VIII. IX. Assistance to be Provided to the Auditor Entrance and Exit Conferences and Retirement Board Presentation Bidding Requirements Evaluation and Selection Procedures X. Contract Terms and Conditions Exhibits A. Form Agreement B. Contact Information for Key Personnel C. Organization Chart D. Comprehensive Annual Financial Report E. Investment Policy F. Minimum Audit Requirements and Reporting Guidelines for California Retirement Systems, issued by the State Controller G. Proposer Guaranties H. Proposer Warranties 2

SACRAMENTO COUNTY EMPLOYEES RETIREMENT SYSTEM REQUEST FOR PROPOSALS AUDIT SERVICES SECTION I. INTRODUCTION A. General Information Send one original and five (5) copies of your complete proposal to the office of the Sacramento County Employees Retirement System at 980 9 th Street, Suite 1800, Sacramento, CA 95814 by 4:00 p.m. Pacific Daylight Time on Wednesday, April 16, 2008. Finalists may be invited to make an oral presentation to the Retirement Board at the May 2008 meeting. Costs for developing proposals are entirely the responsibility of the CONTRACTOR and will not be chargeable to SCERS. By providing references as requested, the CONTRACTOR is thereby giving permission to SCERS to contact these individuals. All proposals submitted in response to this RFP shall become the exclusive property of SCERS and shall be subject to public disclosure pursuant to the California Public Records Act (Cal. Govt. Code Section 6250 et. seq.). The Act provides generally that all records relating to a public agency s business are open to public inspection and copying, unless specifically exempted under one of several exemptions set forth in the Act. All proposals must remain valid for a period of not less than 90 days from the closing date for submission. This includes pricing as well as nominated engagement staff. B. Background The Sacramento County Employees Retirement System (SCERS) is requesting proposals from qualified firms of certified public accountants (Auditors) to audit its financial statements for the fiscal years ending June 30, 2008 and 2007, and for each of the two subsequent fiscal years, contingent on the stipulations in the term of engagement as stated below in Section I.C. 3

These audits are to be performed in accordance with standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States and the Minimum Audit Requirements and Reporting Guidelines for California Public Retirement Systems issued by the California State Controller (See Exhibit A). Clarifications of or requests for additional information to this Request for Proposal should be submitted to SCERS Chief Operations Officer, Kathryn T. Regalia, with sufficient time to allow a timely response prior to the RFP submission deadline. Simple clarification questions may be communicated by telephone while all others should be communicated in writing and sent by mail or email (See Exhibit B). SCERS will administer the contract that will result from this Request for Proposal (RFP). C. Term of Engagement A three-year contract is contemplated, subject to the satisfactory negotiation of terms (including a price acceptable to both SCERS and the selected firm). The term of the original contract may be extended for an additional one to three years upon the mutual agreement of SCERS and the selected firm. D. Qualifications of the Auditor Firms submitting a proposal must: Have sufficient knowledge and training to enable them to comply with generally accepted auditing standards. Have an adequate knowledge of governmental accounting. Have sufficient knowledge of pension accounting and actuarial science. Have experience auditing public retirement systems. SECTION II. DESCRIPTION OF ENTITY AND RECORDS TO BE AUDITED A. General Background SCERS is a defined benefit pension plan established to provide retirement benefits to the employees of the County of Sacramento (County) and 4

other participating agencies pursuant to the County Employees Retirement Law of 1937, (CERL), California Government Code Section 31450, et seq. Original membership in the system began in 1941. SCERS collects, deposits, invests, and manages retirement trust funds solely in the interest of, and for the exclusive purpose of providing benefits to participants and their beneficiaries. As of June 30, 2007 SCERS membership included approximately 15,000 active members and 10,000 retirees and beneficiaries currently receiving benefits and terminated employees entitled to benefits but not yet receiving them. SCERS acts as fiduciary agent for the accounting and control of member and employer contributions and investment income. The trust fund had net assets of approximately $6 billion as of June 30, 2007. Management of SCERS, pursuant to CERL, is vested in the Board of Retirement which: Is responsible for the administration and maintenance of SCERS records in accordance with the provisions of CERL and Retirement Board Bylaws. Sets policy for and monitors the investment of SCERS assets. Appoints a Chief Executive Officer for SCERS. Annually adopts a budget covering the entire expense of SCERS administration. SCERS administers the plan primarily for the County and the employees of the County. In addition, eleven districts and the Superior Court, County of Sacramento, actively participate in the retirement plan. B. Investments SCERS uses external investment managers chosen by the Board of Retirement to invest the System s assets. As of June 30, 2007, there were twenty-one separate account portfolios. In addition, SCERS has investments in a commingled equity emerging markets growth fund, two equity long/short commingled hedge fund-of-funds, three private equity fund-of-funds, two commodities funds, five real estate funds and a strategic overlay (See Exhibit E). The Board utilizes the services of an investment consultant, Mercer Investment Consulting, Inc. SCERS has a Chief Investment Officer who monitors investment manager compliance but does not do any internal management of investments. SCERS accounting staff performs investment reconciliation accounting. 5

SCERS engages in one securities-lending program administered by its custodian. SCERS retains State Street California, Inc. as master custodian, holding all assets, excluding real estate. SCERS Investment program is described on pages 56 to 75 of Exhibit D. C. Contributions County payroll records are interfaced to the SCERS accounting system from the County s customized SAP payroll system and contributions are automatically posted to the SCERS general ledger accounts as part of the County s payroll posting and reconciliation process. District payroll records are interfaced from a payroll service provider and contributions, which are posted to a payroll liability account, are transferred by SCERS to the appropriate general ledger accounts. D. Accounting and Reporting SCERS operates as an independent governmental pension trust fund separate and distinct from the County of Sacramento. SCERS annual financial statements are not included in the County of Sacramento s Annual Financial Report. E. Systems Applications SCERS uses Sacramento County s payroll and general ledger system. Sacramento County purchased SAP Software to build a modular financial reporting system which integrates accounting, purchasing and human resources data. The County s system was given the acronym COMPASS to represent Comprehensive Online Maintenance of Personnel and Accounting Systems for Sacramento. SCERS general accounting records and financial reports are collected in the COMPASS system, which is run on County servers dedicated to the COMPASS system. Active member data collected in COMPASS payroll is passed through to the accounting module, and utilizing an interface, it is passed to SCERS member accounting application (MBASE). Retirement staff uses this application to view current and historical payroll records for County, special district, deferred and reciprocal members. Detailed investment accounting records are maintained by the System s custodian. SCERS utilizes Excel to combined data from COMPASS and the custodian s records to prepare its financial statements. F. Administrative Expenses SCERS Board of Retirement annually adopts the operating budget for the administration of SCERS. The administrative expenses are charged 6

against the earnings of the fund and are limited to eighteen hundredths of one percent of the total assets of SCERS, pursuant to Government Code Section 31580.2. The operating budget includes allocations for fixed assets, which are capitalized upon purchase and expensed over their useful lives. G. Actuarial Services and Information SCERS engages an independent actuarial firm, The Segal Company, to conduct annual actuarial valuations to monitor SCERS funding status. An annual actuarial valuation report is expected to be issued prior to completion of the audit and Comprehensive Annual Financial Report. On a triennial basis, these valuations are updated for economic and noneconomic assumptions as required by the California Government Code. The last triennial valuation was performed as of June 30, 2007. An annual valuation report will be conducted as of June 30, 2008. A copy of the most recent actuarial valuation report as of June 30, 2007 is available on the SCERS web site at www.scers.org. Both the triennial and annual valuations use the entry age normal method, and an actuarial 5-year smoothing of asset values. The most recent actuarial valuation as of June 30, 2007 used an 7.875% annual investment return assumption, and a 3.5% general inflation assumption. H. Membership Plans SCERS provides retirement, disability, and death benefits by continuing monthly allowances or lump sum payments to its qualifying members. Safety membership includes law enforcement, fire suppression, and other selected classifications as approved by statute. Miscellaneous membership is applicable to all other occupational classifications. The membership plans are briefly summarized on pages 82 through 84 of Exhibit D. SECTION III. NATURE OF SERVICES REQUIRED A. General SCERS is soliciting the services of a qualified firm of certified public accountants to audit its financial statements for the fiscal years ending June 30, 2008 and 2007 and for each of the two (2) subsequent fiscal years. These audits are to be performed in accordance with the provisions contained in this request for proposal. 7

B. Scope of Work to be Performed SCERS requires the Auditor to express an opinion on the fair presentation of the financial statements in conformity with generally accepted accounting principles. The Auditor shall be responsible for performing certain limited review procedures involving required supplementary information required by the Governmental Accounting Standards Board as mandated by generally accepted auditing standards. The Auditor will evaluate and report on SCERS internal control structure, policies and procedures. SCERS is responsible for the preparation of the Financial Statement footnotes and the Comprehensive Annual Financial Report, however, the Auditor may assist SCERS with the preparation as new technical accounting and reporting requirements arise. C. Auditing Standards to be Followed To meet the requirements of this RFP, the audit shall be performed in accordance with auditing standards generally accepted in the United States of America. The Auditor must issue an opinion whether the financial statements of SCERS are presented fairly in all material respects and in conformity with accounting principles generally accepted in the United States of America. A report must also be issued on the Auditor s consideration of SCERS internal controls in accordance with Government Auditing Standards and with the Minimum Audit Requirements and Reporting Guidelines for California Public Retirement Systems, issued by the California State Controller (see Exhibit F). D. Working Records and Reports and Access to Working Records and Reports All working records and reports, including electronic images and/or hardcopies of documents and spreadsheets, must be retained, at the Auditor s expense, during the term of the engagement and for a minimum of three (3) years thereafter, unless the firm is notified in writing by SCERS of the need to extend the retention period or unless written permission is given by SCERS to dispose of any such records prior to this time. The Auditor will be required to make working records and reports available, upon request, to SCERS, or its designees. The Auditor shall respond to the reasonable inquiries of successor auditors and allow successor auditors to review working records and reports relating to matters of continuing accounting significance. 8

SECTION IV. REPORTS TO BE ISSUED A. Report Examination of Financial Statements Following the completion of the audit of each fiscal year s financial statements, the Auditor shall issue a report on the fair presentation of the financial statements in conformity with accounting principles generally accepted in the United States of America. The audit report shall contain an opinion regarding the fairness of the financial statements as enumerated by the State Board of Accountancy Rule 58. If the type of opinion expressed is not an unqualified opinion, then the Auditor shall make an immediate, written report to The President of the Board of Retirement and the Chief Executive Officer of the Retirement System. B. Management Letter The Auditor shall prepare a separate report on the internal control structure based on the Auditor s understanding of the control structure and assessment of control risk. The report shall communicate the following elements. The scope of the Auditor s work in obtaining an understanding of the internal control structure and in assessing the control risk. SCERS significant internal controls or control structure including the controls established to ensure compliance with laws and regulations that have a material impact on the financial statements and results of the financial audit. Reportable conditions found during the audit. A reportable condition, per Statement on Auditing Standards Number 60, is a significant deficiency in the design or operation of the internal control structure, which could adversely affect the organization s ability to record, process, summarize, and report financial data consistent with the assertions of the management in the financial statements. Reportable conditions that are also material weaknesses shall be identified in the report. Non-reportable conditions discovered by the auditors shall be reported in a separate letter to management, which shall be referred to in the report(s) on internal controls. 9

SECTION V. TIME REQUIREMENTS A. Critical Dates in RFP Process The following is a list of key dates in the proposal/contract process: Request for Proposal issued March 21, 2008 Due Date for Proposal April 16, 2008 Anticipated date for notifying selected May 12, 2008 firm Anticipated date for award of contract June 19, 2008 Preliminary meetings/fieldwork, listing of August September 2008 schedules to be prepared by SCERS, audit confirmations to be mailed. Fieldwork begins/entrance Conference October 20, 2008 Fieldwork ends/exit Conference November 7, 2008 Audit opinion due to SCERS November 21, 2008 Presentation to Retirement Board December 18, 2008 B. Due Date for Final Audit Report If financial statement misstatements are discovered, they will be communicated to SCERS management staff for comment and response. Upon conclusion of fieldwork, a summary of uncorrected financial statement misstatements, together with the Auditor s comments regarding materiality both individually and in aggregate, will be delivered directly to the Chief Executive Officer or his designee. The Auditor will also disclose any open items required for resolution so that an unqualified opinion may be issued. If the Auditor does not expect to issue an unqualified opinion, the Auditor must communicate this determination in accordance with Section IV.A. above. The Chief Executive Officer or his designee will complete review of the summary of financial statement misstatements as expeditiously as possible. It is expected that this process should not exceed one week. During that period, the Auditor should be available for any meetings that may be necessary to discuss the audit reports. Once all issues for discussion are resolved, the final signed report shall be delivered to SCERS for inclusion in the Comprehensive Annual Financial Report. It is anticipated that this process will follow the timetable outlined in Section V.A. 10

The final report is to be delivered to SCERS Chief Executive Officer at 980 9 th Street, Suite 1800, Sacramento, CA 95814. It is preferred that the final report may be delivered in Adobe Acrobat PDF format. SECTION VI. ASSISTANCE TO BE PROVIDED TO THE AUDITOR Assistance During Engagement SCERS will prepare year-end closing entries, draft financial statements, footnote preparation, and all required supplementary schedules. The Auditor will provide to SCERS management with recommendations and suggestions for improvement during the course of the audit. SCERS will arrange for reasonable office space, desks, tables and chairs. The Auditor will be provided access to photocopying and scanning equipment and to SCERS network and financial systems. SECTION VII. ENTRANCE AND EXIT CONFERENCES AND RETIREMENT BOARD PRESENTATION A. Entrance conference Prior to commencing fieldwork, the Auditor will attend an entrance conference with SCERS management. The purpose of this meeting will be to establish and discuss the following: The overall liaison for the audit. Arrangements for work space and other needs of the Auditor. Prior audit or anticipated audit problems. The timetable and prioritization for year end work to be performed. SCERS responsibilities and schedules required. Any special areas of concern. Auditor responsibilities. B. Exit conference The Auditor will attend an exit conference with SCERS Management to review the Final Audit Report, the Management Letter and the Compliance 11

Report. If requested, the Auditor will discuss findings and recommendations from each report with the Board of Retirement. C. Retirement Board Presentation The Auditor will attend the Retirement Board meeting to present the Final Audit Report, the Management Letter, and the Compliance Report. SECTION VIII. BIDDING REQUIREMENTS Each bidder shall observe the following in preparation and submission of a proposal: A. General There is no expressed or implied obligation for SCERS to reimburse responding firms for any expenses incurred in preparing proposals in response to this request. SCERS reserves the right to retain all proposals submitted and to use any ideas in a proposal regardless of whether that proposal is selected. B. Preparation of Responses A response to this RFP must be prepared and submitted according to the specifications set forth in this section, both for content and sequence. Failure to adhere to these specifications may be cause for rejection of the proposal. Any correction or resubmission of a proposal must be submitted prior to the bid submission deadline. C. Submission of Proposals The bidder will submit one original and five (5) copies of the proposal and any related information to be received at SCERS office by 4:00 PM on Wednesday, April 16, 2008. Proposals received after the submission deadline will not be accepted. Completed proposals must be submitted to: Richard Stensrud, Chief Executive Officer Sacramento County Employees Retirement System 980 9 th Street, Suite 1800 Sacramento, CA 95814 All proposals shall be firm for a period of 90 days following the date of submission of proposals. 12

C. Proposal Contents A proposal shall adhere to the format set forth below. Each of the required sections identified must be addressed and must be specifically labeled. The content and sequence of the proposal will be as follows: Section Title 1 Cover Letter 2 Table of Contents 3 Executive Summary 4 Technical Proposal 5 Dollar Cost Bid 6 Additional Data and Attachments Items 1 through 6 below contain brief descriptions of material that must be included in the proposal. 1. Cover Letter A maximum one-page cover letter shall include the (a) name of the bidder firm, (b) organizational structure of the firm (e.g., corporation, partnership, etc.), (c) address, telephone number, and web site of the firm s office, (d) name, telephone number, and facsimile number of the firm s representative who is designated as primary liaison to SCERS, (e) name, telephone number, and email address of the representative who is authorized to bind the firm in contract, and (f) date of the proposal. 2. Table of Contents Immediately following the cover letter, there should be a Table of Contents of the material included in the proposal. 3. Executive Summary This section should briefly state the bidder s understanding of the work to be done, the commitment to perform the work within the time period, a statement why the firm believes itself to be best qualified to perform the engagement, and a statement that the proposal is a firm and irrevocable offer for 90 days following the date for submission of proposals. 13

4. Technical Proposal a. General Requirements The technical proposal should address all the points outlined in the RFP. The proposal should be prepared by providing a straightforward, concise description of the bidder s capabilities to satisfy the requirements of the RFP. While additional data may be presented, the following subjects, Items (b) through (l) must be included. They represent the criteria for evaluating and analyzing material included in the proposal. b. Independence The bidder should provide an affirmative statement regarding its independence of SCERS as defined by the U.S. General Accounting Office s Government Auditing Standards. c. License to practice in California An affirmative statement should be included indicating that the bidder and all assigned key professional staff are properly licensed to practice in California. d. Bidder qualifications and experience The proposal should state the size of the firm, the size of the firm s governmental audit staff, the location and telephone number of the office from which the work on this engagement is to be performed, and the number and nature of the professional staff to be employed in this engagement on a full or part-time basis. The bidder is required to provide information on the circumstances and status of any investigation, examination, complaint, disciplinary action or other proceeding commenced by any state or federal regulatory body or professional organization during the past three (3) years against the bidding firm. The bidder is required to provide information on the circumstances and status of any pending litigation or litigation that has taken place against the bidding firm during 14

the pending litigation or litigation that has taken place against the bidding firm during the past three years. e. Audit Staff qualifications and experience The bidder should identify the principal supervisory and management staff, including engagement partners, managers, supervisory seniors and specialists, who would be assigned to the engagement and indicate whether each person as applicable, is licensed to practice as a certified public accountant in California. The bidder should provide a statement of the qualifications of the key individuals so identified, including their experience in the auditing of public retirement systems, other employee benefit plans, systems applications, governmental units, auditing in general, and any specialized expertise such individuals may have which is applicable to this engagement (i.e., that pertaining to pension accounting and actuarial science, cash management, investments, etc.). Information should be included on total continuing professional education hours (divided into governmental and non-governmental) for firm for the past two (2) years, and on membership in professional organizations relevant to the performance of this audit. The bidder should identify the extent to which partners, managers, supervisory staff, specialists and other staff will have continuity in their audits with SCERS for the period of the contract. Engagement partners, managers, other supervisory staff and specialists may be changed if those personnel leave the firm, are promoted or are assigned to another office. These personnel may be changed for other reasons with the express prior written permission of SCERS. However, in either case, SCERS retains the right to approve or reject replacements. f. Similar engagements with other public retirement systems For the bidder s office that will be assigned responsibility for the audit, list the most significant engagements performed in the last four years that are similar to the engagement 15

described in this RFP. List prior engagements auditing 1937 Act public retirement systems first, followed by other public retirement systems, and finally other government units. Indicate the scope of the work, date, engagement partners, total hours and the name and telephone number of the principal client contact. g. Liaison with other entities The bidder should describe arrangements that it has with regard to liaison with or access to offices of the state and federal governments or other entities relevant to this engagement for the purpose of obtaining prompt responses to inquiries arising from technical or procedural questions developed in the course of the examination. h. Specific audit approach The proposal should set forth the bidder s understanding of the engagement requirements, and a work plan, including an explanation of the audit methodology to be followed, to perform the services required in Sections III through V of this RFP. The bidder should not necessarily limit the bid response to the performance of the services in Sections III through V, but should outline any additional services if the bidder deems them necessary to accomplish the audits. Additional services should be clearly marked as such, with their costs separately stated in the Sealed Dollar Cost Bid (Section VIII.D5.d. below). Bidders will be required to provide the following information on their audit approach: Proposed segmentation of the engagement Level of staff and estimated number of hours to be assigned to each proposed segment of the engagement Proposed supervisory review and direction Approach to be taken to gain and document an understanding of SCERS internal control structure Approach to be taken in determining laws and regulations that will be subject to audit test work 16

i. Procedures for resolving potential audit problems The proposal should describe the bidder s approach to resolving potential problems that may be encountered during the performance of the audit, and any special assistance that may be requested from SCERS. 5. Sealed Dollar ($) Cost Bid a. Total not-to-exceed Maximum Price The sealed dollar cost bid should contain all pricing information relative to performing the audit engagement as described in this request for proposal. The total not-toexceed maximum price to be bid is to contain all direct and indirect costs including all out-of-pocket expenses. SCERS will not be responsible for expenses incurred in preparing and submitting the proposal or the sealed dollar cost bid. Such costs should not be included in the proposal. The first page of the sealed dollar cost bid should include the following information: Name of the firm. Certification that the person signing the proposal is entitled to represent the firm, empowered to submit the bid, and authorized to sign a contract with SCERS. A Total Not-To-Exceed Maximum Price for each of three (3) years during the engagement (separately stated for each year). b. Rates by staff classification and anticipated hours The second page of the sealed dollar cost bid should include schedules of professional fees and expenses, that supports the total not-to-exceed maximum price. A separate schedule should be prepared for each year s audit. If needed, a separate schedule of additional services should be prepared for each year s audit. 17

c. Out-of-pocket expenses included in the total not-to-exceed maximum price and reimbursement rates All estimated out-of-pocket expenses to be reimbursed, if any should be presented. All expense reimbursements will be charged against the total not-to-exceed maximum price submitted by the bidder. d. Rates for additional professional services If it should become necessary for SCERS to request the auditor to render any additional services to either supplement the services requested in this RFP or to perform additional work as a result of the specific recommendations included in any report issued on this engagement, then such additional work shall be performed as set forth in an addendum to the contract between SCERS and the bidder. Any such additional work agreed to between SCERS and the bidder shall be performed at the same rates as set forth in the schedule of fees and expenses included in the sealed dollar cost bid. e. Manner of payment Progress payments will be made on the basis of hours of work completed during the course of the engagement and out-ofpocket expenses incurred in accordance with the firm s cost bid proposal. Interim billings shall cover a period of not less than a calendar month. 6. Additional data and attachments Material and data not specifically requested for evaluation, but which the bidder wishes to submit may be included, but only in the Additional Data section. The following are examples of the type of data that may be included in this section: Standard sales brochures and promotional material with minimal technical content. Pictorial material 18

SECTION IX EVALUATION AND SELECTION PROCEDURES A. General This section describes the guidelines to be used for analyzing and evaluating proposals. SCERS reserves the right to evaluate all factors deemed appropriate, whether or not such factors have been stated in this section. B. Evaluation Committee Proposals submitted will be evaluated by the Evaluation Committee consisting of the Chief Executive Officer, Chief Operations Officer, General Counsel, and a member of the Retirement Board. C. Review of Proposals Proposals will be evaluated using a two-step process. Bidders meeting the mandatory criteria listed below will then have their proposals evaluated and scored for technical qualifications and price. Each member of the Evaluation Committee will evaluate the individual proposals using a scoring system. The full Evaluation Committee will then convene to review and discuss these evaluations to arrive at a final score. The evaluation criteria to be used in the selection process will include, but may not be limited to, the following: 1. Mandatory Elements The bidder is independent and licensed to practice in California. The bidder has no conflict of interest with regard to any other work performed by the bidder. The bidder adheres to the instructions in this RFP. 2. Technical Qualifications and Price Comprehensiveness of financial audit work plan Comprehensiveness of agreed-upon procedures work plan Completeness of deliverables Ability to meet proposed timetable 19

Adequacy of proposed staffing plan Adequacy of supervisory review and direction Approach to be taken to gain and document an understanding of the internal control structure Approach to determine relevant laws and regulations (Weight 35%) 3. Bidder s Experience and Capabilities Relevant experience and technical skills Quality of bidder s management support personnel to be available for technical consultation Financial stability (Weight 15%) 4. Assigned Professional Personnel General experience Experience relevant to this engagement Professional and academic qualifications Adequate continuing professional education within the last two years (Weight 30%) 5. Audit Cost Hours Hourly Rate Total not-to-exceed maximum price (Weight 20%) 20

COST WILL NOT BE THE PRIMARY FACTOR IN THE ELECTION OF AN AUDIT FIRM. 6. Oral Presentations The Evaluation Committee will select a firm, which will be recommended to the Board of Retirement. The Board of Retirement may request an oral presentation to answer any questions it may have on a recommended firm s proposal. 7. Final Selection The Board of Retirement will approve or reject the recommended firm. It is anticipated that a firm will be selected by May 12, 2008. Following notification of the firm selected, it is expected that a contract will be executed between both parties by June 19, 2008. 8. Right to Reject Proposals Submission of a proposal indicates acceptance by the firm of the conditions contained in this request for proposal unless clearly and specifically noted in the proposal submitted and confirmed in the contract between SCERS and the firm selected. SCERS reserves the right without prejudice to reject any or all proposals. SECTION X CONTRACT TERMS AND CONDITIONS CONTRACTOR agrees to the terms set forth in the Form Agreement as attached as Exhibit A to this Request for Proposal unless specifically noted in CONTRACTOR S proposal. Please read it carefully. If any objections to the form agreement (see Exhibit A) are noted in CONTRACTOR S proposal, CONTRACTOR must submit substitute language that will be acceptable to CONTRACTOR. Failure to submit substitute language will be deemed acceptance of the form agreement." 21

EXHIBIT A AUDITING SERVICES AGREEMENT THIS AUDITING SERVICES AGREEMENT (Agreement) is entered into by and between the Sacramento County Employees' Retirement System (SCERS), a public employees retirement system established and maintained pursuant to the County Employees' Retirement Law of 1937, as amended, and, Certified Public Accountants, (Contractor), as of July 1, 2008. WHEREAS, pursuant to Government Code section 31593, and related provisions of law, SCERS' Board of Retirement (Board) has determined that it is in the best interests of SCERS, its members and beneficiaries to appoint Contractor to provide independent audit services, and WHEREAS, Contractor is ready, willing and able to accept this appointment; and WHEREAS, Government Code section 31593 requires the Board to obtain an audit of SCERS once every twelve months, and authorizes retention of the services of a certified public accountant; NOW, THEREFORE, in consideration of the covenants and conditions set forth herein, SCERS and Contractor hereby agree as follows: 1. Retention. SCERS hereby retains Contractor and Contractor hereby agrees to serve as SCERS independent auditor to perform the services specified in SCERS' Request for Proposal for Professional Auditing Services. A copy of the Request for Proposal is attached hereto, marked "Exhibit 1" and incorporated by this reference. 2. Performance Requirements. The description of the records to be audited, services performed, reports issued and time requirements shall be as specified in Exhibit 1. Contractor shall provide the services in the manner and with the personnel described in its Proposal dated, for the fiscal years ending June 30, 2008, 2009 and 2010. A copy of said Proposal is attached hereto, marked "Exhibit 2" and incorporated by this reference. The fees for such services shall be as specified in Exhibit 2 to be paid upon Board's acceptance of the audit of each fiscal year. Contractor shall perform all services in accordance with applicable professional 22

standards. 3. Term. The term of this agreement shall commence July 1, 2008, and shall continue until June 30, 2010, unless otherwise extended or terminated in accordance with the provisions of this Agreement. This Agreement may be extended by mutual agreement. 4. Termination. This Agreement may be terminated at any time by either party upon thirty (30) days' prior written notice. Upon service of said written notice Contractor shall immediately suspend and terminate all work under this Agreement and use all efforts to mitigate expenses and obligations hereunder. A final accounting shall be prepared by Contractor and delivered to SCERS within thirty (30) days after the effective date of the termination. 5. Independent Contractor Status. In performing under this Agreement, Contractor shall at all times act in the capacity of an independent contractor. This Agreement is not intended, and shall not be construed, to create the relationship of agent, servant, employee, partnership, joint venture, or association as between Contractor and SCERS. Nothing in this Agreement shall cause SCERS to be responsible for any action, omission or inaction of Contractor. For all purposes, including but not limited to Workers' Compensation liability, Contractor understands and agrees that all persons furnishing services to SCERS pursuant to this Agreement are deemed employees solely of Contractor and not of SCERS. If applicable, Contractor shall cooperate with SCERS to comply with the California Independent Contractor Reporting Law (Unemployment Insurance Code Section 1088.8). 6. Indemnification and Insurance. (a). Indemnification. Contractor will indemnify, defend and hold harmless SCERS and its trustees, officers, employees, agents and volunteers from and against any and all claims, demands, actions, losses, liabilities, damages and costs, including reasonable attorneys fees, arising out of or resulting from the performance of this Agreement, regardless of whether caused in part by a party indemnified under this Agreement. (b). Insurance. Without limiting Contractor s indemnification, Contractor shall provide and maintain in force at its own expense during the term and any extensions or modifications of this Agreement the insurance as specified in Exhibit 3, incorporated by this reference. Failure by Contractor to procure or maintain the insurance described in 23

Exhibit 3 shall constitute a material breach upon which SCERS may immediately terminate this Agreement for default. 7. Confidentiality. Contractor acknowledges that when performing under this Agreement, Contractor may be exposed to the records of SCERS members and that such records are considered confidential and protected from public disclosure by law. Contractor shall maintain the confidentiality of all such records according to all applicable federal, state, county and local laws, regulations, ordinances and directives relating to confidentiality. Contractor shall inform all of its Agents of the confidentiality provisions of this Agreement. 8. Assignment. Neither party may assign this Agreement, in whole or in part, nor delegate except as contemplated herein the performance of any of its duties under this Agreement, without the prior written consent of the other, which consent may be granted or withheld in such other party's sole discretion. No assignment permitted hereunder shall release either party of any of its obligations or alter any of its primary obligations to be performed under the Agreement, unless such consent expressly provides for such release. Any attempted assignment or delegation in violation of this provision by a party hereto shall be void. 9. Notices. All notices, requests, demands or other communications required or desired to be given hereunder or under any law now or hereafter in effect shall be in writing. Such notices shall be deemed to have been given if delivered by facsimile with telephone confirmation of receipt, or by overnight courier, or if mailed by first class registered or certified mail, postage prepaid, and addressed as follows (or to such other address as either party from time to time may specify in writing to the other party in accordance with this notice provision): If to SCERS: Kathryn T. Regalia, Chief Operations Officer, Sacramento County Employees' Retirement System 980 9th Street, Suite 1800 Sacramento, CA 95812-0627 Telephone: 916.874.9088 Email: RegaliaK@SacCounty.net 24

If to Contractor: Telephone: Facsimile: /// 10. Compliance with Laws. Contractor shall observe and comply with all applicable laws and regulations of the United States, the State of California and the County of Sacramento, as well as any other rules, regulations, or directives imposed by the SCERS Board of Retirement or the County Board of Supervisors. This Agreement shall be construed in accordance with and governed by the laws of the State of California. The parties acknowledge and agree that this Agreement was entered into, and is intended to be performed in, Sacramento County, and that any action or proceeding arising out of this Agreement should be filed in a California state court or federal district court located in Sacramento, California. 11. Entire Agreement. This Agreement constitutes the entire contract between SCERS and Contractor with respect to the appointment and retention of Contractor as the investment Contractor for the Account, and no modification or amendment to this Agreement shall be valid unless such modification or amendment is set forth in writing and is signed by both parties hereto. 12. Severability. If any provision of this Agreement is held by any court to be invalid, void or unenforceable, in whole or in part, the other provisions shall remain unaffected and shall continue in full force and effect. 13. Waiver. The waiver of any breach of any provision of this Agreement by either party shall not constitute a waiver of any preceding or subsequent breach of such provision or of any other provision of this Agreement. The failure or delay of either party to exercise any right given to the party under this Agreement shall not constitute a waiver of such right, nor shall any partial exercise of any right given hereunder preclude further exercise of such right. 25

14. Execution in Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 15. Time of the Essence. Time is of the essence in respect to all provisions of this Agreement that specify a time for performance. 16. Force Majeure. Neither Contractor nor SCERS will be deemed in default of this Agreement if the failure to perform this Agreement arises from causes beyond the control and without the fault or negligence of Contractor or SCERS, as the case may be. Such causes may include, but are not restricted to, acts of God or of the public enemy, acts of the non-defaulting party hereto, acts of the Federal or State government (including all subdivisions thereof) in its sovereign capacity, fires and floods; but in every case the failure to perform must be beyond the control and without the fault or negligence of Contractor or SCERS, as the case may be. 17. Dispute Resolution In the event of any dispute arising out of or relating to this Agreement, the parties shall attempt, in good faith, to promptly resolve the dispute mutually between themselves. If the dispute cannot be resolved by mutual agreement, nothing in this Agreement shall preclude either party from pursuing remedy or relief by civil litigation pursuant to the laws of California. 18. Authorized SCERS Personnel. Upon execution of this Agreement, SCERS Chief Operations Officer shall provide Contractor with a list of authorized SCERS personnel, who will be permitted to communicate with Contractor on SCERS behalf. 19. Communications. Any contact Contractor has with County or SCERS board members, officers, employees, Agents or representatives other than authorized SCERS personnel with respect to a financial transaction, solicitation or gift shall be promptly reported by telephone and in writing to SCERS' Chief Executive Officer. 26

20. Gratuities. Contractor has not offered or given any gratuities in the form of gifts, entertainment or otherwise, to any officer, fiduciary, or employee of Contractor, SCERS, or the County of Sacramento with a view toward securing this Agreement. Any gift or payment made by Contractor to County or SCERS or their board members, officers, employees, Agents, representatives or anyone directly or indirectly acting on behalf of such parties shall be promptly reported by telephone and in writing to SCERS' Chief Executive Officer. 21. Audit. Upon request, SCERS or its designee shall have the right at reasonable times and intervals to audit, at Contractor s premises, Contractor s financial and program records as SCERS deems necessary to determine Contractor s compliance with legal and contractual requirements and the accuracy of claims and invoices submitted by Contractor. Contractor shall maintain such records for a period of four (4) years following termination of this Agreement. IN WITNESS WHEREOF, SCERS and Contractor have caused this Agreement to be duly executed by their duly authorized representatives. Sacramento County Employees' Retirement System Dated: By: President Attest: Secretary of the Sacramento County Employees' Retirement System Board, "Contractor" Dated: By: 27

Exhibit 1 Request for Proposal 28

Exhibit 2 Contractor s Proposal 29

EXHIBIT 3 INSURANCE REQUIREMENTS Without limiting Contractor's indemnification, Contractor shall procure and maintain for the duration of the Agreement, insurance against claims for injuries to persons or damages to property which may arise from or in connection with the performance of the Agreement by the Contractor, its officers, agents, representatives, employees and volunteers. SCERS shall retain the right at any time to review the coverage, form, and amount of the insurance required hereby. If in the opinion of the SCERS Risk Manager, insurance provisions in these requirements do not provide adequate protection for SCERS, SCERS may require Contractor to obtain insurance sufficient in coverage, form and amount to provide adequate protection. SCERS requirements shall be reasonable but shall be imposed to assure protection from and against the kind and extent of risks that exist at the time a change in insurance is required. Verification of Coverage Contractor shall furnish SCERS with certificates evidencing coverage required below. Copies of required endorsements must be attached to provided certificates. SCERS Risk Manager may approve self-insurance programs in lieu of required policies of insurance if, in the opinion of the Risk Manager, the interests of the SCERS is adequately protected. All certificates, evidences of self-insurance, and additional insured endorsements are to be received and approved by the SCERS before performance commences. SCERS reserves the right to require that Contractor provide complete, certified copies of any policy of insurance including endorsements offered in compliance with these specifications. Minimum Scope of Insurance Coverage shall be at least as broad as: 1. GENERAL LIABILITY: Insurance Services Office s Commercial General Liability occurrence coverage form CG 0001. Including, but not limited to Premises/Operations, Products/Completed Operations, Contractual, and Personal & Advertising Injury, without additional exclusions or limitations, unless approved by SCERS Risk Manager. 2. AUTOMOBILE LIABILITY: Insurance Services Office s Commercial Automobile Liability coverage form CA 0001. a. Commercial Automobile Liability: auto coverage symbol 1 (any auto) for corporate/business owned vehicles. If there are no owned or leased vehicles, symbols 8 and 9 for non-owned and hired autos shall apply. b. Personal Lines automobile insurance shall apply if vehicles are individually owned. 30

3. WORKERS COMPENSATION: Statutory requirements of the State of California and Employer's Liability Insurance. 4. PROFESSIONAL LIABILITY or Errors and Omissions Liability insurance appropriate to the Contractor's profession or services. 5. UMBRELLA or Excess Liability policies are acceptable where the need for higher liability limits is noted in the Minimum Limits of Insurance and shall provide liability coverages that at least follow form over the underlying insurance requirements where necessary for Commercial General Liability, Commercial Automobile Liability, Employers Liability, and any other liability coverage (other than Professional Liability) designated under the Minimum Scope of Insurance. Minimum Limits of Insurance 1. General Liability shall be on an Occurrence basis (as opposed to Claims Made basis). Minimum limits and structure shall be: General Aggregate: $2,000,000 Products Comp/Op Aggregate: $2,000,000 Personal & Adv. Injury: $1,000,000 Each Occurrence: $1,000,000 Fire Damage: $ 100,000 2. Automobile Liability: a. Commercial Automobile Liability for Corporate/business owned vehicles including non-owned and hired, $1,000,000 Combined Single Limit. b. Personal Lines Automobile Liability for Individually owned vehicles, $250,000 per person, $500,000 each accident, $100,000 property damage. 3. Workers' Compensation: Statutory. 4. Employer's Liability: $1,000,000 per accident for bodily injury or disease. 5. Professional Liability or Errors and Omissions Liability: $2,000,000 per claim and aggregate. Deductibles and Self-Insured Retention Any deductibles or self-insured retention that apply to any insurance required by this Agreement must be acceptable to SCERS. 31

Claims Made Professional Liability Insurance If professional liability coverage is written on a Claims Made form: 1. The "Retro Date" must be shown, and must be on or before the date of the Agreement or the beginning of Agreement performance by Contractor. 2. Insurance must be maintained and evidence of insurance must be provided for at least one (1) year after completion of the Agreement. 3. If coverage is cancelled or non-renewed, and not replaced with another claims made policy form with a "Retro Date" prior to the contract effective date, the Contractor must purchase "extended reporting" coverage for a minimum of one (1) year after completion of the Agreement. Other Insurance Provisions The insurance policies are to contain or be endorsed to contain, as applicable, the following provisions: All Policies: 1. ACCEPTABILITY OF INSURERS: Insurance is to be placed with insurers with a current A.M. Best's rating of no less than A- :VII. SCERS Risk Manager may waive or alter this requirement, or accept self-insurance in lieu of any required policy of insurance if, in the opinion of the Risk Manager, the interests of SCERS are adequately protected. 2. MAINTENANCE OF INSURANCE COVERAGE: The Contractor shall maintain all insurance coverages in place at all times and provide SCERS with evidence of each policy's renewal ten (10) days in advance of its anniversary date. Each insurance policy required by this Agreement shall be endorsed to state that coverage shall not be canceled by either party except after thirty (30) days' written notice for cancellation or sixty (60) days written notice for non-renewal has been given to SCERS. For nonpayment of premium 10 days prior written notice of cancellation is required. Commercial General Liability and/or Commercial Automobile Liability: 1. ADDITIONAL INSURED STATUS: SCERS, its officers, agents, employees, and volunteers are to be endorsed as additional insureds as respects: liability arising out of activities performed by or on behalf of the Contractor; products and completed operations of the Contractor; premises owned, occupied or used 32

by the Contractor; or automobiles owned, leased, hired or borrowed by the Contractor. The coverage shall contain no endorsed limitations on the scope of protection afforded to the SCERS, its officers, agents, employees, or volunteers. 2. CIVIL CODE PROVISION: Coverage shall not extend to any indemnity coverage for the active negligence of the additional insured in any case where an agreement to indemnify the additional insured would be invalid under Subdivision (b) of Section 2782 of the Civil Code. 3. PRIMARY INSURANCE: For any claims related to this agreement, the Contractor's insurance coverage shall be endorsed to be primary insurance as respects SCERS, its officers, agents, employees and volunteers. Any insurance or self-insurance maintained by SCERS, its officers, agents, employees, or volunteers shall be excess of the Contractor's insurance and shall not contribute with it. 4. SEVERABILITY OF INTEREST: The Contractor's insurance shall apply separately to each insured against whom claim is made or suit is brought, except with respect to the limits of the insurer's liability. 5. SUBCONTRACTORS: Contractor shall be responsible for the acts and omissions of all its subcontractors and shall require all its subcontractors to maintain adequate insurance Professional Liability: PROFESSIONAL LIABILITY PROVISION: Any professional liability or errors and omissions policy required hereunder shall apply to any claims, losses, liabilities, or damages, demands and actions arising out of or resulting from professional services provided under this Agreement. Workers Compensation: WORKERS COMPENSATION WAIVER OF SUBROGATION: The workers' compensation policy required hereunder shall be endorsed to state that the workers' compensation carrier waives its right of subrogation against SCERS, its officers, agents, employees, or volunteers, which might arise by reason of payment under such policy in connection with performance under this Agreement by the Contractor. 33

Notification of Claim If any claim for damages is filed with Contractor or if any lawsuit is instituted against Contractor, that arise out of or are in any way connected with Contractor s performance under this Agreement and that in any way, directly or indirectly, contingently or otherwise, affect or might reasonably affect SCERS, Contractor shall give prompt and timely notice thereof to SCERS. Notice shall not be considered prompt and timely if not given within thirty (30) days following the date of receipt of a claim or ten (10) days following the date of service of process of a lawsuit. 34

EXHIBIT B Contact Information for Key Personnel Name and Title E-mail Address Telephone Richard Stensrud Chief Executive Officer StensrudR@SacCounty.net (916) 874-9119 James G. Line General Counsel LineJ@SacCounty.net (916) 874-5706 Kathryn T. Regalia Chief Operations Officer RegaliaK@SacCounty.net (916) 874-9088 35

EXHIBIT C Organization Chart 36

SCERS Organizational Chart Effective August 8, 2007 BOARD OF RETIREMENT 43.0 Positions 42.5 F.T.E RICHARD STENSRUD Chief Executive Officer Jennifer Foster Executive Assistant John. W. Gobel, Sr. Chief Benefits Officer Jeffrey W. States Chief Investment Officer James G. Line General Counsel Kathryn T. Regalia Chief Operations Officer Suzanne Likarich Retirement Services Manager Accounting Administration Information Services Michele Rovito Ret Svcs Analyst Shane Flores Ret Svcs Supervisor Margaret Dugger Ret Svcs Supervisor Bill Schnathorst Ret Disability Specialist Helen Sylvia Senior Accountant T. Ziyalan Senior Accountant Pamela Grant-Fronval Personnel Analyst Paul von Knoblauch IT Administrator Benefit Coordination, Benefit Calculations & Active Member Death Benefits Sr PS, Steven Franco Sr PS, Jenna Taylor PS 2, Cathy Miguel PS 2, Cindy Cartt PS 2, Kurt Train PS 1/2, Vacant Purchasable Services & Terminations Sr PS, Mebrak Bahta Sr PS, John Taylor PS 2, Jeffrey A. Snively PS 2, Amber Martinez PS 2, Jennifer Parry PS 2, Candice Anderson PS 2, Dorothy Clark Pension Payroll & Retiree Benefits Sr PS, Elizabeth Garcia PS 2, Gail Sielert PS 2, Chris Winchell Disability Retirement & Special Projects Sr PS, Treneice Collins Acctg Tech, Melody Tator Accountant 2, Tamara Koryaka Accountant 1, Ian Peacock PS 2, Renu Khilnani PS 2, Ophelia Wilson Sr OS, Vacant OS 2, Joy Knowles OS 2, Vacant Sr OA, Michele Raymond OA 2, Thuy Huynh AC 3, La Trisha McDaniels (0.5) Vacant Positions: Office Specialist 2 (1) Personnel Specialist 1/2 (1) Sr. Office Specialist (1)

EXHIBIT D Comprehensive Annual Financial Report 37

Sacramento County Employees Retirement System Comprehensive Annual Financial Report for the Fiscal Years Ended June 30, 2007 and 2006 Sacramento, California

Comprehensive Annual Financial Report for the fiscal years ended June 30, 2007 and 2006 Issued By: Richard Stensrud Chief Executive Officer Kathryn T. Regalia, CPA Chief Operations Officer Thuyet Ziyalan Senior Accountant Sacramento County Employees Retirement System 980 9th Street, Suite 1800 Sacramento, CA 95814 www.scers.org

T a b l e o f C o n t e n t s Introductory Section Letter of Transmittal... 6 Certificate of Achievement for Excellence in Financial Reporting...11 Board of Retirement... 12 Organization Chart... 13 Participating Employers... 14 Professional Consultants... 15 Financial Section Independent Auditor s Report......18 Management s Discussion and Analysis - Required Supplementary Information... 20 Basic Financial Statements Statements of Fiduciary Net Assets - Pension Trust Fund... 28 Statements of Changes in Fiduciary Net Assets - Penstion Trust Fund... 29 Statements of Fiduciary Net Assets - Agency Fund... 30 Notes to the Basic Financial Statements... 31 Required Supplementary Information Schedule of Funding Progress... 50 Schedule of Employer Contributions... 50 Significant Actuarial Assumptions... 51 Other Supplemental Information Schedule of Administrative and Other Expenses... 52 Schedule of Investment Fees and Expenses... 52 Schedule of Payments to Consultants... 52 Statements of Changes in Assets and Liabilities - Agency Fund... 53 Investment Section Chief Investment Officer s Report on Investment Activity... 56 Asset Allocation... 61 Investment Professionals... 62 Investment Results... 63 Summary of Investment Assets as Allocated... 64 Schedule of Manager Fees... 66 Ten Largest Stock Holdings (by Fair Value)... 68 Ten Largest Bond Holdings (by Fair Value)... 68 Schedule of Equity Brokerage Fees... 69

Table of Contents (Continued) Actuarial Section Actuarial Certification... 78 Summary of Actuarial Assumptions and Methods... 80 Summary of Plan Provisions... 82 Schedule of Active Member Valuation Data... 85 Retirees and Beneficiaries Added to and Removed from Retiree Payroll... 86 Schedule of Funding Progress... 86 Solvency Tests... 87 Actuarial Analysis of Financial Experience... 87 New Probabilities of Separation Prior to Retirement: Mortality Rate... 88 Disability Rate... 88 Withdrawal Rate with Less than Five Years of Service... 89 Withdrawal Rate with More than Five Years of Service... 89 Statistical Section Schedule of Additions by Source... 92 Schedule of Deductions by Type... 93 Schedule of Benefits Paid and Withdrawals by Type... 94 Schedule of Changes in Net Assets... 95 Schedule of Retiree Members by Type of Benefit... 96 Schedule of Average Benefit Payments (Based on Years of Credited Service)... 97 Schedule of Average Benefit Payments (Based on Years Since Retirement)... 98 Schedule of Principal Participating Employers and Active Members-Summary... 99 Schedule of Principal Participating Employers and Active Members-Detail... 100 Schedule of Employer Contribution Rates... 101 Growth of System Membership...102 Schedule of Distribution of Retired Members and Beneficiaries by Type and by Monthly Amount......103 Schedule of Administrative Expenses... 104

I n t r od u c t ory S e c t i on

L e t t e r o f T r a n s m i t t a l Executive Staff Richard Stensrud Chief Executive Officer Jeffrey W. States Chief Investment Officer James G. Line General Counsel Kathryn T. Regalia Chief Operations Officer John W. Gobel Sr. Chief Benefits Officer November 30, 2007 Board of Retirement Sacramento County Employees Retirement System 980 9 th Street, Suite 1800 Sacramento, CA 95814 Dear Board Members: As Chief Executive Officer of the Sacramento County Employees Retirement System ( SCERS or the System ), I am pleased to present this Comprehensive Annual Financial Report ( CAFR or the Report ) for the fiscal years ended June 30, 2007 and 2006. The System SCERS is a multi-employer public employee retirement system, enacted and administered in accordance with the provisions of the County Employees Retirement Law of 1937 (California Government Code Section 31450, et seq.) ( 1937 Act ). Since its creation by the Sacramento County Board of Supervisors in 1941, SCERS has provided retirement, disability, and survivors benefits to eligible participants of the System. Under Article XVI, Section 17 of the Constitution of the State of California, the SCERS Board of Retirement is vested with plenary authority and fiduciary responsibility for the investment of monies and the administration of the System. Together, the provisions of the State Constitution and the 1937 Act establish SCERS as a separate and independent governmental entity from the public employers that participate in SCERS. At June 30, 2007, the County of Sacramento; Superior Court of California, County of Sacramento; and eleven Special Districts participated in SCERS. The Comprehensive Annual Financial Report Responsibility for both the accuracy of the data and the completeness and fairness of the presentation in this CAFR rests with the management of the System. To the best of management s knowledge and belief, the enclosed data is accurate in all material respects and is reported in a manner designed to present fairly the financial position and results of operations of the System. I trust that readers of this Report and participants of the System will find this information helpful in understanding SCERS and its commitment to financial integrity and participant service. Introductory Section

L e t t e r o f T r a n s m i t t a l ( C o n t i n u e d ) SCERS Mission Statement and Core Values SCERS is dedicated to providing quality services and managing system assets in a prudent manner. In carrying out the mission SCERS will: Act as fiduciaries for the members, retirees, and beneficiaries. Take responsibility for cost effective operations and minimize employer contributions. Display competency, courtesy, and respect. Continue our professional growth through education and training. Plan strategically for the future. Accounting System and Reports Management of SCERS is responsible for establishing and maintaining internal controls designed to ensure that the System s assets are protected from loss, theft, or misuse. Responsibility for the accuracy, completeness, and fair presentation of information, and all disclosures in this CAFR and in the System s records, rests with SCERS management. Macias Gini & O Connell, LLP, a certified public accounting firm, has audited the financial statements and related disclosures. The financial audit provides assurance that SCERS financial statements are presented in conformity with accounting principles generally accepted in the United States and are free from material misstatement. The internal controls are designed to provide reasonable, but not absolute, assurance that these objectives are met. The concept of reasonable assurance recognizes that: (1) The cost of a control should not exceed the benefits likely to be derived; and (2) The assessment of costs and benefits requires estimates and judgments by management. This report has been prepared in accordance with generally accepted accounting principles ( GAAP ) as promulgated by the Governmental Accounting Standards Board ( GASB ). GAAP requires that management provide a narrative introduction, overview, and analysis to accompany the basic financial statements in the form of management s discussion and analysis ( MD&A ). This letter of transmittal is designed to complement the MD&A and should be read in conjunction with it. The System s MD&A can be found immediately following the independent auditor s report. Investments General Authority and SCERS Article XVI, Section 17 of the Constitution of the State of California provides that Notwithstanding any other provisions of law or this Constitution, the Retirement Board of a public pension or retirement system shall have plenary authority and fiduciary responsibility for investment of monies and administration of the system. Article XVI, Section 17(a) further provides that the Retirement Board of a public pension or retirement system shall have sole and exclusive fiduciary responsibility over the assets. SCERS maintains an overall investment policy designed to achieve a diversified investment portfolio. An integral part of the investment policy is the strategic asset allocation, which is designed to provide an optimal mix of asset classes with return expectations that correspond to expected liabilities. The strategic asset allocation also emphasizes maximum diversification of the portfolio to protect the System from the possibility that a particular asset class may experience poor investment performance in a given period. For the year ended June 30, 2007, SCERS investments provided a 18.0% rate of return (gross of fees), compared to the investment policy benchmark return of 17.5%. Introductory Section

L e t t e r o f T r a n s m i t t a l ( C o n t i n u e d ) More detailed information regarding SCERS strategic asset allocation, professional investment advisors, and investment performance can be found in the Investment Section of this Report. Actuarial Funding Status SCERS overall funding objective is to meet long-term benefit promises by maintaining a well-funded plan status through a combination of superior investment returns and employer and employee contributions which are both minimized and maintained as level as possible for each generation of active members. The greater the level of overall plan funding, the larger the ratio of assets accumulated to the actuarial accrued liability and the greater the investment potential. The advantage of a well-funded plan is that the benefits earned by participants are funded during their working careers and not by future generations of taxpayers. To help reduce year-to-year volatility in employer contribution rates due to fluctuations in investment performance, SCERS smooths the calculation of actuarial assets over a rolling five-year period. This not only stabilizes contribution rates but also improves the ability of the employer to plan for possible future increases or decreases in the rates. SCERS engaged an independent actuarial consulting firm, The Segal Company, to conduct its annual actuarial valuation as of June 30, 2007. Triennially, the System requests that its actuary perform an analysis of the appropriateness of all economic and non-economic assumptions. The most recent triennial analysis was performed as of June 30, 2007, and as a result of that analysis and information provided by the County of Sacramento, the Board of Retirement approved certain changes to the actuarial assumptions, which were incorporated in the actuarial valuation as of June 30, 2007. At June 30, 2007, SCERS funding ratio was 93.4%, with the actuarial value of assets totaling $5,406.5 million and the actuarial accrued liability totaling $5,788.3 million. The increase in the funding ratio (up from 93.0% as of June 30, 2006) was due primarily to strong investment performance over the past five years. Deferred gains under the smoothing methodology exceed the deferred losses by $569.4 million as of June 30, 2007, and these deferred gains can be utilized to offset possible investment shortfalls in the future or to lower future costs. Budget The Board of Retirement approves SCERS annual budget. The 1937 Act limits SCERS annual administrative expenses to eighteen hundredths of one percent (0.18%) of the System s total assets, and SCERS administrative expenses have historically been below that limitation. For the years ended June 30, 2007 and 2006, administrative expenses were within the budget established by the Board of Retirement and were 0.09% of each of the prior year s total assets. Significant Events Following are significant events which occurred during the fiscal year: Enhanced SCERS web calculator to provide additional estimated benefit payment options. Provided significant support to the Superior Court, County of Sacramento (Court) with respect to the Court s new payroll system. Implemented a new Interest Crediting and Unallocated Earnings Policy. A significant change is that member reserves will generally be credited with one-half of the five-year Treasury Note rate. Unallocated earnings will be applied equally to address earnings deficiencies from past periods and to establish target contingency reserve levels. Adopted measures designed to implement the federal Pension Protection Act of 2006, including Introductory Section

L e t t e r o f T r a n s m i t t a l ( C o n t i n u e d ) distribution rules allowing direct rollover by non-spouse beneficiaries, implementation of the $3,000 tax exclusion for qualified public safety officers, and the adoption of age 50 for safety members and age 55 ½ for miscellaneous members as the respective normal retirement ages for the safety and miscellaneous member plans. Successfully managed a surge in retirements as a result of a change by Sacramento County which limited the eligibility of retiree health care subsidies to individuals retiring before June 2007. Expanded the Statistical Section of the Comprehensive Annual Financial Report (CAFR) as of June 30, 2006 and 2005 to comply with new Governmental Accounting Standards Board (GASB) requirements. Enhanced the look of the CAFR with a professional design. Conducted elections for the unexpired term of a Miscellaneous Member and for new threeyear terms for a Miscellaneous Member, the Safety Member, and the Alternate Safety Member. Alice Jarboe was elected as Miscellaneous Member. William Johnson was re-elected as Safety Member. John Conneally was elected as Alternate Safety Member. Commenced an Asset and Liability Modeling Study with investment consultant, Mercer Investment Consulting, with the goal of developing a new strategic asset allocation model. Worked with custodian, State Street Bank, to establish an alternative methodology to make retirement benefit payments in the event of a disaster affecting SCERS and the County. Diversified the real estate portfolio to include value-added funds. Developed and implemented a systematic Board investment education process. Conducted several educational sessions for trustees, including new developments in investment management strategies, overlay strategies, 130/30 strategies, private equity investment classes, commodity futures indices, and investment risks and opportunities related to environmental change. Adopted a Securities Litigation Policy and Procedures. Revised the Disability Retirement Procedures and Bylaws. Participated as co-lead plaintiff in a securities class action (In re Brooks Automation, Inc.) alleging failure to disclose the back-dating of executive stock options. Reviewed and revised the Investment Policy to reflect changes in investment strategies. Worked with CPS Human Resource Services and the County Employment Office to analyze and reallocate positions and compensation to better meet SCERS business needs. Certificate of Achievement The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to SCERS for its comprehensive annual financial report for the fiscal years ended June 30, 2006 and 2005. In order to be granted this national award, a governmental entity must publish an easily readable and efficiently organized CAFR that meets the highest standards of governmental financial reporting. This was the eighth consecutive year that the System has achieved this prestigious award. A Certificate of Achievement is valid for a period of one year. Management believes that this current comprehensive annual financial report continues to meet the requirements for earning a Certificate of Achievement, and it will be submitted to the GFOA for consideration for the award. Acknowledgements This Report is intended to provide complete and reliable information with respect to the responsible stewardship of SCERS. The compilation of this Report is a product of the combined and dedicated Introductory Section

L e t t e r o f T r a n s m i t t a l ( C o n t i n u e d ) effort of the System s staff. This Report is also a reflection of the leadership of the SCERS Board in assuring the prudent fiduciary oversight of SCERS. I would like to take this opportunity to express my thanks to the SCERS Board, staff, and advisors for their commitment to SCERS and for working so diligently to ensure the successful operation of the System. Respectfully submitted, Richard Stensrud Chief Executive Officer Introductory Section 10

C e r t i f i c a t e o f A c h i e v e m e n t Introductory Section 11

B o a r d o f R e t i r e m e n t President 1st Vice President James A. Diepenbrock Keith DeVore Appointed by Board of Elected by Miscellaneous Supervisors Members Present term expires Present term expires June 30, 2009 December 31, 2007 2nd Vice President John B. Kelly Appointed by Board of Supervisors Present term expires December 31, 2009 Ex-Officio Dave Irish Sacramento County Director of Finance Member mandated by law Trustee Trustee Winston H. Hickox Alice Jarboe Appointed by Board of Elected by Miscellaneous Supervisors Members Present term expires Present term expires June 30, 2009 December 31, 2009 Trustee Trustee William D. Johnson Nancy Wolford-Landers Elected by Safety Elected by Retired Members Members Present term expires Present term expires December 31, 2009 December 31, 2007 Trustee Alternate Safety Trustee Robert Woods John Conneally Appointed by Board of Elected by Safety Supervisors Members Present term expires Present term expires June 30, 2010 December 31, 2009 Alternate Retiree Trustee William Cox Elected by Retired Members Present term expires December 31, 2007 Introductory Section 12

O r g a n i z a t i o n C h a r t BOARD OF RETIREMENT Richard Stensrud Chief Executive Officer Jeffrey W. States Chief Investment Officer James G. Line General Counsel John W. Gobel, Sr. Chief Benefits Officer Kathryn T. Regalia Chief Operations Officer Investment policy and objectives Investment compliance and performance reporting Asset allocation rebalancing Conduct manager searches Manager due diligence Proxy voting and corporate governance Board education on investment issues Legal representation and counsel to SCERS Board and staff Coordinate and oversee the selection and work of outside legal counsel Evaluation of securities litigation Analysis of state and federal legislation Legislative proposals, contracts, resolutions, opinions Legal education programs Legal service planning and budgeting Suzanne Likarich Retirement Services Manager Service, disability, deferred, and reciprocal retirements Pension payroll administration Seminar presentations and member retirement counseling Retirement publications and communications Death benefits, service credit purchases Community property interest resolution Accounting and financial reporting Budgeting and cash flow analysis Human resources Facilities and safety Information technology and telecommunications Administration and records Introductory Section 13

P a r t i c i p a t i n g E m p l o y e r s Employer Date Entered System County of Sacramento July 1, 1941 Elected Officials: Board of Supervisors Sheriff Assessor District Attorney July 1, 1941 U.C. Davis Medical Center July 1, 1941 Sacramento Metropolitan Fire District* March 1, 1957 Sunrise Recreation and Park District August 1, 1961 Fair Oaks Cemetery District March 1, 1962 Carmichael Recreation and Park District January 1, 1967 Florin Fire District* July 1, 1974 Mission Oaks Recreation and Park District February 1, 1976 Sacramento Employment Training Agency (SETA) June 1, 1979 Orangevale Recreation and Park District March 3, 1987 Elk Grove Cosumnes Cemetery District April 28, 1987 Galt-Arno Cemetery District July 1, 1987 Superior Court of California, County of Sacramento June 25, 2006** * Florin Fire District terminated its membership on June 30, 1996. Members are currently part of Sacramento Metropolitan Fire District. ** Prior to June 25, 2006, Superior Court member information was included in the totals for the County of Sacramento. Introductory Section 14

P r o f e s s i o n a l C o n s u lt a n t s Actuary The Segal Company 120 Montgomery Street, Suite 500 San Francisco, CA 94104 Auditor Macias Gini & O'Connell, LLP Certified Public Accountants 3000 S Street, Suite 300 Sacramento, CA 95816 Custodian State Street California, Inc. 1001 Marina Village Parkway, 3rd Floor Alameda, CA 94501 Legal Counsel County of Sacramento Office of the County Counsel 700 H Street, Suite 2650 Sacramento, CA 95814 Nossaman, Guthner, Knox & Elliot, LLP 50 California Street, 34th Floor San Francisco, CA 94111-4712 Investment Consultant Mercer Investment Consulting, Inc. 777 South Figuero Street, Suite 2000 Los Angeles, CA 90017 Investment Managers AEW Capital Management World Trade Center East, Two Seaport Lane Boston, MA 02210-2021 Alliance Bernstein Institutional Investments 555 California Street, 46th Floor San Francisco, CA 94104 AXA Rosenberg Investment Management, LLC 4 Orinda Way, Bldg E Orinda, CA 94563 Bear Stearns Asset Management 383 Madison Avenue, 28th Floor New York, NY 10179 BlackRock Realty Advisors, Inc. 300 Campus Drive, Suite 300 Florham Park, NJ 07932 The Blackstone Group, L.P. 345 Park Avenue, 28th Floor New York, NY 10154 Bradford & Marzec Global Fixed Income Management 333 South Hope Street, Suite 4050 Los Angeles, CA 90071 Capital Guardian Trust Company 135 S. State College Boulevard Brea, CA 92821-5804 Capital International, Inc. 11100 Santa Monica Boulevard, 16th Floor Los Angeles, CA 90025 Cornerstone Real Estate Advisers, LLC One Financial Plaza, Suite 1700 Hartford, CT 06103-2604 Dalton, Greiner, Hartman, Maher & Co., LLC 3001 Tamiami Trail North, Suite 206 Naples, FL 34103 Enhanced Investment Technologies, LLC 2401 PGA Boulevard, Suite 100 Palm Beach Gardens, FL 33410 Continued Introductory Section 15

Professional Consultants (Continued) Investment Managers - continued Grosvenor Capital Management, L.P. 900 North Michigan Avenue, Suite 1100 Chicago, IL 60611 Heitman Capital Management Corporation 191 North Wacker Drive Chicago, IL 60606 Hines U.S. Office Value Added Fund II, LLC 2800 Post Oak Boulevard, Suite 5000 Houston, TX 77056-6118 Independence Investments, LLC 160 Federal Street, 9th Floor Boston, MA 02110-1700 INVESCO Global Asset Management (N.A.), Inc. 101 California Street, Suite 1900 San Francisco, CA 94111 Lehman Brothers Asset Management, LLC 190 South LaSalle Street, Suite 2400 Chicago, IL 60603 LSV Asset Management One North Wacker Drive, Suite 4000 Chicago, IL 60606 M.A. Weatherbie & Co., Inc. 265 Franklin Street, 16th Floor Boston, MA 02110 Metropolitan West Asset Management 11766 Wilshire Boulevard, Suite 1580 Los Angeles, CA 90025 OFI Institutional Asset Management 301 North Spring Street Bellefonte, PA 16823 Principal Global Investors, LLC 801 Grand Avenue, 25th Floor Des Moines, IA 50392-0490 Pzena Investment Management, LLC 120 West 45th Street, 20th Floor New York, NY 10036 State Street Global Advisors One Lincoln Street Boston, MA 02111-2900 TCW Asset Management 500 Grant Street, 9th Floor Pittsburgh, PA 15258 UBS Realty Investors, LLC 242 Trumbull Street Hartford, CT 06103-1212 Urdang Securities Management, Inc. 630 West Germantown Pike, Suite 300 Plymouth Meeting, PA 19462 A schedule of manager fees is located on pages 66 and 67 in the Investment Section. Introductory Section 16

F i n a n c i a l S e c t i on

Financial Section 18 I n d e p e n d e n t A u d i t o r s R e p o r t

Independent Auditor s Report (Continued) Financial Section 19

M a n a g e m e n t s D i s c u s s i o n a n d A n a ly s i s This section presents SCERS management s discussion and analysis (MD&A) of the financial activities of the Sacramento County Employees Retirement System (SCERS) for the years ended June 30, 2007 and 2006. Readers are encouraged to consider the narrative overview and information presented in the MD&A in conjunction with the Letter of Transmittal beginning on page 6 of this Report and the Financial Statements, Notes to the Financial Statements, Required Supplementary Information, and Other Supplemental Information that follows. FINANCIAL HIGHLIGHTS As of June 30, 2007, the net assets of SCERS held in trust for pension benefits (Net Assets) totaled $5,975.9 million. This represents an increase of $885.0 million (or 17.4%) from the $5,090.9 million in SCERS Net Assets as of June 30, 2006, which, in turn, represented an increase of $514.5 million (or 11.2%) over the $4,576.4 million in Net Assets as of June 30, 2005. Additions to Net Assets were $1,091.2 million and $702.5 million for the years ended June 30, 2007 and 2006, respectively. Investment gains were a significant portion of total additions in both years, with net investment gains of $891.5 million in the year ended June 30, 2007 and $527.8 million in the year ended June 30, 2006. Although total additions increased in the year ended June 30, 2007 primarily due to strong net investment income, total additions decreased in the year ended June 30, 2006 compared to the prior year because of the receipt of $420.0 million in proceeds from pension obligation bonds (POB) issued by the County of Sacramento in the year ended June 30, 2005. Deductions in Net Assets were $206.2 million and $188.0 million for the years ended June 30, 2007 and 2006, respectively. The total deductions in the year ended June 30, 2007 increased $18.2 million (or 9.7%) over the year ended June 30, 2006, which, in turn, had increased in total deductions of $16.7 million (or 9.7%) over the year ended June 30, 2005. Increased monthly benefit payments was the primary reason for the increase in total deductions for both years. SCERS funding objective is to meet long-term benefit obligations through contributions and investment income. As of June 30, 2007, the funded ratio of SCERS (i.e., the ratio of the actuarial value of assets to actuarial accrued liability) was 93.4%, up from the funded ratio of 93.0% as of June 30, 2006. OVERVIEW OF THE FINANCIAL STATEMENTS This MD&A serves as an introduction to the basic financial statements, which are comprised of the following components: Statements of Fiduciary Net Assets - Pension Trust Fund Statements of Changes in Fiduciary Net Assets - Pension Trust Fund Statements of Fiduciary Net Assets - Agency Fund Notes to the Basic Financial Statements Required Supplementary Information Other Supplemental Information In addition, please note that this Report also contains three required supplementary schedules of historical trend information and actuarial assumptions and three schedules of other supplemental information. The Statements of Fiduciary Net Assets - Pension Trust Fund are snapshots of account balances at fiscal year end. These statements reflect assets available for future payments to retirees and their beneficiaries, and liabilities owed as of fiscal year end. Financial Section 20

Management s Discussion and Analysis (Continued) The Statements of Changes in Fiduciary Net Assets - Pension Trust Fund reflect all the activities that occurred during the year and show the impact of those activities as additions or deductions to the plan. The trend of additions versus deductions to the plan will indicate whether SCERS financial position is improving or deteriorating over time. The basic financial statements and the required disclosures are in accordance with the accounting principles and reporting guidelines as set forth by the Governmental Accounting Standards Board (GASB) utilizing the accrual basis of accounting, which is the accounting method practiced by most private-sector companies. Under this method, all of the current year s revenues and expenses are taken into account regardless of when cash is received or paid. All investment gains and losses are recorded at trade date, not settlement date. Both realized and unrealized gains and losses are included in investments. The fiduciary fund statements report SCERS net assets held in trust for pension benefits (net assets) i.e., the difference between assets and liabilities as one way to measure the System s financial position. Over time, increases or decreases in net assets serve as one indicator of whether SCERS financial health is improving or deteriorating. Other factors, such as market conditions, should also be considered in measuring the System s overall health. The Statements of Fiduciary Net Assets - Agency Fund reflect assets held by SCERS in a trustee capacity or as an agent on behalf of others and do not measure the results of operations. The Notes to the Basic Financial Statements are an integral part of the financial reports and provide additional information that is essential to a full understanding of the data provided in the financial statements. In addition to the financial statements and accompanying notes, this Report presents certain Required Supplementary Information concerning SCERS progress in funding its obligations to provide benefits to System members. The schedule of funding progress includes historical trend information about the actuarially-funded status of the plan and the progress made in accumulating sufficient assets to pay benefits when due. The schedule of employer contributions presents historical trend information about the annual required contribution of the employers and the actual contributions made. The significant actuarial assumptions include the actuarial cost, amortization, and asset valuation methods, remaining amortization period, and assumptions regarding the investment rate of return, projected salary increases, wage inflation, and postretirement benefit increases. These schedules provide information to help promote understanding of the changes in the funded status of the plan over time. Schedules of administrative expenses, investment management expenses, payments to consultants, and statements of change in assets and liabilities for agency fund are presented as Other Supplemental Information following the Required Supplementary Information. FINANCIAL ANALYSIS Assets and Funded Ratio SCERS net assets held in trust for pension benefits as of June 30, 2007 totaled $5,975.9 million, an increase of $885.0 million (17.4%) from the $5,090.9 million in net assets as of June 30, 2006, which, in turn, represented an increase of $514.5 million (11.2%) over the $4,576.4 million in net assets as of June 30, 2005. The increase in net assets over the two-year period was primarily due to investment Financial Section 21

Management s Discussion and Analysis (Continued) gains and receipt of the proceeds of pension obligation bonds. All of the net assets are available to meet SCERS obligations to plan participants and beneficiaries. NET ASSETS As of June 30 (Amounts Expressed in Millions) Assets 2007 2006 Increase/ (Decrease) % Change Cash and short-term investments $ 282.7 $ 331.0 $ (48.3) (14.6)% Receivables 89.2 68.7 20.5 29.8 Investments, at fair value 5,968.8 5,121.7 847.1 16.5 Securities lending collateral 864.2 638.4 225.8 35.4 Other assets 8.4 9.5 (1.1) (11.6) Total assets 7,213.3 6,169.3 1,044.0 16.9 Liabilities Investment trades payable 137.1 255.2 (118.1) (46.3) Mortgages payable 199.1 153.7 45.4 29.5 Securities lending liability 864.2 638.4 225.8 35.4 Other liabilities 37.0 31.1 5.9 19.0 Total liabilities 1,237.4 1,078.4 159.0 14.7 Net assets held in trust for pension benefits $ 5,975.9 $ 5,090.9 $ 885.0 17.4% NET ASSETS As of June 30 (Amounts Expressed in Millions) Assets 2006 2005 Increase/ (Decrease) % Change Cash and short-term investments $ 331.0 $ 248.3 $ 82.7 33.3% Receivables 68.7 85.3 (16.6) (19.5) Investments, at fair value 5,121.7 4,531.0 590.7 13.0 Securities lending collateral 638.4 569.5 68.9 12.1 Other assets 9.5 4.4 5.1 115.9 Total assets 6,169.3 5,438.5 730.8 13.4 Liabilities Investment trades payable 255.2 156.4 98.8 63.2 Mortgages payable 153.7 112.6 41.1 36.5 Securities lending liability 638.4 569.5 68.9 12.1 Other liabilities 31.1 23.6 7.5 31.8 Total liabilities 1,078.4 862.1 216.3 25.1 Net assets held in trust for pension benefits $ 5,090.9 $ 4,576.4 $ 514.5 11.2% Financial Section 22

Management s Discussion and Analysis (Continued) SCERS retains an independent actuarial firm, The Segal Company, to perform annual actuarial valuations to monitor the funding status of the System. An actuarial valuation is similar to an inventory process. On the valuation date, the assets available for the payment of retirement benefits are appraised. These assets are compared with the actuarial liabilities, which are the actuarial present value of all future benefits expected to be paid with respect to each member. The purpose of the valuation is to determine what future contributions will be needed by the members and participating employers to pay all expected future benefits. As of June 30, 2007, the funded ratio of SCERS (i.e., the ratio of the actuarial value of assets to actuarial accrued liability) was 93.4%, up from the funded ratio of 93.0% as of June 30, 2006. In general terms, this ratio means that as of June 30, 2007, SCERS had approximately 93 cents available for each dollar of anticipated future liability. The Required Supplementary Information and Actuarial Section of this Report provide additional actuarial information. Reserves SCERS reserves are established in accordance with the requirements of the 1937 Act, utilizing contributions and the accumulation of investment income, after satisfying administrative and investment expenses. Under GASB Statement No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans, investments are stated at fair value instead of cost and include the recognition of unrealized gains and losses. In addition, for actuarial purposes, SCERS utilizes a five-year smoothing methodology under which a portion of the market gains and losses is recognized and allocated to the reserves through interest crediting. The difference between the market value of assets (equivalent to the net assets held in trust for pension benefits) and the smoothed actuarial value of assets is tracked in the Market Stabilization Reserve. As a result of strong investment performance over the past four years, SCERS maintained strong balances in its Market Stabilization Reserve. As of June 30, 2007 and 2006, the Market Stabilization Reserve was $569.4 million and $242.0 million, respectively. Financial Section 23

Management s Discussion and Analysis (Continued) NET ASSETS AVAILABLE FOR BENEFITS AT FAIR VALUE AS OF JUNE 30 (Amounts Expressed in Thousands) 2007 2006 2005 Employee reserves $ 595,078 $ 573,498 $ 537,994 Employer reserves 2,123,725 1,974,407 1,887,086 Retiree reserves 2,580,318 2,286,217 2,091,019 Retiree death benefit reserves 14,128 13,264 12,912 Retiree health care benefits designations 1,567 1,568 1,571 Contingency reserve 91,645 - - Total reserves and designations 5,406,461 4,848,954 4,530,582 Unallocated earnings undesignated - - - Smoothed actuarial value of assets 5,406,461 4,848,954 4,530,582 Market stabilization reserve 569,401 241,975 45,862 Net assets available for benefits, at fair value $ 5,975,862 $ 5,090,929 $ 4,576,444 Financial Section 24

Management s Discussion and Analysis (Continued) Changes in Fiduciary Net Assets - Pension Trust Fund The following tables present the changes in net assets for the fiscal years ended June 30, 2007, 2006, and 2005, respectively. Additions CHANGE IN FIDUCIARY NET ASSETS For the Fiscal Years Ended June 30 (Amounts Expressed in Millions) 2007 2006 Increase/ (Decrease) % Change Employee contributions $ 42.9 $ 42.0 $ 0.9 2.1% Employer contributions 156.8 132.7 24.1 18.2 Net income from investment activities 922.7 553.0 369.7 66.9 Net income from securities lending 1.9 1.7 0.2 11.8 Other income (4.1) 1.8 (5.9) (327.8) Investment fees and expenses (29.0) (28.7) (0.3) 1.0 Total additions 1,091.2 702.5 388.7 55.3 Deductions Benefits paid 196.0 178.4 17.6 9.9 Withdrawal of contributions 4.4 4.6 (0.2) (4.3) Administrative and other expenses 5.8 5.0 0.8 16.0 Total deductions 206.2 188.0 18.2 9.7 Increase in net assets 885.0 514.5 370.5 72.0 Net assets held in trust for pension benefits, beginning 5,090.9 4,576.4 514.5 11.2 Net assets held in trust for pension benefits, ending $ 5,975.9 $ 5,090.9 $ 885.0 17.4% Financial Section 25

Management s Discussion and Analysis (Continued) Additions CHANGE IN FIDUCIARY NET ASSETS For the Years Ended June 30 (Amounts Expressed in Millions) 2006 2005 Increase/ (Decrease) % Change Employee contributions $ 42.0 $ 36.9 $ 5.1 13.8% Employer contributions 132.7 529.6 (396.9) (74.9) Net income from investment activities 553.0 435.4 117.6 27.0 Net income from securities lending 1.7 0.9 0.8 88.9 Other income 1.8 0.5 1.3 260.0 Investment fees and expenses (28.7) (17.3) (11.4) (65.9) Total additions 702.5 986.0 (283.5) (28.8) Deductions Benefits paid 178.4 162.5 15.9 9.8 Withdrawal of contributions 4.6 3.5 1.1 31.4 Administrative and other expenses 5.0 5.3 (0.3) (5.7) Total deductions 188.0 171.3 16.7 9.7 Increase in net assets 514.5 814.7 (300.2) (36.8) Net assets held in trust for pension benefits, beginning Net assets held in trust for pension benefits, ending Additions to Net Assets 4,576.4 3,761.7 814.7 21.7 $ 5,090.9 $ 4,576.4 $ 514.5 11.2% Financing for the benefits SCERS provides to its members comes primarily from income on investments and through the collection of employer and member (employee) retirement contributions. For the years ended June 30, 2007 and 2006, total additions were $1,091.2 million and $702.5 million, respectively. For the years ended June 30, 2007 and 2006, combined employer and employee contributions were $199.7 million and $174.7 million, respectively. The increase in employer contributions in fiscal year 2007 was primarily due to the increase in contribution rates. The overall reduction in employer contributions in fiscal year 2006 was primarily due to the receipt of $420.0 million in proceeds from the issuance of pension obligation bonds (POB) by the County of Sacramento and the receipt of $10.5 million from the issuance of POB by the Sacramento Metropolitan Fire District in fiscal year 2005 compared to $0 in fiscal year 2006. Net investment gains were $891.5 million and $527.8 million for the fiscal years ended June 30, 2007 and 2006, respectively. The Investment Section of this Report provides a detailed discussion of the investment markets and investment performance. Financial Section 26

Management s Discussion and Analysis (Continued) Deductions from Net Assets SCERS assets are primarily used for the payment of benefits to members and their beneficiaries, the refunding of contributions to terminated employees, and the cost of administering the System. For the years ended June 30, 2007 and 2006, total deductions were $206.2 million and $188.0 million, respectively. Deductions increased $18.2 million or 9.7% in the year ended June 30, 2007 and $16.7 million or 9.7% in the year ended June 30, 2006. The primary cause of the increase in deductions in both years was increased monthly benefit payments. The Board of Retirement approves SCERS annual budget. The 1937 Act limits SCERS annual administrative expenses to eighteen hundredths of one percent (0.18%) of the System s total assets, and SCERS administrative expenses have historically been below that limitation. For the years ended June 30, 2007 and June 30, 2006, administrative expenses were within the budget established by the Board of Retirement and were 0.09% of each of the prior year s total assets. OVERALL ANALYSIS For the years ended June 30, 2007 and 2006, SCERS financial position and results of operations have improved over each prior year. For the year ended June 30, 2007 net assets increased $885.0 million or 17.4% over the prior year. For the year ended June 30, 2006, net assets increased $514.5 million or 11.2% over the prior year. This improvement was due primarily to increased investment returns resulting from the recovery of the domestic and international equity markets. SCERS FIDUCIARY RESPONSIBILITIES SCERS Board of Retirement and management staff are fiduciaries of the pension trust fund. Under the California Constitution and California state law, the net assets must be used exclusively for the benefit of plan participants and their beneficiaries. REQUESTS FOR INFORMATION This financial report is designed to provide the Board of Retirement, SCERS membership, participating employers, taxpayers, and other stakeholders and interested parties with a general overview of SCERS finances and to show accountability for the money SCERS receives. Questions about this report or requests for additional financial information may be addressed to: Sacramento County Employees Retirement System 980 9 th Street, Suite 1800 Sacramento, CA 95814 Copies of this report are available at the above address and on the System s web site at www.scers.org. Financial Section 27

S t a t e m e n t s o f F i d u c i a r y N e t A s s e t s PENSION TRUST FUND AS OF JUNE 30, 2007 AND 2006 (Amounts Expressed In Thousands) Assets 2007 2006 Cash and short-term investments Cash invested with Sacramento County Treasurer $5,706 $6,078 Other cash and cash equivalents 17,953 23,349 Short-term investments with fiscal agents 258,982 301,611 Cash and short-term investments 282,641 331,038 Receivables Securities sold 55,680 48,441 Accrued investment income 27,178 14,654 Employee and employer contributions 6,384 5,560 Total receivables 89,242 68,655 Investments, at fair value United States government and agency securities 706,018 693,343 Domestic corporate bonds 524,898 451,219 International bonds 102,414 86,666 Common and preferred stock - domestic 2,499,794 2,126,687 Common and preferred stock - international 1,295,586 1,054,841 Real estate 840,074 708,896 Securities lending collateral 864,165 638,437 Total investments 6,832,949 5,760,090 Other Assets 8,398 9,509 Total assets 7,213,230 6,169,292 Liabilities Accounts payable and other accrued liabilities 33,952 27,793 Investment trades payable 137,062 255,160 Mortgages payable 199,150 153,706 Warrants payable 3,039 3,267 Securities lending liability 864,165 638,437 Total liabilities 1,237,368 1,078,363 Net assets held in trust for pension benefits $5,975,862 $5,090,929 (A schedule of funding progress for the system is presented on page 50) The notes to the basic financial statements are an integral part of this statement. Financial Section 28

S t a t e m e n t s o f C h a n g e s i n F i d u c i a r y N e t A s s e t s PENSION TRUST FUND FOR THE YEARS ENDED JUNE 30, 2007 AND 2006 (Amounts Expressed In Thousands) Additions 2007 2006 Contributions Employee $42,871 $41,959 Employer 156,805 132,708 Total contributions 199,676 174,667 Investment income From investment activities Net appreciation in fair value of investments - securities 677,218 323,197 Net appreciation in fair value of investments - real estate 67,864 73,256 Interest 77,680 64,879 Dividends 72,595 61,483 Real estate 27,319 30,221 Net gain from investment activities 922,676 553,036 From securities lending activities Securities lending income 41,773 25,473 Securities lending expense Borrower rebate expense (38,961) (23,093) Securities lending management fees (844) (694) Net income from securities lending 1,968 1,686 Other income/(expenses) (4,147) 1,888 Investment fees and expenses (28,991) (28,747) Net investment income 891,506 527,863 Total additions 1,091,182 702,530 Deductions Benefits paid 195,997 178,362 Withdrawal of contributions 4,434 4,622 Administrative and other expenses 5,818 5,061 Total deductions 206,249 188,045 Net increase 884,933 514,485 Net assets held in trust for pension benefits, beginning 5,090,929 4,576,444 Net assets held in trust for pension benefits, ending $5,975,862 $5,090,929 The notes to the basic financial statements are an integral part of this statement. Financial Section 29

S t a t e m e n t s o f F i d u c i a r y N e t A s s e t s AGENCY FUND AS OF JUNE 30, 2007 AND 2006 (Amounts Expressed in Thousands) Assets 2007 2006 Receivables $ 43 $ 9 Total assets 43 9 Liabilities Accounts payable 43 9 Total liabilities 43 9 Net assets $ - $ - The notes to the basic financial statements are an integral part of this statement. Financial Section 30

N o t e s t o t h e B a s i c F i n a n c i a l S t a t e m e n t s NOTE 1 - PLAN DESCRIPTION The Sacramento County Employees Retirement System ( SCERS or the System ) is a multipleemployer, cost-sharing public employee retirement system which operates under the County Employees Retirement Law of 1937 (Section 31450 et seq. of the California Government Code). The System was created by resolution of the Sacramento County (the County ) Board of Supervisors on July 1, 1941, to provide retirement, disability, and death benefits for qualified employees of Sacramento County and participating Special Districts ( Special Districts or Member Districts ). SCERS is governed by a nine member Board of Retirement, four are appointed by the County Board of Supervisors, four are elected by the members of the System (two by the Miscellaneous members, one by the Safety members and one by the Retiree members), and the County Director of Finance serves as an Ex-Officio member. An alternate Safety member and an alternate Retiree member are also elected by those respective member groups. The System is legally and fiscally independent of the County. At June 30, 2007, participating local government employers consisted of the County of Sacramento; Superior Court of California, County of Sacramento ( Superior Court ); and eleven Special Districts. The System s membership consists of the following categories: Safety Tier One - Includes employees whose principal duties consist of law enforcement or fire suppression work or who occupy positions designated by law as safety positions and who have a membership start-date prior to June 25, 1995. Safety Tier Two - Includes employees whose principal duties consist of law enforcement or fire suppression work or who occupy positions designated by law as safety positions and who have a membership start-date on or after June 25, 1995. Miscellaneous Tier One - Includes all members other than Safety who have a membership start-date prior to September 27, 1981. Miscellaneous Tier Two - Includes all members other than Safety who have a membership start-date on or after September 27, 1981 and prior to June 27, 1993 and who elected not to become members of Miscellaneous Tier Three. Miscellaneous Tier Three - Includes all members other than Safety who have a membership start-date on or after June 27, 1993, and those Miscellaneous Tier Two members who elected to become members of this class. Financial Section 31

Notes to the Basic Financial Statements (Continued) At June 30, 2007 and 2006, the System s membership consisted of: Retirees and beneficiaries currently receiving benefits: 2007 2006 Miscellaneous - Service 4,682 4,432 Miscellaneous - Beneficiary 895 885 Miscellaneous - Nonservice-Connected Disability 313 300 Miscellaneous - Service-Connected Disability 173 185 Safety - Service 959 885 Safety - Beneficiary 221 207 Safety - Nonservice-Connected Disability 26 25 Safety - Service-Connected Disability 195 189 Total Retirees and Beneficiaries 7,464 7,108 Terminated employees entitled to benefits but not yet receiving them: Miscellaneous Tier 1 193 234 Miscellaneous Tier 2 305 317 Miscellaneous Tier 3 1,599 1,348 Safety Tier 1 169 176 Safety Tier 2 171 117 Total Terminated 2,437 2,192 Current Members: Vested Miscellaneous Tier 1 579 703 Miscellaneous Tier 2 332 352 Miscellaneous Tier 3 7,262 6716 Safety Tier 1 697 766 Safety Tier 2 1,070 933 Subtotal 9,940 9470 Non-Vested Miscellaneous Tier 1 2 1 Miscellaneous Tier 3 4,152 4280 Safety Tier 1 1 1 Safety Tier 2 621 660 Subtotal 4,776 4942 Total Current Members 14,716 14,412 Financial Section 32

Notes to the Basic Financial Statements (Continued) Pension Benefits The System s benefits are established by the provisions of the County Employees Retirement Law of 1937 and provide for retirement, death, and disability benefits. All permanent full-time and part-time employees of the County or Member Districts are eligible to participate in the System. Upon reaching five years of service, participants have earned the right to receive a retirement benefit, subject to certain restrictions if retirement is prior to attaining age 50 or if less than 10 years service has been achieved. Retirement benefits under each tier are as follows: Members covered under Safety Tier 1 who retire at age 50 are entitled to a retirement benefit, payable monthly for life, equal to 3 percent of their final-average salary for each year of credited service. This benefit includes a cost-of-living adjustment of up to 4 percent annually. Final-average salary is the member's average salary for the highest twelve consecutive months of credited service. Members covered under Safety Tier 2 who retire at age 50 are entitled to a retirement benefit, payable monthly for life, equal to 3 percent of their final-average salary for each year of credited service. This benefit includes a cost-of-living adjustment of up to 2 percent annually. Final-average salary is the member's average salary for the highest thirty-six consecutive months of credited service. Members covered under Miscellaneous Tier 1 who retire at age 50 are entitled to a retirement benefit, payable monthly for life, which is equal to 1.474 percent of their final-average salary for each year of credited service. This benefit includes a cost-of-living adjustment of up to 4 percent annually. Final-average salary is the member's average salary for the highest twelve consecutive months of credited service. Members covered under Miscellaneous Tier 2 who retire at age 50 are entitled to a retirement benefit, payable monthly for life, equal to 1.474 percent of their final-average salary for each year of credited service. There is no cost-of-living adjustment. Final-average salary is the member's average salary for the highest thirty-six consecutive months of credited service. Members covered under Miscellaneous Tier 3 who retire at age 50 are entitled to a retirement benefit, payable monthly for life, equal to 1.474 percent of their final-average salary for each year of credited service. This benefit includes a cost-of-living adjustment of up to 2 percent annually. Final-average salary is the member's average salary for the highest thirty-six consecutive months of credited service. The retirement benefits of Miscellaneous Tier 1, 2, and 3 members who retire after age 50 are increased by an age factor for each quarter year of age up to a maximum of 2.611 percent of final-average salary for each year of credited service at age 62. Effective June 29, 2003 the County Board of Supervisors applied these formulas for all SCERS members, including the employees of Member Districts, prospectively from June 29, 2003 and for County employees retroactively to service credits which precede that date. In accordance with applicable retirement law, each SCERS Member District s governing body determined whether or not to apply these formulas retroactively for service credits earned prior to June 29, 2003 by their employees. Members whose employers determined not to retroactively apply the formulas to service credits earned prior to June 29, 2003 will continue to have their retirement benefits for that service calculated Financial Section 33

Notes to the Basic Financial Statements (Continued) pursuant to the formulas in effect at the time the service was earned (i.e., Safety and Miscellaneous members who retire at age 50 earn 2 percent and 1.1 percent, respectively, of their final-average salary for each year of credited service). Member Termination Upon separation from employment with a participating employer, members accumulated contributions are refundable with interest accrued through the prior six-month period ended June 30 or December 31. Interest on member accounts is credited semiannually on June 30 and December 31. Withdrawal of such accumulated contributions results in forfeiture of the related benefits. Financing Benefits payable by the System are financed through member contributions, employer contributions, and earnings from investments. Member contributions are required by law. Contribution rates, which are actuarially determined, are based on age at entry into the System (a single rate is used for members entering the System after January 1, 1975). County and Member Districts contributions are actuarially determined to provide for the balance of contributions needed. This rate includes an additional amount required to partially fund the annual cost-of-living increases for retired members of the Miscellaneous Tier 1 and Tier 3 and Safety Tiers. All contribution rates are reviewed and revised annually. The authority for both benefit provisions and contribution obligations is derived from the County Employees Retirement Law of 1937. NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PLAN ASSET MATTERS Basis of Accounting The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. SCERS has fiduciary funds at June 30, 2007 and 2006 which include pension trust and agency funds. The pension trust fund is used to report resources that are required to be held in trust for the members and the beneficiaries of the defined benefit pension plan, and agency fund accounts for assets held by SCERS in a trustee capacity or as an agent on behalf of the others. The pension trust fund is accounted for on the flow of economic resources measurement focus and the accrual basis of accounting. The agency fund is custodial in nature and does not measure the results of operations. Assets and liabilities are recorded using the accrual basis of accounting. The System has adopted Governmental Accounting Standards Board Statement No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans, as its source of accounting and reporting principles. Investments are valued at their fair value, which results in the recognition of fair value gains and losses. Member and employer contributions are recognized when due pursuant to formal commitments, as well as statutory or contractual requirements. Benefits and refunds are recognized when due and payable in accordance with the terms of the plan. Expenses are recorded when the corresponding liabilities are incurred, regardless of when payment is made. Investment purchases and sales are recorded on the trade date. Financial Section 34

Notes to the Basic Financial Statements (Continued) Valuation of Investments Investments other than real estate are reported based on quoted market prices. The fair value of the real estate trust holdings has been determined using industry standard appraisal techniques and assumptions. The real estate trust managers use appraisals, which are updated annually, to determine the fair value of these trusts. Cash deposited in the Sacramento County Treasurer s pool is stated at fair value. The value of the System s pool shares is determined on an amortized cost basis, which approximates fair value. Short-Term Investments Short-term investments, which include highly-liquid investments expected to be utilized by the System within 30-90 days, are reported at fair value. These investments may include securities, which have a maturity in excess of 90 days but are readily marketable. Other Assets Other assets consist of accounts receivable, prepaid expenses, net capital assets, and security deposits. Administrative Expenses Administrative costs are financed with earnings from investments and employer and employee contributions. Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results may differ from those estimates. Reclassification Certain reclassifications have been made to June 30, 2006 balances to conform to the presentation as of June 30, 2007. NOTE 3 - RETIREE MEDICAL AND DENTAL INSURANCE PROGRAM Plan Description The Sacramento County Retiree Medical and Dental Insurance Program (the Program ) is an agent multiple-employer defined benefit medical and dental plan sponsored, financed, and administered by nine participating employers. SCERS role in regard to the Program is limited to collecting monies from Sacramento County and calculating and initiating payment of premiums when due. Financial Section 35

Notes to the Basic Financial Statements (Continued) (Amounts Expressed in Thousands) The table below lists the participating employers as of June 30, 2007: Name Medical Subsidy Dental Subsidy Carmichael Recreation and Park District Yes Yes County of Sacramento Yes Yes Elected Officials Yes Yes Mission Oaks Recreation and Park District Yes Yes Orangevale Recreation and Park District Yes Yes Sacramento Metropolitan Fire District Yes No Sacramento Employment Training Agency Yes Yes Sunrise Recreation and Park District Yes Yes Superior Court Yes Yes The Program provides medical and/or dental subsidy/offset payments to eligible retirees. According to the Program s Administrative Policy, only safety and miscellaneous members who retired on or before May 31, 2007 are eligible for the subsidy. As of June 30, 2007, there are 6,730 retired members and beneficiaries currently receiving subsidy payments. The Sacramento County Board of Supervisors, at its own discretion, sets the amount of subsidy/offset payment available to eligible retirees on a year-to-year basis. For calendar year 2008, the monthly dental subsidy is $25, and the monthly medical subsidy amounts range from $122 to $244 depending on years of the member s earned service credit. There are no vested benefits associated with the Program. The Program does not create any contractual, regulatory, or other vested entitlement to present or future retirees, their spouses, or dependents for medical and/or dental benefits, or subsidy/ offset payments at any particular level, or at all. Sacramento County and other participating employers may, in their sole discretion, amend or terminate, in whole or in part, the Program by Resolution of the Board of Supervisors. Contributions and Reserves The System does not have any authority to establish or amend the obligations of the plan members and employers to contribute to the Program. SCERS does not determine the contribution rate or collect the required contributions from employers. SCERS role in regards to the Program is limited to collecting monies from Sacramento County and paying the premiums when due. Monies received by the System in excess of liabilities to pay premiums are recognized as liabilities to the Sacramento County. There are no net assets or legally required reserve accounts for the Program. In accordance with GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, each participating employer is required to disclose the Program information with regard to funding policy, the employer s annual OPEB cost and contributions made, the funded status and funding progress, and actuarial methods and assumptions used. Request for Information Requests for additional financial information regarding the Program may be addressed to: County of Sacramento, Department of Finance Auditor-Controller Division 700 H Street, Room 3650 Sacramento, CA 95814 (916) 874-7422 Financial Section 36

Notes to the Basic Financial Statements (Continued) (Amounts Expressed in Thousands) NOTE 4 - CASH AND INVESTMENTS The investment authority for the System rests primarily through the prudent person rule, as set forth in Section 31595 of the County Employees Retirement Law of 1937, which establishes a standard for all fiduciaries, including anyone with investment authority on behalf of the System. Cash Invested with Sacramento County Treasurer The System invests cash held for benefit payments and general operations in the County Treasurer s pool. The County Treasury Oversight Committee is responsible for regulatory oversight of the pool. The System s share of the County Treasurer s pool is separately accounted for, and interest earned, net of related expenses, is apportioned quarterly based on the relationship of the System s average daily cash balance to the total of the pooled cash and investments. The fair value of the System s cash invested with the County Treasurer totaled $5,706 and $6,078 at June 30, 2007 and 2006, respectively. The pool is not rated, and the weighted average maturity of the pool were 197 days and 185 days at June 30, 2007 and 2006, respectively. Interest earned but not received from the County Treasurer at year end is reported as a component of accrued investment income on the statement of changes in fiduciary net assets. Cash and investments included within the County Treasurer s pool are described in the County s Comprehensive Annual Financial Report. Other Cash and Cash Equivalents At June 30, 2007 and 2006, other cash and cash equivalents constitute balances in bank demand deposit accounts of $17,953 and $23,349, respectively, of which $10,470 and $16,586 were not held in the System s name. The System is exposed to custodial credit risk with respect to these deposits. Short-Term Investments with Fiscal Agents At June 30, 2007 and 2006, the fair value of the System s short-term investments with fiscal agents was $258,982 and $301,611, respectively. The total consisted of investments in the State Street Short-Term Investment Fund (STIF). The STIF is designed to provide qualified benefit plans with a readily accessible investment vehicle that may be accessed on a daily basis. The STIF is limited to investing in securities that are rated A-1 by Moody s Investors Services and P-1 by Standard & Poor s Corporation at the time of issuance. The STIF is not rated by credit rating agencies. Most investments range in maturity from overnight to 90 days with up to 20% of the STIF s value eligible for investment between 90 days and 13 months. The weighted average maturities were 27 days at June 30, 2007 and 2006. Net assets invested in the STIF from all participating custodial clients of State Street were $40.1 billion and $39.7 billion on June 30, 2007 and 2006, respectively. Financial Section 37

Notes to the Basic Financial Statements (Continued) (Amounts Expressed in Thousands) Securities Lending State statutes permit the System to participate in securities lending transactions and, pursuant to a Securities Lending Authorization Agreement, the System has authorized State Street Bank and Trust Company (State Street) to act as its agent in lending the System s securities to broker-dealers and banks pursuant to an approved loan agreement. During the years ended June 30, 2007 and 2006, on behalf of the System, State Street loaned securities held by State Street as custodian, including U.S. government and agency obligations, domestic corporate bonds, and domestic and international equities and received, as collateral, U.S. and foreign currency, securities issued or guaranteed by the U.S. government, sovereign debt of foreign countries, and irrevocable bank letters of credit. State Street does not have the ability to pledge or sell collateral securities absent a borrower default. Borrowers are required to deliver collateral for each loan equal to a minimum of 100% of the market value of the loaned security. In accordance with GASB Statement No. 28, Accounting and Financial Reporting for Securities Lending Transactions, securities lending collateral reported in the statement of fiduciary net assets represented only cash collateral invested in the lending agent s cash collateral investment pool. SCERS did not impose any restrictions during the fiscal years on the amount of the loans that State Street made on its behalf. There were no failures to return loaned securities or pay distributions thereon by any borrowers during the fiscal years. Moreover, there were no losses during the fiscal years resulting from a default of the borrowers or State Street. During the fiscal years ended June 30, 2007 and 2006, SCERS and the borrowers maintained the right to terminate all securities lending transactions on demand. The cash collateral received on each loan was invested, together with the cash collateral of other qualified tax-exempt plan lenders, in a collective investment pool. Because the loans were terminable at will, their duration did not generally match the duration of the investments made with cash collateral. Since the System held collateral from the borrowers greater than the amounts borrowed, on June 30, 2007 and 2006 the System had no credit risk exposure to the borrowers. Furthermore, the lending agreement with the custodian requires the custodian to indemnify the System if the borrower fails to return the securities. The cash collateral held and the market value of securities on loan as of June 30, 2007 were $864,165 and $881,470, respectively. The cash collateral held and the market value of securities on loan as of June 30, 2006 were $638,437 and $625,890, respectively. Additional information regarding the cash collateral investment pool (collateral pool) follows: Method for Determining Fair Value. The fair value of investments held by the collateral pool is based upon valuations provided by a recognized pricing service. Policy for Utilizing Amortized Cost Method. Because the collateral pool does not meet the requirements of Rule 2a-7 of the Investment Company Act of 1940, State Street has valued the collateral pool investments at fair value for reporting purposes. Regulatory Oversight. The collateral pool is not registered with the Securities and Exchange Commission. State Street, and consequently the investment vehicles it sponsors (including the collateral pool), are subject to the oversight of the Federal Reserve Board and the Massachusetts Commissioner of Banks. The fair value of the System s position in the collateral pool is the same as the value of the collateral pool shares. Financial Section 38

Notes to the Basic Financial Statements (Continued) (Amounts Expressed in Thousands) Collateral and related securities on loan at June 30, 2007 and 2006 were as follows: Security Description Cash Collateral Value 2007 Other Collateral Value Fair Value of Securities on Loan U.S. government and agency obligations $ 302,109 $ 10,555 $ 306,341 Domestic corporate bonds 25,616 (3) 25,085 Common and preferred stock domestic 421,641 27,770 438,685 Common and preferred stock international 114,799 2,314 111,359 Totals $ 864,165 $ 40,636 $ 881,470 Security Description Cash Collateral Value 2006 Other Collateral Value Fair Value of Securities on Loan U.S. government and agency obligations $ 241,928 $ 363 $ 237,445 Domestic corporate bonds 28,352 245 28,005 Common and preferred stock domestic 236,624 1,647 232,325 Common and preferred stock international 131,533 3,162 128,115 Credit Risk Totals $ 638,437 $ 5,417 $ 625,890 Credit risk is the risk that an issuer or other counterparty to a debt instrument will not fulfill its obligations. This is measured by the assignment of ratings by nationally-recognized statistical rating organizations. SCERS utilizes external investment managers to manage its portfolios. SCERS Investment Policy specifies that fixed income investments will include both actively and passively managed investments in U.S. treasury and agency securities, corporate bonds, mortgage-backed and asset-backed securities and non-dollar denominated sovereign and corporate debt. The actively-managed investments will have a minimum average credit quality rating of AA-2 by Moody s Investor Services or AA by Standard and Poor s Corporation. The System s policy is that the passively-managed investments will have a credit quality rating equal to the Lehman Brothers Aggregate Index. Portfolio diversification is constrained by the following parameters in order to minimize overall market and credit risk: No more than 10% of the portfolio will be concentrated in any one issuer except U.S. government and agency securities. No more than 20% of the portfolio will be invested in high yield or below investment grade straight securities. No more than 15% of the portfolio will be invested in convertible securities, which includes bonds and preferred issues. No more than 20% of the portfolio will be invested in non-u.s. dollar bonds. Financial Section 39

Notes to the Basic Financial Statements (Continued) (Amounts Expressed in Thousands) The following tables depict the fixed income assets by credit rating as of June 30, 2007 and 2006: Fixed Income As of June 30, 2007 S&P Quality Rating Total Securitized Obligations Credit Obligations U.S. Government & Agency Obligations International Government Collateralized Mortgage Obligations Mortgage Pass-Through FHLMC FNMA GNMA AAA $ 627,607 $138,560 $ 10,041 $ 44,045 $30,590 $ 94,272 $ 87,422 $222,677 $ - AA+ 1,033-1,033 - - - - - - AA 21,470-20,268 - - 1,202 - - - A+ 36,083-36,083 - - - - - - A 52,130-52,130 - - - - - - BBB+ 28,240-28,240 - - - - - - BBB 73,762-73,762 - - - - - - BB+ 7,417-7,417 - - - - - - BB 17,996 8,050 9,946 - - - - - - B+ 3,548-3,548 - - - - - - B 7,178-7,178 - - - - - - CCC 389 389 - - - - - - - D 201 201 - - - - - - - NA 286,916 - - 276,943 - - - - 9,973 NR 169,360 30,882 38,515-3,198 31,808 26,600 38,357 - Total $1,333,330 $178,082 $288,161 $320,988 $33,788 $127,282 $114,022 $261,034 $9,973 Financial Section 40

Notes to the Basic Financial Statements (Continued) (Amounts Expressed in Thousands) Fixed Income As of June 30, 2006 S&P Quality Rating Total Securitized Obligations Credit Obligations U.S. Government & Agency Obligations International Government Collateralized Mortgage Obligations Mortgage Pass-Through FHLMC FNMA GNMA AAA $ 605,184 $135,456 $ 7,911 $ 49,215 $28,848 $ 83,997 $40,325 $259,432 $ - AA+ 300-300 - - - - - - AA 3,311-3,311 - - - - - - AA- 11,210-11,210 - - - - - - A+ 22,845-22,845 - - - - - - A 26,312-26,312 - - - - - - A- 33,267-33,267 - - - - - - BBB+ 28,095-28,095 - - - - - - BBB 33,904-33,904 - - - - - - BBB- 28,476-28,476 - - - - - - BB+ 3,714-3,714 - - - - - - BB 9,980-9,980 - - - - - - BB- 11,548 7,769 3,779 - - - - - - B+ 9,360-9,360 - - - - - - B 1,406-1,406 - - - - - - B- 2,516-2,258 - - - 258 - - CCC- 594 594 - - - - - - - D 370 370 - - - - - - - NA 295,451 - - 283,909 - - - - 11,542 NR 103,386 17,791 11,422 9,500 4,823 20,688 29,550 9,612 - Total $1,231,229 $161,980 $237,550 $342,624 $33,671 $104,685 $70,133 $269,044 $11,542 Obligations of the U.S. government or obligations explicitly guaranteed by the U.S. government are not considered to have credit risk and do not require disclosure of credit quality. NA represents those securities that are not applicable to the rating disclosure requirements, and NR represents those securities that are not rated. Securities Lending Collateral Credit Risk All of the cash collateral received for securities lending is invested in the Quality D Short-Term Investment Fund managed by State Street, which is not rated by credit rating agencies. At the time of purchase, all securities with maturities of 13 months or less must qualify as first-tier securities and all securities with maturities in excess of 13 months will be rated A or better by at least two nationallyrecognized statistical rating organizations or, if unrated, be of comparable quality. The fund may invest in other State Street managed vehicles provided they conform to the guidelines. Interest Rate Risk Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. The investment guidelines negotiated with the actively-managed external portfolio Financial Section 41

Notes to the Basic Financial Statements (Continued) (Amounts Expressed in Thousands) managers give the managers the discretion to deviate within +/- 20% from the effective duration of the relevant Lehman Brothers benchmark based on the portfolio total. Below are tables depicting the duration in years of the long-term fixed income portfolio vs. the benchmark in years: Long-Term Fixed Income Investments Duration As of June 30, 2007 Type of Securities Market Value Securitized Obligations Effective Duration Benchmark Duration Difference Asset Backed Securities $63,366 1.33 2.79 (1.46) Collateralized Mortgage-Backed Securities 114,716 4.70 4.96 (0.26) Credit Obligations Corporate Bonds 238,007 5.98 6.12 (0.14) Commingled Fund 20,963 3.44 NA NA Municipal 155 0.09 NA NA Private Placement 3,832 3.79 NA NA Yankees 25,204 5.59 5.59 - U.S. Government & Agency Obligations Agency Securities 44,045 4.38 3.61 0.77 U.S. Treasury 276,943 5.59 4.88 0.71 International Government 33,788 2.44 NA NA Collateralized Mortgage Obligations 127,282 4.99 6.68 (1.69) Mortgage Pass-Through FHLMC 114,022 4.87 4.45 0.42 FNMA 261,034 5.78 4.48 1.30 GNMA 9,973 4.22 4.68 (0.46) Total Market Value with Weighted Average Duration $1,333,330 5.17 4.85 0.32 Financial Section 42

Notes to the Basic Financial Statements (Continued) (Amounts Expressed in Thousands) Long-Term Fixed Income Investments Duration As of June 30, 2006 Type of Securities Market Value Securitized Obligations Effective Duration Benchmark Duration Difference Asset Backed Securities $115,405 0.84 2.73 (1.89) Collateralized Mortgage-Backed Securities 46,575 5.32 4.77 0.55 Credit Obligations Corporate Bonds 211,466 6.23 5.84 0.39 Municipal 1,420 1.24 NA NA Private Placement 1,460 6.98 NA NA Yankees 23,204 5.07 5.24 (0.17) U.S. Government & Agency Obligations Agency Securities 58,715 3.17 3.70 (0.53) U.S. Treasury 283,909 4.89 4.89 - International Government 33,671 6.37 NA NA Collateralized Mortgage Obligations 104,685 2.98 5.84 (2.86) Mortgage Pass-Through FHLMC 70,133 4.02 4.36 (0.34) FNMA 269,044 4.36 4.34 0.02 GNMA 11,542 4.37 4.77 (0.40) Total Market Value with Weighted Average Duration $1,231,229 4.40 4.76 (0.36) The investment objective for the short-term fixed income portfolio is to seek the preservation of capital and liquidity. Secondarily, the objective is to provide a competitive short-term yield, in a low cost, liquid portfolio, while minimizing both interest rate and credit risk. No more than 20% of the portfolio may be invested in U.S. corporate debt. Permitted investments are U.S. Treasury and Agency securities and AA or better U.S. corporate debt. As of June 30, 2007, SCERS did not have the short-term fixed income portfolio. Securities Lending Collateral Interest Rate Risk Cash collateral from loans of securities is invested in the State Street Quality D Short-Term Investment Fund. Its average effective duration is restricted to 120 days or less. As of June 30, 2007 and 2006, the actual effective duration was 68 days and 58 days, respectively. The maximum option adjusted duration of any variable rate security is five years or less. All fixed-rate instruments must have an option-adjusted duration not to exceed 30 months. Concentration of Credit Risk Concentration of credit risk is the risk of loss attributed to the magnitude of a government s investment Financial Section 43

Notes to the Basic Financial Statements (Continued) (Amounts Expressed in Thousands) in a single issuer. As of June 30, 2007 and 2006, the System had no single issuer that exceeds 5% of total investments. Investments issued or explicitly guaranteed by the U.S. government and investments in mutual funds, external investment pools, and other pooled investments are excluded. There are no general policies addressing the concentration of credit risk, however, as noted on the previous page in the discussion of credit risk, manager investment guidelines place limitations on the maximum holdings in any one issuer. Custodial Credit Risk Custodial credit risk is the risk that in the event a financial institution or counterparty fails, the System would not be able to recover the value of its deposits, investments, or securities. As of June 30, 2007 and 2006, 100% of the System s investments were held in the System s name, and the System is not exposed to custodial credit risk related to these investments. The System is exposed to custodial credit risk for uncollateralized cash and cash equivalents that are not covered by federal depository insurance. There are no general policies relating to the custodial credit risk. Foreign Currency Risk Foreign currency risk is the risk that changes in exchange rates will adversely affect the fair value of an investment or a deposit. The following tables represent securities held in a foreign currency as of June 30, 2007 and 2006. As of June 30, 2007 Local Currency Name Cash Equity Fixed Income Total Australian Dollar $ 30 $ 22,874 $ 9,658 $ 32,562 British Pound 1,127 171,580 9,019 181,726 Canadian Dollar 30 31,596-31,626 Danish Krone 15 8,586-8,601 Euro 1,510 290,773 11,913 304,196 Hong Kong Dollar 319 21,702-22,021 Japanese Yen 1,281 199,980-201,261 New Zealand Dollar 20 1,848 3,198 5,066 Norwegian Krone 250 7,218-7,468 Singapore Dollar 189 6,970-7,159 South African Rand - 1,402-1,402 South Korean Won 4 4,629-4,633 Swedish Krona 97 20,899-20,996 Swiss Franc (58) 73,476-73,418 Total $ 4,814 $ 863,533 $ 33,788 $ 902,135 Financial Section 44

Notes to the Basic Financial Statements (Continued) (Amounts Expressed in Thousands) As of June 30, 2006 Local Currency Name Cash Equity Fixed Income Total Australian Dollar $ 56 $ 25,509 $ 6,733 $ 32,298 British Pound 2,386 176,163-178,549 Canadian Dollar 280 21,940 10,834 33,054 Danish Krone 76 8,788-8,864 Euro 1,314 271,476 11,282 284,072 Hong Kong Dollar 220 17,146-17,366 Japanese Yen 1,637 217,925-219,562 New Zealand Dollar 1 1,120 4,823 5,944 Norwegian Krone 12 4,992-5,004 Singapore Dollar 21 4,770-4,791 South African Rand - 3,698-3,698 South Korean Won 5 4,562-4,567 Swedish Krona 71 16,011-16,082 Swiss Franc 561 72,490-73,051 Total $ 6,640 $ 846,590 $ 33,672 $ 886,902 Foreign currency is comprised of international investment proceeds and income to be repatriated into U.S. dollars and funds available to purchase international securities. Foreign currency is not held as a form of investment. Foreign currency is held temporarily in foreign accounts until it is able to be repatriated or expended. The System does not have a foreign currency risk policy. Highly-Sensitive Investments As of June 30, 2007 and 2006, SCERS investments included mortgage-backed securities totaling $512,311 and $455,404, respectively. These securities are highly-sensitive to interest rate fluctuations in that they are subject to early payment in a period of declining interest rates. The resulting reduction in expected total cash flows affects the fair value of these securities and makes the fair value of these securities highly sensitive to changes in interest rates. Derivatives The System s investment policy allows investment managers to use derivative instruments for certain purposes and within certain parameters. Such instruments include currency forward contracts, currency futures, floater/inverse floater debt instruments, interest-only and principal-only notes, and exchange traded financial futures and options. The System permits the use of derivatives to minimize the exposure of certain investments to adverse fluctuations in financial and currency markets. The System does not permit the use of derivatives for speculative use or to create leverage. In addition, the System invests in mortgage-backed securities, including collateralized mortgage obligations (CMOs), to increase the yield and return on its investment portfolio relative to the available alternative investment opportunities. The value of mortgage-backed securities is generally based on the cash flow from principal and interest receipts on the underlying mortgage pools. In a CMO, the cash flow from principal and interest payments from one or more mortgage pass-through securities or a pool of mortgages may be reallocated to multiple security classes with different priority claims and payment streams (commonly referred to as tranches). A holder of the CMO security thus chooses the class Financial Section 45

Notes to the Basic Financial Statements (Continued) (Amounts Expressed in Thousands) of security that best meets its risk and return objectives. CMOs are subject to significant market risk related to fluctuations in interest rates, prepayment rates, and various liquidity factors tied to their specific markets. As of June 30, 2007 and 2006, total CMO investments were $512,311 and $455,404, respectively, of which $51,153 and $24,361 were considered derivatives because of the priority claim and payment terms assigned to the specific security class (tranche) in which the System was invested. A summary of the various derivative instruments as of June 30, 2007 and 2006 is as follows: 2007 2006 Currency forward contracts $ 259,044 $ 118,029 Futures contracts 9,845 5,230 Floating-rate notes 98,533 59,190 Interest-only notes 475 1,051 Collateralized mortgage obligations 51,153 24,361 Total derivative instruments $ 419,050 $ 207,861 The System could be exposed to risk if the counterparties to derivative contracts are unable to meet the terms of the contracts. The System s investment managers seek to control this risk through counterparty credit evaluations and approvals, counterparty credit limits, and exposure monitoring procedures. The System anticipates that the counterparties will be able to satisfy their obligations under the contracts. Real Estate During fiscal year 2005-2006, SCERS adopted a new structure for its real estate investments. The new allocation broadens SCERS real estate investments from being mostly in core properties through direct investment to include investments in commingled core real estate funds, value added real estate investment funds, and publicly-traded real estate investment trust (REIT) stock investments. Direct investments include offices, apartments, retail, and industrial. During fiscal year 2006-2007, SCERS selected three new value added real estate funds in which SCERS has committed to invest $25 million each. Of the $75 million commitment, SCERS only funded $6 million. As of June 30, 2007 and 2006, real estate investments were $840,074 and $708,896, respectively. NOTE 5 - CONTRIBUTIONS REQUIRED AND CONTRIBUTIONS MADE Contributions to the plan are made pursuant to Section 31584 of the County Employees Retirement Law of 1937. The System s funding policy provides for periodic contributions at actuarially-determined rates that, expressed as percentages of annual covered payroll, are sufficient to accumulate adequate assets to pay benefits when due. Members of the System are required to contribute, and such contributions range from 1.79% to 11.58% of annual covered salary depending on the member s tier, employer, and bargaining unit. Each employer of the System is obligated by state law to make all required contributions to the plan, and depending on the participating employer and their employees tiers, such contribution rates range from 13.10% to 48.30% of covered payroll. The required contributions include current service cost and amortization of any unfunded prior service cost over a 30-year closed amortization period, with 26 years remaining as of June 30, 2007. Financial Section 46

Notes to the Basic Financial Statements (Continued) (Amounts Expressed in Thousands) Employer contribution rates are determined using the entry age normal cost method based on a level percentage of payroll. The System also uses this actuarial method to amortize the unfunded liability, if applicable. Contributions for the years ended June 30, 2007 and 2006 totaled $199,676 and $174,667. Included in this total are employer contributions of $156,805 and $132,708, respectively, of which $143,497 and $127,846 were made by the County of Sacramento. Member contributions were $42,871 and $41,959 in fiscal years 2007 and 2006, respectively. All contributions were made in accordance with actuarially-determined contribution requirements based on the actuarial valuations performed at June 30, 2005 and 2004, respectively. NOTE 6 RESERVES Member and employer contributions are allocated to various legally required reserve accounts based on actuarial determinations. Descriptions of the purpose for the reserve and designated accounts are provided below. Employee reserves represent the balance of member contributions. Additions include member contributions and interest earnings. Deductions include refunds of member contributions and transfers to retiree reserves. Employer reserves represent the balance of employer contributions for future retirement payments to current active members. Additions include contributions from the employer and interest earnings. Deductions include transfers to retiree reserves, lump sum death benefits, and payments under California Government Code Sections 31725.5 and 31725.6 related to alternative employment for members otherwise entitled to disability retirement benefits. Retiree reserves represent the balance of transfers from employee reserves, employer reserves, and interest earnings, less payments to retired members. Retiree death benefit reserves represent the balance of funds for lump sum death benefits for retirees. Additions include interest earnings and, if necessary, employer contributions. Deductions include payments to beneficiaries of retired members who are deceased. Retiree heath care benefit designations include transfers made by the System from unallocated earnings in prior years to provide funding for a non-vested health and dental insurance premium offset for retirees. Funding of and payments for the retiree health care premium offsets are made in accordance with section 401(h) of the Internal Revenue Code. Effective July 1, 2004, funding for health care premium offsets for retirees has been provided by those employers who have elected to continue the payments for their retired members and have not been funded by the System. Contingency reserve was created to serve as a reserve against deficiencies in future earnings and unexpected expenses. Smoothed actuarial value of assets. Investment gains and losses for the year are recognized (smoothed) over a five-year period. As of June 30, 2007 and 2006, total allocated reserves were $5,406,461 and $4,848,953, respectively. Financial Section 47

Notes to the Basic Financial Statements (Continued) (Amounts Expressed in Thousands) Market stabilization reserve represents the difference between the smoothed actuarial value of assets and the net assets available for benefits at fair value. A summary of the various reserve accounts, which comprise net assets available for pension benefits at June 30, 2007 and 2006 (under the five-year smoothed market asset valuation method for actuarial valuation purposes), is as follows: NET ASSETS AVAILABLE FOR BENEFITS AT FAIR VALUE As of June 30 2007 2006 Employee reserves $ 595,078 $ 573,497 Employer reserves 2,123,725 1,974,407 Retiree reserves 2,580,318 2,286,217 Retiree death benefit reserves 14,128 13,264 Retiree health care benefits designations 1,567 1,568 Contingency reserve 91,645 - Total allocated reserves and designations 5,406,461 4,848,953 Unallocated earnings - - Smoothed actuarial value of assets 5,406,461 4,848,953 Market stabilization reserve 569,401 241,976 Net assets available for benefits, at fair value $ 5,975,862 $ 5,090,929 NOTE 7 - PLAN TERMINATION California Government Code Section 31483 allows the governing body of the County or Special District, through the adoption of an ordinance or resolution, to terminate the applicability of the plan to employees of the County, Superior Court, or Special District whose services commence after a given future date. NOTE 8 MORTGAGES PAYABLE The System has real estate investments secured by long-term mortgage obligations. Activities related to such mortgages were as follows for the years ended June 30: 2007 2006 Beginning Balance $ 153,706 $ 112,649 Additions 55,120 73,453 Deductions (9,676) (32,396) Ending Balance $ 199,150 $ 153,706 Financial Section 48

Notes to the Basic Financial Statements (Continued) (Amounts Expressed in Thousands) Future debt service requirements for outstanding mortgages are as follows: Year Ending June 30: Interest Principal Total 2008 $ 11,556 $ 293 $ 11,849 2009 10,242 57,140 67,382 2010 7,460 14,595 22,055 2011 4,587 85,878 90,465 2012 2,246 738 2,984 2013-2017 9,076 14,802 23,878 2018-2022 6,347 4,587 10,934 2023-2027 4,932 6,002 10,934 2028-2032 3,080 7,854 10,934 2033-2036 757 7,261 8,018 Total $ 60,283 $ 199,150 $ 259,433 NOTE 9 lease obligations SCERS has commitments under operating lease agreements for office facilities and equipment. Minimum future rental payments as of June 30, 2007 were as follows: Year Ending June 30: 2008 $ 586 2009 589 2010 599 2011 298 Total $ 2,072 Rental costs during the year ended June 30, 2007 and 2006 were $647 and $612, respectively. NOTE 10 - SUBSEQUENT EVENTS The recent events regarding sub-prime residential mortgage-backed securities and the real estate markets have not materially affected the fair value of investments as of the date of the independent auditor s report. SCERS real estate investments are primarily comprised of commercial real estate and SCERS asset-backed securities are invested in the higher tranches which have lower risk exposure and almost no exposure to sub-prime related mortgages or mortgage-backed securities. Financial Section 49

R e q u i r e d S u p p l e m e n t a r y I n f o r m a t i o n Schedule I - Schedule of funding progress (Amounts expressed in thousands): A six-year schedule of the funding progress of the System is presented herewith as required supplementary information. This information is intended to help users assess the System s funding status on a going basis, assess progress made in accumulating assets to pay benefits when due, and make comparisons with other public employee retirement systems. Unfunded/ (Over funded) Actuarial Actuarial Actuarial Accrued Unfunded/ Annual AAL as a Valuation Value of Liability (AAL) (Over funded) Funded Covered Percentage of Date Assets Entry Age AAL Ratio Payroll Covered Payroll June 30 (a) (b) (b-a) (a/b) (c) ((b-a)/c) 2002 $3,839,081 $3,586,250 $(252,831) 107.1% $695,259 (36.4) 2003 3,864,400 4,108,294 243,894 94.1 733,296 33.3 2004 4,379,514 4,694,009 314,495 93.3 714,069 44.0 2005 4,530,583 4,860,882 330,299 93.2 722,015 45.7 2006 4,848,953 5,214,915 365,962 93.0 782,572 46.8 2007 5,406,461 5,788,336 381,875 93.4 832,484 45.9 Effective June 29, 2003, the Sacramento County Board of Supervisors adopted an enhanced benefit formula for Miscellaneous and Safety members. The County and certain Member Districts adopted these improvements for both past and prospective service, while the remaining Member Districts adopted these improvements for future service only. The adoption of enhanced benefits significantly increased the actuarial accrued liability as of June 30, 2003 and significantly increased employer contributions for the year ended June 30, 2004 and subsequent years. On July 1, 2004, the County issued $420,000 of Pension Obligation Bonds (POB). On October 20, 2004, Sacramento Metropolitan Fire District (SMFD) issued Pension Obligation Bonds. SCERS received proceeds of $10,538 from the SMFD POB s of which $874 was attributable to SMFD s active SCERS members. The receivable contributions from the County POB and the SMFD POB for its active members were included in the value of assets for the actuarial valuation date as of June 30, 2004. Schedule II - Schedule of employer contributions (Amounts expressed in thousands): Year Annual Ended Required Percentage June 30 Contribution Contributed 2002 $44,547 100.0% 2003 52,841 100.0 2004 119,114 100.0 2005 529,618* 100.0 2006 154,052 86.1** 2007 156,805 100.0 * Includes proceeds from Pension Obligation Bonds **Caused by the phase-in of the employer rates adopted by the Board in the June 30, 2004 actuarial valuation. % Financial Section 50

Required Supplementary Information (Continued) Schedule III Significant actuarial assumptions: The following significant actuarial assumptions underlying the required supplementary schedules were utilized as part of the actuarial valuation dated June 30, 2007: Actuarial cost method: Amortization method: Remaining amortization period: Asset valuation method: Entry age normal cost method Level percent of payroll for total unfunded liability 30-year closed amortization period with 26 years remaining as of June 30, 2007 5-year smoothed fair value* *The market value of assets plus or minus unrecognized returns in each of the last five years. Unrecognized return is equal to the difference between actual and expected returns on a market value basis and is recognized over a five-year period. The actuarial value is further adjusted, if necessary, to be within 20% of the market value. Actuarial assumptions: Investment rate of return: 7.875% Inflation rate: 3.50% Real across-the-board salary increase: 0.25% Miscellaneous projected salary increases**: 5.14% to 11.55% Safety projected salary increases**: 3.75% to 9.76% **Includes inflation at 3.50% plus real across-the-board salary increase of 0.25% plus merit and longevity increases. Assumed postretirement benefit increase: Miscellaneous Tier 1 3.40% Miscellaneous Tier 2 0.00% Miscellaneous Tier 3 2.00% Safety Tier 1 3.40% Safety Tier 2 2.00% Financial Section 51

O t h e r S u p p l e m e n t a l I n f o r m a t i o n For the Years Ended June 30 (Amounts Expressed in Thousands) Schedule I - Schedule of administrative and other expenses: Type of expense: 2007 2006 Salaries and benefits $3,352 $2,718 Professional fees 629 808 Equipment purchases and maintenance 85 70 Rent and lease expense 648 612 Depreciation expense 5 3 Other administrative expenses 1,099 850 Total administrative and other expenses $5,818 $5,061 Schedule II - Schedule of investment fees and expenses: Type of investment expense: 2007 2006 Domestic equity managers $3,959 $4,056 International equity managers 7,151 5,859 Bond managers 1,917 1,838 Hedge fund managers 2,742 2,633 Real estate managers 12,179 13,353 Strategic cash overlay managers 210 128 Custodian fees 370 343 Investment consulting fees 200 244 Other professional fees 263 293 Total investment fees and expenses $28,991 $28,747 Schedule III - Schedule of payments to consultants: Type of Service: 2007 2006 Legal services $815 $736 Actuarial services 50 257 Medical consulting services 139 156 Audit and consulting services 43 45 Total payments to consultants $1,047 $1,194 Financial Section 52

S tat e m e n t s of Changes in A s s e t s and Liabilities A G E N C Y F U N D As of June 30 (Amounts Expressed in Thousands) Assets 2007 2006 Beginning Balance $ 9 $ 10 Additions 26,849 25,530 Deductions (26,815) (25,531) Ending Balance $ 43 $ 9 Liabilities Beginning Balance $ 9 $ 10 Additions 26,849 25,530 Deductions (26,815) (25,531) Ending Balance $ 43 $ 9 Financial Section 53

I n v e s t m e n t S e c t i on

C h i e f I n v e s t m e n t O f f i c e r s R e p o r t Executive Staff Richard Stensrud Chief Executive Officer Jeffrey W. States Chief Investment Officer James G. Line General Counsel Kathryn T. Regalia Chief Operations Officer John W. Gobel Sr. Chief Benefits Officer November 30, 2007 Dear Members of the Board, Introduction SCERS finished the 2007 fiscal year with a gross investment return of 18.0% and a return net of investment management fees of 17.7%. This is the fourth consecutive fiscal year of double digit investment results. The good performance results are due to the strong performance of SCERS domestic equity and international equity investments. International equity had a return of 31.4%, net of fees for one year and domestic equity investments returned 19.3%, net of fees. These returns reflect the continued moderate growth of the U.S. and global economies in spite of record high oil prices and a slowdown in U.S. home construction. The fiscal year return, net of manager fees, is 0.2% above SCERS policy weighted benchmark return of 17.5%. On a peer comparison, SCERS performance ranks in the 52 nd percentile of the Russell/Mellon Trust Universe for public funds of a billion dollars or more for the twelve-month period. Over the trailing five- year period, SCERS annualized investment return is 13.4%, gross of manager fees and exceeds the actuarial return objective of 7.75%. Mercer Investment Consulting, Inc. (Mercer) prepares the investment returns using information it receives from SCERS custodian bank and investment managers. General Information SCERS uses external investment managers chosen by the Board to invest the System s assets. As of June 30, 2007, there were twenty one separate account portfolios. In addition, SCERS has investments in a commingled equity emerging markets growth fund, two equity long/short commingled hedge fund-of-funds, and five real estate funds. The managers, the emerging markets fund, and the commingled funds are identified on the following page. The Board uses the services of Mercer as a general investment consultant to assist in developing the investment policy, prepare asset/liability studies, provide advice on the asset allocation, conduct investment manager searches, and help monitor investment manager performance. SCERS primary legal services are provided by in-house General Counsel and were supplemented by contract legal counsel for real estate investments. Investment Section 56

Chief Investment Officer s Report (Continued) In July 2006, SCERS completed the process of selecting a new domestic equity small cap growth manager to replace one terminated in the first quarter of 2006. As SCERS total assets have grown, a decision was made to divide the assets invested in the domestic equity large cap growth style to diversify the investment management process and reduce investment manager risk. In September, a second domestic equity large cap growth manager was selected and the portfolio was funded at the beginning of October. Progress continues to be made in the implementation of the real estate investment strategy adopted in 2005. In September 2006, commitments of $25 million each were made to three new value-added real estate funds. SCERS real estate portfolio strategy calls for twenty percent (20%) of the fifteen percent (15%) real asset allocation to be invested in value-added funds. Additional commitments will be made over the next twelve to twenty-four months to create a portfolio of value-added fund investments that will provide diversification by property type, geographic location and vintage year. During the fiscal year, the Board and staff conducted an assessment of the investment program as part of the systematic review set out in the Investment Policy. The assessment began with a comparison of SCERS investment performance and asset allocation to other public funds to identify differences in investment strategies used by others that also appeared to result in better risk adjusted investment performance. Upon completion of the comparison, an Asset and Liability Modeling Study was carried out by Mercer. The study analyzed various asset allocation alternatives. The addition of new asset classes including private equity, commodities and several other investment alternatives was considered. In July 2007, SCERS Board adopted a new strategic asset allocation which reduced the asset allocation to domestic equity by five percent and the allocation to fixed income by five percent, and added new five percent asset class allocations to private equity and an opportunities portfolio. During the fiscal year, several educational sessions were provided by SCERS staff, SCERS investment consultant and various investment managers to assist the Board in making decisions about including new asset classes and investment strategies in the investment program. The education sessions included the topics of commodities investing, private equity, portable alpha investment strategies and domestic equity portfolio extension strategies commonly referred to as 130/30. SCERS custodial bank is State Street California, Inc. State Street California provides securities lending services to SCERS and, through State Street Global Markets, administers a commission recapture program. In fiscal year 2007, SCERS earned net income of $1,968,000 from securities lending and received recapture income of $185,000. SCERS does not use directed brokerage or softdollar commissions to purchase any services. SCERS Investment Objectives SCERS investment objectives are set forth in the Board s Investment Policy and Objectives. SCERS investment objectives are: 1. Provide for Present and Future Benefit Payments - The overall objective of SCERS is to invest pension assets solely in the interest of providing benefits to the participants and their beneficiaries, while attempting to minimize the employer contributions and defraying the administrative costs. The investment of contributions and other fund assets in accordance with the investment policy described herein will accomplish this and maintain adequate funding of SCERS liabilities over time. The goal of the Board is to design an investment portfolio that will achieve and exceed the annualized actuarial assumed rate of 7.75% over a market cycle. The Board strives to achieve this Investment Section 57

Chief Investment Officer s Report (Continued) 2. 3. 4. 5. level of return with a high level of certainty and with an acceptable level of risk. Make Prudent Investments - With care, skill, prudence and diligence the Board will strive to produce an investment return based on levels of liquidity and investment risk that are prudent and reasonable under present circumstances. Such circumstances may change over time. Diversify the Assets - The Board will diversify the investments of the Fund to maximize the investment return with acceptable investment risk. Create Reasonable Pension Investments Relative to Other Pension Funds - The pension investment program must operate in compliance with all applicable State and Federal laws and regulations concerning the investment of pension assets. SCERS judges its selection of investment vehicles and policies against other private and public pension funds, with special emphasis on comparisons with public funds. Establish Policy and Objective Review Process - Annually, SCERS will conduct a formal review of its Investment Policy and Objectives and will develop an updated financial projection at least every five years. Summary of Proxy Voting Guidelines and Procedures As a fiduciary, the Board has an obligation to manage the retirement system s assets in the best interest of the plan participants. The Board has established a Proxy Voting & Corporate Governance Policy. This policy provides guidance to the Chief Investment Officer for voting proxies and acting on corporate action issues, such as mergers and acquisitions. For the fiscal year ended June 30, 2007, all proxies that were received were voted through an electronic voting platform provided by Institutional Shareholder Services. The Chief Investment Officer, in accordance with the Board s policy, votes proxies with the assistance of research and analysis provided by Institutional Shareholder Services. Summary of Asset Allocation The Board develops the strategic asset allocation with the assistance of Mercer Investment Consulting, Inc. The intent of the asset allocation policy is to ensure that investments are diversified in a manner that achieves the desired rate of investment return with an acceptable investment risk. The actual and policy allocation for each asset class is shown in the pie chart in the materials that follow. The capital market assumptions adopted along with the asset allocation give SCERS an expected 8.0% annualized total rate of return over the next ten years with a standard deviation of returns of 11.6%. SCERS utilizes active investment management to achieve the target earnings rate. The asset allocation is broadly diversified between asset classes as well as within each class in a manner that ensures consistent long-term performance in line with the policy objectives. Summary of Investment Results SCERS monitors capital market investment returns through reference to recognized and easily obtainable market indices which are used as asset class benchmarks. The benchmark index and index performance by asset class for one, three and five years is shown on page 63 of this report. The asset class benchmark returns are weighted by the asset allocation to provide a policy-weighted return based on SCERS asset allocation model. SCERS total investment return for the fiscal year ended June 30, 2007, net of manager fees, was 17.7%. SCERS policy-weighted benchmark return for the fiscal year was 17.5%. SCERS also compares its performance against the performance of other public funds utilizing a series of universe comparisons provided by Mercer. For the fiscal year, the median public fund in the Mellon Analytical Solutions Trust Universe ( MASTU ) of thirty-nine (39) Investment Section 58

Chief Investment Officer s Report (Continued) public funds with assets of greater than one billion dollars had a return of 18.0%. SCERS ranked at the 52 nd percentile. U.S. Domestic equity is SCERS largest investment asset class. For the fiscal year, SCERS total domestic equity return was 19.3%, net of fees. The return was below the benchmark Russell 3000 index return by 0.8%. In the MASTU U.S. Equity Billion Dollar Segment SCERS return ranks in the 67 th percentile for the one-year period. For the three-year period, SCERS domestic equity return is 11.6%, net of fees, compared to the benchmark Russell 3000 Index return of 12.4%. Underperformance in the U.S. equity investments relative to the benchmark was primarily due to the failure of SCERS small cap U.S. equity investment managers to add value. Domestic equity investments are divided into two sub-asset classes based on stock capitalization. Large cap domestic equity is 85% of the domestic equity allocation. The large cap domestic equity investments had a 20.4% return, net of fees, for one-year, which equaled the return of the Russell 1000 Index. The investment return for large cap equity for three years was 12.2%, 0.1% less than the Russell 1000 Index. The one-year return for small cap equity investments was 13.8%, net of fees. This return was 2.6% below the benchmark Russell 2000 Index return of 16.4%. For the three-year period, the small cap equity return was 8.6%, net of fees, 4.8% below the Russell 2000 Index return of 13.4%. International equity was SCERS best performing asset class for the fiscal year. The total international equity return was 31.4%, net of fees. This was 4.4% above the benchmark MSCI EAFE Net Dividend Index equity return of 27.0%. Performance for three years of 26.1% was 3.9% better than the benchmark return of 22.2%. In the MASTU Non-U.S. Equity Billion Dollar Segment, SCERS ranked at the 30th percentile for one year and at the 24th percentile for three years. SCERS international equity investments are in two categories, established markets and emerging markets based on country location. SCERS established market investments returned 26.8%, net of fees, 0.2% below the benchmark MSCI EAFE Net Dividend Index. Over the trailing three-year period the established market return was 22.4%, net of fees, compared to a MSCI EAFE Net Dividend Index return of 22.2%. The international emerging markets outperformed the established markets. The MSCI Emerging Markets Free Index return for the fiscal year was 45.5%. SCERS investment in the emerging markets growth fund outperformed the benchmark by 6.6% returning 52.1%, net of fees. For the three-year period, SCERS return of 41.2% net of fees exceeded the MSCI Emerging Markets Index return of 38.7%. After a period of steadily increasing short-term interest rates, the Federal Reserve held the Federal Funds rate steady at 5.5% for the fiscal year. While the short end of the Treasury yield curve remained steady, longer rates from five to thirty years fell, and credit spread for lower quality bonds (BB and below) narrowed to lower-than-normal levels producing stronger-than-expected returns for fixed income for the fiscal year. The U.S. core fixed income investments had a return of 6.3% compared to the return of the Lehman Aggregate Bond Index of 6.1%. Over the three-year period ended June 30, 2007, SCERS fixed income investments returned 4.3%, net of fees compared to the benchmark Lehman Aggregate Bond Index return of 4.0%. SCERS has one-third of the fixed income assets in a passive Lehman Aggregate indexed portfolio and two core plus portfolios. SCERS fixed income performance ranked at the 58th percentile for one year in the MASTU U.S. Fixed Income Billion Dollar segment. The real estate asset class had good double-digit returns, although they were below the return of the NCREIF Property Index. For one-year, the investment return was 15.4%. This was 2.8% below the NCREIF Property Index. Over three years, the real estate portfolio return was 19.3% compared to the Investment Section 59

Chief Investment Officer s Report (Continued) NCREIF Property Index return of 18.0%. The real estate assets class return for one year ranked at the 6th percentile for the MASTU Real Estate Billion Dollar Segment. The Equity Long/Short Hedge Fund-of-Funds investments implemented in 2004 provided portfolio diversification and downside protection for the U.S. equity investments. For one-year, the two hedge fund-of-funds investment portfolios had a return of 17.8%. The performance objective for the hedge fund-of-funds investments of the T-Bill plus five percent (5%) was 9.9%. Respectfully submitted, Jeffrey W. States Chief Investment Officer Investment Section 60

A s s e t A l l o c a t i o n SCERS' Asset Allocation as of June 30, 200 Real Estate 12.66% Cash 5.51% Large Cap Domestic Equity 31.20% Domestic Fixed Income 22.34% Small Cap Domestic Equity 5.82% Emerging Markets 3.80% International Equity 18.67% Target Asset Allocation Real Estate 15.00% Cash 0.00% Large Cap Domestic Equity 30.00% Domestic Fixed Income 25.00% Small Cap Domestic Equity 5.00% Emerging Markets 5.00% International Equity 15.00% Equity Long/Short Hedge Funds 5.00% The 2007 Actual Asset Allocation is based upon the Investment Summary adjusted to net out $199.2 million in leverage. Investment Section 61

I n v e s t m e n t P r o f e s s i o n a l s Investment Managers Equity - Domestic Alliance Bernstein Institutional Investments Bear Stearns Asset Management Dalton, Greiner, Hartman, Maher & Co., LLC Enhanced Investment Technologies, LLC Independence Investments, LLC LSV Asset Management M.A. Weatherbie & Co., Inc. OFI Institutional Asset Management Pzena Investment Management, LLC TCW Asset Management Equity - Long/Short Hedge Fund-of-Funds Grosvenor Capital Management, L.P. The Blackstone Group, L.P. Equity - International AXA Rosenberg Investment Management, LLC Capital Guardian Trust Company Capital International, Inc. INVESCO Global Asset Management (N.A.), Inc. LSV Asset Management Fixed Income Lehman Brothers Asset Management, LLC Bradford & Marzec Global Fixed Income Management Metropolitan West Asset Management Real Estate AEW Capital Management BlackRock Realty Advisors, Inc. Cornerstone Real Estate Advisers, LLC Heitman Capital Management Corporation Hines U.S. Office Value Added Fund II, LLC Principal Global Investors, LLC UBS Realty Investors, LLC Urdang Securities Management, Inc. Strategic Cash Overlay State Street Global Advisors Real Estate Legal Counsel Nossaman, Guthner, Knox & Elliot, LLP Investment Consultant Mercer Investment Consulting Proxy Advisor Institutional Shareholder Service Glass Lewis & Co. Investment Section 62

I n v e s t m e n t R e s u lt s For the Period Ended June 30, 2007 Annualized 1 Year 3 Years 5 Years Domestic Equity Total Domestic Equity 19.5% 11.8% 11.2% Mercer Equity Universe Median 19.9% 12.9% 12.3% Benchmark: Russell 3000 Index 20.1% 12.4% 11.5% International Equity Total International Equity 32.0% 26.7% 20.4% Mercer International Equity Universe Median 30.6% 24.7% 20.1% Benchmark: MSCI EAFE Index 27.0% 22.2% 17.7% Fixed Income Total Fixed Income 6.4% 4.5% 5.4% Mercer Fixed Income Universe Median 6.5% 4.6% 5.4% Benchmark: Lehman Brothers Aggregate 6.1% 4.0% 4.5% Equity Hedge Fund of Funds Total Hedge Funds 17.8% N/A N/A Real Estate Total Real Estate 15.4% 19.3% 16.4% Mercer Real Estate Universe Median 16.1% 20.7% 15.3% Benchmark: NCREIF Classic Property Index 17.2% 18.0% 14.4% Total Fund Scaramento Total Fund 18.0% 13.4% 12.0% Russell/Mellon Public Funds Billion $ Universe 18.0% 13.7% 12.4% Benchmark: Asset Allocation Weightings* 17.5% 13.6% 12.0% Notes: Returns were prepared by Mercer Investment Consulting, Inc., and shown on a gross of fee basis. Return calculations were prepared using a time-weighted rate of return. *The Benchmark consisted of 30% Russell 1000, 5% Russell 2000, 25% Lehman Brothers Aggregate Bond Index, 15% MSCI EAFE index, 5% MSCI Emerging Markets Free Index, 12% NCREIF Property Index, 3% NAREIT Index, and 5%T-Bill Plus 5%. From 9/1/04 to 1/31/06, the Benchmark consisted of 30% Russell 1000 Index, 5% Russell 2000 Index, 25% Lehman Brothers Aggregate Bond Index, 15% MSCI EAFE Index, 5% MSCI Emerging Markets Free Index, 15% NCREIF Property Index and 5% T-Bill plus 5%. From 1/1/00 to 8/31/04, the Benchmark consisted of 35% Russell 1000 Index, 5% Russell 2000 Index, 30% Lehman Aggregate Bond Index, 15% MSCI EAFE index, 5% MSCI Emerging Markets Free Index, and 10% NCREIF Property Index. Investment Section 63

S u m m a r y o f I n v e s t m e n t A s s e t s Domestic Equities As of June 30, 2007 Fair Value (Amounts Expressed in Thousands) Percentage of Total Cash & Investments Alliance Capital Russell 1000 Index $1,232,693 19.72% Dalton, Greiner - Active Small Cap Value 81,623 1.31 Independence - Growth 144,047 2.30 M.A. Weatherbie - Small Growth 89,678 1.43 LSV Asset Management - Value 112,041 1.79 Pzena Investment Management - Value 104,263 1.67 OFI Institutional Asset Management - Value 100,982 1.62 TCW Asset Management - Active Small Cap Value 81,515 1.30 BearStearns Asset Management - Small growth 64,553 1.03 InTech - Large Cap 135,930 2.17 International Total Domestic Equity 2,147,325 AXA Rosenberg - MSCI EAFE Small Cap 60,481 0.97 Capital Guardian Trust - MSCI EAFE 305,325 4.88 INVESCO - MSCI EAFE Core 275,409 4.41 LSV - MSCI EAFE Value 291,361 4.66 Capital International - Emerging Markets 336,042 5.38 Total International Equity 1,268,618 Hedge Fund of Funds Blackstone Equity Long/Short 153,461 2.45 Grosvenor 155,212 2.48 Total Hedge Fund of Funds 308,673 Total Equities 3,724,616 Domestic Fixed Income Lincoln Capital - Lehman Aggregate Index 466,051 7.46 Bradford & Marzec - Lehman Aggregate Core Plus 379,618 6.07 Metropolitan West Asset Management 422,576 6.76 International Total Domestic Fixed 1,268,245 Lincoln Capital - Lehman Aggregate Index 13,964 0.22 Bradford & Marzec - Lehman Aggregate Core Plus 79,055 1.26 Metropolitan West Asset Management 9,396 0.15 Total International Fixed 102,415 Total Fixed Income 1,370,660 Investment Section 64

Summary of Investment Assets (Continued) Real Estate Fair Value (Amounts Expressed in Thousands) Percentage of Total Cash & Investments BlackRock Realty Advisors- Separate Account 467,823 7.48 Cornerstone Realty Advisers - Separate Account 216,725 3.47 Cornerstone Patriot Fund 79,079 1.26 Granite Property Fund 69,439 1.11 Principal Global Investors 53,789 0.86 Urdang Securities Management 55,273 0.88 Allegis Value Trust 4,120 0.07 AEW Value Investors 2,853 0.05 Other Commingled Trusts 35 0.00 Total Real Estate 949,136 Future Overlay State Street Global Advisors 21,431 0.34 Total Future Overlay 21,431 Total Investments at Fair Value $6,065,843 Cash Cash (Unallocated) 169,406 2.71 Other Cash and Cash Equivalents 16,176 0.26 Total Cash and Investments 6,251,425 100.00% Other Assets Receivables 89,242 Other Assets 8,398 Securities Lending Collateral 864,165 Total Assets 7,213,230 Liabilities Accounts Payable 33,952 Investment Trades Payable 137,062 Mortgages Payable 199,150 Other Liabilities 3,039 Securities Lending Liability 864,165 Total Liabilities 1,237,368 Net Assets held in Trust for Pension Benefits $5,975,862 Note: Allocated assets include cash and cash equivalents and short-term investment with fiscal agents. Investment Section 65

S c h e d u l e o f M a n a g e r F e e s (Amounts Expressed in Thousands) Manager Domestic Equity Alliance Bernstein Institutional Investments $ 258 Bear Stearns Asset Management 203 Dalton, Greiner, Hartman, Maher & Co., LLC 418 Enhanced Investment Technologies, LLC 475 Independence Investments, LLC 200 LSV Asset Management 875 M.A. Weatherbie & Co., Inc. 715 OFI Institutional Asset Management 98 Pzena Investment Management, LLC 302 TCW Asset Management 415 Total Domestic Equity 3,959 International Equity AXA Rosenberg Investment Management, LLC 379 Capital Guardian Trust Company 1,841 Capital International, Inc. 1,632 INVESCO Global Asset Management (N.A.), Inc. 1,259 LSV Asset Management 2,040 Total International Equity 7,151 Hedge Fund of Funds Grosvenor Capital Management, L.P. 1,126 The Blackstone Group, L.P. 1,616 Total Hedge Fund of Funds 2,742 Fixed Income Lehman Brothers Asset Management, LLC 198 Bradford & Marzec Global Fixed Income Management 1,037 Metropolitan West Asset Management 682 Total Fixed Income 1,917 Investment Section 66

Schedule of Manager Fees (Continued) (Amounts Expressed in Thousands) Real Estate BlackRock Realty Advisors, Inc. 9,520 Cornerstone Real Estate Advisers, LLC 1,893 Hines U.S. Office Value Added Fund II, LLC 255 Principal Global Investors, LLC 181 Urdang Securities Management, Inc. 330 Total Real Estate 12,179 Strategic Cash Overlay State Street Global Advisors 210 Total Future Overlay 210 Other Professional Fees Glass, Lewis & Co., LLC 37 Institutional Shareholder Services 48 Investor Responsibility Support Services, Inc. 25 Mercer Investment Consulting 200 State Street Bank 370 The Segal Company 50 Zephyr Associates 15 Other Professional Services 88 Total Other Professional Fees 833 Total Investment Fees $ 28,991 Investment Section 67

T e n L a r g e s t S t o c k H o l d i n g s ( b y F a i r V a l u e ) As of June 30, 2007 Rank Shares Security Name Fair Value (in thousands) 1 571,963 Exxon Mobile Corp. $ 47,976 2 978,435 General Electric Company 37,454 3 601,821 Citigroup Inc. 30,867 4 1,013,360 Microsoft Corp. 29,864 5 655,179 AT&T Inc. 27,190 6 526,697 Bank of America Corp. 25,750 7 937,312 Pfizer, Inc. 23,967 8 510,640 Royal Dutch Shell 21,024 9 423,573 JPMorgan Chase & Company 20,522 10 240,985 Chevron Corp. 20,301 Total of Ten Largest Stock Holdings $284,916 T e n L a r g e s t B o n d H o l d i n g s ( b y F a i r V a l u e ) As of June 30, 2007 Rank Par Security Name Interest Rate Maturity Fair Value (in thousands) 1 29,807,000 United States Treasury Notes 4.88% 02/15/2012 $ 29,772 2 29,852,000 United States Treasury Notes 4.25% 11/15/2014 28,488 3 27,586,000 United States Treasury Notes 4.50% 03/31/2012 27,080 4 26,027,000 United States Treasury Notes 5.13% 05/15/2016 26,169 5 22,375,162 FNMA Pool 831811 6.00% 09/01/2036 22,148 6 19,912,000 FNMA TBA Aug 30 6.00% 12/01/2099 19,677 7 17,967,000 FNMA TBA Jul 30 6.00% 12/01/2099 17,769 8 16,210,000 United States Treasury Notes 4.75% 01/31/2012 16,090 9 15,921,000 United States Treasury Notes 4.63% 02/15/2017 15,420 10 14,990,000 United States Treasury Notes 4.88% 05/31/2009 14,986 Total of Ten Largest Bond Holdings $217,599 Investment Section 68

S c h e d u l e o f E q u i t y B r o k e r a g e F e e s Broker Name Commission Per Share Shares/ Par Value Total Commissions ABG Securities 0.0671 10,700 $ 718 ABG Securities AS (Stockholm) 0.0201 4,100 82 ABN Amro Asia Limited 0.0002 657,600 104 ABN Amro Bank NV Hong Kong 0.0049 400,700 1,956 ABN Amro Bank NV 0.0070 1,079,382 7,573 ABN Amro Bank NV Hong Kong Branch 0.0006 601,284 375 ABN Amro Securities (USA) Inc. 0.0060 15,000 90 Alpha Brokerage AE 0.0263 28,900 759 American Technology Research Inc 0.0500 19,700 985 Assent LLC 0.0060 27,900 167 Automated Trading Desk Financial Service 0.0112 115,933 1,302 Avian Securities 0.0400 113,300 4,532 Avondale Partners LLC 0.0426 35,009 1,490 B. Riley and Co. Inc 0.0400 1,200 48 Baird, Robert W., & Company Incorporated 0.0420 291,497 12,252 Banc/America Sec. LLC, Montgomery Division 0.0390 857,694 33,444 Banco Bilbao Vizcaya Argentari 0.0113 218,600 2,479 Banco Espirito Santo De Invest 0.0032 72,929 234 Banco Espirito Santo De Investiment 0.0187 43,620 815 Banco Espirito Santo Investimento Sucursa 0.0174 17,233 299 Bank AM Bellevue 0.0794 26,800 2,127 Bank Julius Baer and Company Ltd. 0.1538 460 71 Bayerische Hypo-Und Vereinsbank Munich 0.0106 1,187 13 Bear Stearns & Co., Inc. 0.0406 928,233 37,685 Bear Stearns Asia Ltd. 0.0012 618,500 748 Bear Stearns International Ltd. 0.0036 120,000 436 Bear Stearns Securities Corp. 0.0228 5,963,823 135,804 Bear Stearns Securities Corp. 0.0162 167,657 2,718 BMO Capital Markets Corp. 0.0400 34,163 1,367 BNP Parabas Securities Services 16.2510 10 163 BNY Brokerage 0.0400 14,500 580 BNY Brokerage Inc. 0.0499 79,270 3,960 BNY Brokerage. 0.0400 265,761 10,630 Broadcortcapital (Through ML) 0.0378 290,578 10,979 B-Trade Services LLC 0.0180 229,937 4,139 Buckingham Research Group 0.0437 62,720 2,738 C. L. Glazer & Company, Inc. 0.0400 1,700 68 Canaccordadams Inc. 0.0398 260,948 10,385 Cantor Fitz Eur 2 0.0027 2,385,330 6,431 Investment Section 69

Schedule of Equity Brokerage Fees (Continued) Broker Name Commission Per Share Shares/ Par Value Total Commissions Cantor Fitzgerald & Co 0.0362 234,198 8,481 Capital Institutional Services Inc., Equities 0.0210 1,078,700 22,705 Caris & Company Inc. 0.0500 11,900 595 Carnegie International Lnd 0.0666 23,500 1,565 Cazenove & Co. 0.0120 300,581 3,596 Cedel Bank 0.0030 10,667 32 CIBC World Markets Corp. 0.0400 207,947 8,309 CIBC World markets Inc. 0.0402 47,100 1,893 Citation Group 0.0335 599,545 20,067 Citibank Canada 0.0171 8,800 150 Citigroup Global Markets Asia Limited 0.0001 34,000 3 Citigroup Global Markets Australia Ptr. 0.0108 137,206 1,481 Citigroup Global Markets Inc. 0.0353 1,532,679 54,087 Citigroup Global Markets Inc. 0.0293 818,852 24,006 Citigroup Global Markets Limited 0.0078 2,062,200 16,030 Citigroup Global Markets UK Equity Ltd. 0.0056 61,700 345 CJS Securities 0.0500 44,300 2,215 Cochran, Caronia Securities LLC 0.0415 76,100 3,155 Cowen & Co., LLC 0.0400 28,788 1,152 Cowen & Company, LLC 0.0411 60,372 2,480 Cowen and Company, LLC 0.0400 54,416 2,177 Craig - Hallum 0.0400 54,072 2,163 Credit Agricole Indosuez 0.0231 13,150 304 Credit Agricole Indosuez Cheuvreux 0.0101 1,021,475 10,275 Credit Lyonnais Securities 0.0079 479,027 3,806 Credit Lyonnais Securities (USA) Inc. 0.0025 918,000 2,298 Credit Research & Trading, LLC 0.0400 8,600 344 Credit Suisse First Boston (Europe) Ltd 0.0266 234,604 6,252 Credit Suisse Securities (Europe) Ltd 0.0384 37,190 1,427 Credit Suisse Securities (USA) LLC 0.0098 6,765,159 66,463 CS First Boston (Hong Kong) Limited 0.0119 277,944 3,318 CSFB Australia Equities Ltd 0.0071 120,093 854 Daewoo Securities Co. Ltd., Seoul Korea 0.0105 48,074 504 DAIWA SBCM Europe 0.0252 67,499 1,698 DAIWA Securities America Inc 0.0033 1,013,983 3,316 Davenport & Co. of Virginia, Inc. 0.0312 85,825 2,679 Davidson DA & Co., Inc 0.0463 32,340 1,498 Davis, Mendel & Regenstein 0.0500 7,570 379 Davy (J & E) 0.0410 8,100 332 Investment Section 70

Schedule of Equity Brokerage Fees (Continued) Broker Name Commission Per Share Shares/ Par Value Total Commissions DBS Vickers Securities (Singapore) 0.0003 593,000 206 Den Danske Bank 0.0608 8,600 523 Deutsche Bank AG London 0.0156 737,219 11,474 Deutsche Bank Securities Inc. 0.0247 1,343,910 33,226 Deutsche Morgan Grenfell Inc 0.0006 436,711 247 Deutsche Securities Asia Limited 0.0022 998,600 2,236 Deutsche Securities Asia Ltd 1.2806 747 957 Dowling and Partners 0.0445 44,000 1,958 Dresdner Kleinworth Wasserstein Securities LLC 0.0173 242,275 4,199 E Trade Securities, Inc 0.0285 13,500 385 Edwards AG Sons, Inc 0.0398 52,769 2,098 Emp Research Partners 0.0400 18,425 737 Exane S.A. 0.0672 11,500 773 Ferris Baker Watts, Inc 0.0434 14,735 639 Fidentiis 0.0743 21,613 1,605 First Albany Capital, Inc 0.0400 13,200 528 First Clearing, LLC 0.0485 38,150 1,850 Fox Pitt Kelton, Inc 0.0397 137,654 5,469 Fox Pitt Kelton, Ltd 0.0621 55,495 3,445 Frank Russell SEC/Broadcort Capital Clearing 0.0400 6,200 248 Friedman Billings & Ramsey 0.0410 212,964 8,721 FSA Investment (CLS Through 443) 0.0400 22,100 884 Garp Stearns & Securities Co 0.0400 4,600 184 Gerson Lehrman Group Brokerage Service, LLC 0.0400 201,500 8,060 Global Equities 0.0124 3,992 50 Goldman Sachs & Co. 0.0301 4,837,864 145,690 Goldman Sachs Execution & Clearing 0.0230 2,002,644 45,989 Goldman Sachs International 0.0065 1,869,664 12,173 Goldsmith & Harris (Thru Bear Stearns) 0.0400 5,000 200 Goodbody Stockbrokers 0.0303 109,100 3,302 Green Street Advisors 0.0432 96,191 4,159 Guzman & Co 0.0220 345,202 7,609 Harris Nesbitt Corp 0.0463 27,565 1,278 Hibernia Southcoast Capital Inc 0.0407 30,400 1,237 Hongkong and Shanghai Banking Corp 0.0205 106,922 2,191 HSBC Bankplc 0.0397 52,200 2,074 ING Bank N V 0.0249 9,324 232 Ingalls Snyder 0.0400 1,100 44 Instinet 0.0246 2,082,055 51,253 Investment Section 71

Schedule of Equity Brokerage Fees (Continued) Broker Name Commission Per Share Shares/ Par Value Total Commissions Instinet France S.A. 0.0286 83,686 2,392 Instinet Pacific Limited 0.0357 25,250 902 Instinet U.K. Ltd 0.0030 2,144,223 6,373 Instinet,LLC 0.0400 5,100 204 Investec Securities 0.0722 1,700 123 Investment Technology Group Inc. 0.0185 3,415,549 63,192 Investment Technology Group Ltd 0.0030 2,566,773 7,796 ISI Groupequities 0.0400 34,699 1,388 ISI Groupinc 0.0374 82,025 3,066 ITG Australia Ltd. 0.0011 355,710 399 ITG Inc. 0.0200 930 19 ITG Securities (Hk) Ltd 0.0003 829,785 220 IXIS Securities 0.0040 367,068 1,454 J B Were And Son 0.0075 122,080 914 JP Morgan Securities Inc. 0.0290 572,224 16,619 JP Morgan Securities Limited 0.0679 17,992 1,222 Janney Montgomery, Scott Inc 0.0448 56,127 2,515 Jefferies & Company Inc 0.0284 1,418,658 40,228 JMP Securities 0.0435 52,792 2,297 JOH Berenberg Gossler & Co 0.0216 132,398 2,854 Jones & Associates Inc 0.0319 237,186 7,559 Jonestrading Institutional Services LLC 0.0354 94,739 3,355 JP Morgansecurities Limited 0.0384 282,278 10,849 JP Morgan Sec (Far East) Ltd Seoul 0.0776 23,465 1,820 JP Morgan Securities (Asia Pacific) Ltd 0.0015 1,293,474 1,937 KAS-Associatie N.V. 0.0072 1,780 13 KBC Financial Products UK Ltd 0.0147 182,345 2,676 Keefe Bruyette & Woods Inc 0.0427 240,467 10,276 Kepler Equities Paris 0.0498 2,000 100 Kevin Dann Partners, Llc 0.0500 6,200 310 Keybanc Capital Markets Inc 0.0500 14,000 700 King, CL, & Associates, Inc 0.0491 93,535 4,594 Kleinwortbenson Securities Limited 0.0253 550,008 13,929 Knight Securities 0.0328 278,957 9,146 Leerink Swann and Company 0.0400 13,700 548 Legent Clearing Llc 0.0431 5,500 237 Lehman Brothers Inc 0.0159 2,732,311 43,541 Lehman Brothers International (Europe) 0.0094 2,616,436 24,610 Lehman Brothers Intl (Europe) Seoul Br 0.1381 6,820 942 Investment Section 72

Schedule of Equity Brokerage Fees (Continued) Broker Name Commission Per Share Shares/ Par Value Total Commissions Lehman Brothers Secs (Asia) 0.0106 776,015 8,214 Lek Securities 0.0265 23,950 634 Lek Securities Corp 0.0200 3,900 78 Liquidneteurope Limited 0.0091 146,500 1,327 Liquidnetinc 0.0243 2,449,064 59,559 Longbow Securities LLC 0.0435 45,750 1,990 Lynch Jones and Ryan Inc 0.0164 193,411 3,163 M M Warburg 0.1223 8,157 998 Macquarieequities Limited (Sydney) 0.0028 824,988 2,287 Macquarieequities New Zealand 0.0004 34,571 15 Macquariesecurities Limited 0.0080 306,316 2,463 Macquariesecurities Ltd Seoul 0.0312 80,064 2,499 Mainfirstbank DE 0.4578 770 353 Mcdonald and Company Securities, Inc. 0.0390 210,513 8,217 Merril Lynch & Co., Inc 0.0404 18,900 763 Merrill Lynch International 0.0089 1,771,811 15,733 Merrill Lynch Peirce Fenner And S 0.0140 1,895,270 26,626 Merrill Lynch Professional Clearing Corp 0.0382 45,119 1,721 Merrill Lynch,Pierce,Fenner & Smith, Inc 0.0234 16,379,331 382,847 Merriman Curhan Ford & Co 0.0357 50,040 1,787 Midwest Research Securities 0.0404 52,549 2,125 Miletus Trading LLC 0.0150 37,600 564 Mizuho Securities USA Inc 0.1140 50,544 5,763 MJSK Inc 0.0400 4,400 176 MKM Partners 0.0400 390 16 Moors & Cabot Inc 0.0400 30,900 1,236 Morgan Keegan & Co Inc 0.0414 17,700 732 Morgan Stanley and Co International 0.3856 2,280 879 Morgan Stanley and Co. International 0.0157 1,778,422 27,938 Morgan Stanley Co. Incorporated 0.0118 3,702,047 43,624 Morgan Stanley Securities Limited 0.0039 97,784 381 National Financial Services Corp. 0.0500 60,350 3,018 NBC Clearing Services Incorporated 0.0392 53,300 2,092 NBCN Clearing Inc. 0.0300 32,300 969 Needham & Company 0.0405 261,157 10,577 Neonet Securities AB 0.0025 201,013 503 Nesbitt Burns 0.0168 297,169 4,980 Nomura International (Hong Kong) Ltd 0.0001 489,400 52 Nomura International PLC 0.0050 674,134 3,391 Investment Section 73

Schedule of Equity Brokerage Fees (Continued) Broker Name Commission Per Share Shares/ Par Value Total Commissions Nomura Intl (Hk) Ltd, Seoul BR 0.0062 9,470 59 Nomura Securities Co Ltd 0.0036 16,770 60 Nomura Securities International Inc 0.0160 355,753 5,696 Numis Securities Limited 0.0079 59,800 475 Nyfix Transaction Services #2 0.0200 77,275 1,546 Oppenheim, Sal.,Jr Und Cie Koeln 0.0441 28,884 1,272 Oppenheimer & Co. Inc. 0.0438 75,888 3,326 Pacific American Securities, LLC 0.0300 71,832 2,155 Pacific Crest Securities 0.0397 67,000 2,663 PCS Securities Inc 0.0400 29,400 1,176 Peel Hunt & Company Limited 0.0001 33,078 4 Pershing 0.0902 19,800 1,786 Pershing DLJ S L 0.0201 2,058,447 41,293 Pershing LLC 0.0492 28,260 1,390 Pershing Securities Limited 0.0315 392,186 12,344 Pipeline Trading Systems LLC 0.0217 39,623 861 Piper Jaffray 0.0400 167,285 6,683 Pritchardcapital Partners LLC 0.0500 29,800 1,490 Prudential Equity Group 0.0410 350,040 14,347 R W Pressprich & Co Inc 0.0402 17,300 696 Rabobank Netherland 0.0894 2,600 232 Raymond James and Associates Inc 0.0438 164,816 7,223 RBC Capital Markets 0.0404 68,806 2,778 RBC Dominion Securities 0.0402 25,300 1,017 Redburn Partners LLP 0.0185 51,600 954 Rosenblatt Securities Inc 0.0206 233,200 4,810 Rosenblatt Securities LLC 0.0212 152,300 3,230 Ryan Beck& Co 0.0433 41,905 1,813 S.G. Cowen & Co., LLC 0.0400 1,373 55 Salomon Smith Barney Korea Ltd 0.1226 1,550 190 Sandler Oneill & Part LP 0.0403 104,310 4,206 Sanford C. Bernstein Ltd 0.0392 49,173 1,925 Sanford C. Bernstein Co LLC 0.0409 286,933 11,743 Scotia Capital (USA) Inc 0.0337 92,900 3,126 Scott & Stringfellow, Inc 0.0431 143,645 6,187 Shenyin Wanguo Securities (HK Ltd) 0.0002 108,000 22 Sidoti & Company LLC 0.0419 357,861 14,977 Simmons & Company International 0.0476 32,472 1,545 Societe Generale London Branch 0.0823 14,361 1,182 Investment Section 74

Schedule of Equity Brokerage Fees (Continued) Broker Name Commission Per Share Shares/ Par Value Total Commissions Soleil Securities 0.0439 74,758 3,282 Stanford Group Company 0.0500 12,000 600 Stanley (Charles) & Co Limited 0.0021 1,288,055 2,705 State Street Bank & Trust Co 0.0461 86,800 3,999 State Street Bank & Trust Co London 0.0001 2,377,382 178 State Street Brokerage Services 0.0279 5,716,839 159,567 Stephens, Inc. 0.0425 121,086 5,145 Sterne, Agee & Leach, Inc. 0.0427 26,105 1,115 Stifel Nicolaus & Co., Inc 0.0461 275,937 12,730 Suntrust Capital Markets, Inc. 0.0425 107,355 4,562 Svenska Handelsbanken London Branch 0.0282 1,000 28 The Benchmark Company, LLC 0.0236 23,120 545 Themis Trading LLC 0.0400 435,030 17,401 Thinkequity Partners LLC 0.0365 156,675 5,718 Thomas Weisel Partners LLC 0.0375 126,364 4,732 Toronto Dominion Securities 0.0215 363,961 7,812 UBS AG 0.0218 1,041,805 22,665 UBS AG London 0.0030 1,067,131 3,156 UBS Securities Asia Ltd 0.0051 2,626,245 13,358 UBS Securities Canada Inc 0.0418 8,600 359 UBS Securities LLC 0.0328 1,158,607 38,036 UBS Warburg (Hong Kong) Limited 0.0002 233,500 36 UOB Kay Hian (Hong Kong) Ltd. 0.0002 218,700 39 UOB Kay Hian Private limited 0.0004 479,000 198 Vandham Securities Corp 0.0500 10,300 515 Veritas Securities 0.0250 35,400 885 Wachovia Securities, LLC 0.0500 79,766 3,988 Wachoviacapital Markets, LLC 0.0440 303,286 13,333 Warburg Dillion Read (Asia) Ltd 0.0109 282,652 3,095 Warburg Dillon Read Securities Ltd 0.0061 16,676 102 Wave Securities 0.0151 266,423 4,011 Wedbush Morgan Securities Inc 0.0462 33,985 1,569 Weeden & Co. 0.0248 822,434 20,407 William Blair & Company, L.L.C 0.0400 163,775 6,549 William Smith Securities 0.0500 5,100 255 Woori Investment Securities 0.0093 71,764 667 WR Hambrecht & Co. 0.0400 10,045 402 Yamner & Co. Inc. (Cls Through 443) 0.0100 26,625 266 Total 0.0183 131,581,935 $ 2,403,467 Investment Section 75

A c t u a r i a l S e c t i on

A c t u a r i a l C e r t i f i c a t i o n L e t t e r THE SEGAL COMPANY 120 Montgomery Street, Suite 500 San Francisco, CA 94104-4308 T 415.263.8200 F 415.263.8290 www.segalco.com november 15, 2007 Board of retirement sacramento County employees retirement system 980 9 th street, suite 1800 sacramento, CA 95814-2738 Re: Actuarial Valuation for the Sacramento County Employees Retirement System Dear members of the Board: the segal Company prepared the June 30, 2007 actuarial valuation of the sacramento County employees retirement system. We certify that the valuation was performed in accordance with generally accepted actuarial principles and practices. in particular, the assumptions and methods used for funding purposes meet the parameters of the Governmental Accounting standards Board statement no. 25. As part of the June 30, 2007 actuarial valuation, the segal Company (segal) conducted an examination of all participant data for reasonableness. summaries of the employee data used in performing the actuarial valuations over the past several years are provided in our valuation report. We did not audit the system s financial statements. For actuarial valuation purposes, plan assets are valued at Actuarial value. under this method, the assets used to determine employer contribution rates take into account market value by recognizing the differences between the total return at market value and the expected investment return over a five-year period. the funding objective of the plan is to establish rates which, over time, will remain level as a percentage of payroll unless plan benefit provisions are changed. Actuarial funding is based on the entry Age normal Cost method. under this method, the employer contribution rate provides for current cost (normal cost) plus a level percentage of payroll to amortize any unfunded actuarial accrued liability (uaal). Actuarial gains and losses are incorporated into the uaal and are amortized over the same period. the uaal is amortized as a level percentage of payroll over a 26-year period. the progress being made towards meeting the funding objective through June 30, 2007 is illustrated in the schedule of Funding progress. Benefits, Compensation and HR Consulting ATLANTA BOSTON CALGARY CHICAGO CLEVELAND DENVER HARTFORD HOUSTON LOS ANGELES MINNEAPOLIS NEW ORLEANS NEW YORK PHILADELPHIA PHOENIX PRINCETON RALEIGH SAN FRANCISCO TORONTO WASHINGTON, DC Multinational Group of Actuaries and Consultants BARCELONA BRUSSELS DUBLIN GENEVA HAMBURG JOHANNESBURG LONDON MELBOURNE MEXICO CITY OSLO PARIS Actuarial Section 78

Actuarial Certification Letter (Continued) Board of Retirement Sacramento County Employees Retirement System November 15, 2007 Page 2 A listing of supporting schedules segal prepared for inclusion in the actuarial, statistical, and financial sections of the system s CAFr is provided below: 1. retirees and beneficiaries added to and removed from retiree payroll; 2. solvency test; and 3. schedule of retiree members by type of benefit. the valuation assumptions included in the Actuarial section were adopted by the retirement Board based on the June 30, 2007 experience Analysis or in conjunction with the June 30, 2007 actuarial valuation. it is our opinion that the assumptions used in the June 30, 2007 valuation produce results, which, in the aggregate, reflect the future experience of the plan. Actuarial valuations are performed on an annual basis. An experience analysis is performed every three years. the next experience analysis is due to be performed as of June 30, 2010. in the June 30, 2007 valuation, the ratio of the valuation assets to actuarial accrued liabilities increased from 93.0% to 93.4%. the employer s rate has decreased from 19.63% of payroll to 19.14% of payroll, while the employee s rate has increased from 4.77% of payroll to 4.85% of payroll. sincerely, paul Angelo, FsA, ea, maaa, FCA senior vice president and Actuary Andy Yeung, AsA, ea, maaa vice president and Associate Actuary mym/hy enclosures Actuarial Section 79

S u m m a r y o f A s s u m p t i o n s & M e t h o d s The following assumptions and methods have been adopted by the Board for the June 30, 2007 valuation. Assumption: Valuation Interest Rate and Rate of Return on Investment: Inflation Assumption: 3.50% Cost-of-Living Adjustment: Employee Contribution Crediting Rate: 7.875% net of administration and investment expenses 3.40% for Miscellaneous and Safety Tier 1 Members 0.00% for Miscellaneous Tier 2 Members 2.00% for Miscellaneous Tier 3 and Safety Tier 2 Members 5-year Treasury rate, assuming sufficient net investment earnings Post-Retirement Mortality: a) Service For Miscellaneous and Safety Members - 1994 Group Annuity Mortality Table set back one year b) Disability For Miscellaneous Members - 1981 Miscellaneous Disability Mortality Table set back three years For Safety Members - 1994 Group Annuity Mortality Table set back one year c) Employee Contribution Rate For Miscellaneous Members - 1994 Group Annuity Mortality Table set back one year weighted 40% male and 60% female For Safety Members - 1994 Group Annuity Mortality Table set back one year weighted 75% male and 25% female Pre-Retirement Mortality: Withdrawal Rates: Disability Rates: Service Retirement Rates: Salary Increases: Actuarial Value of Assets: Based upon the 6/30/2007 Experience Analysis Based upon the 6/30/2007 Experience Analysis Based upon the 6/30/2007 Experience Analysis Based upon the 6/30/2007 Experience Analysis Merit and longevity increases are based upon the 6/30/2007 Experience Analysis plus 3.50% inflation and across the board salary increases of 0.25% per year The market value of assets less unrecognized returns in each of the last five years. Unrecognized return is equal to the difference between actual and expected returns on a market value basis and is recognized over a five-year period. The actuarial value is further adjusted, if necessary, to be within 20% of the market value. Actuarial Section 80

Summary of Assumptions & Methods (Continued) Valuation Value of Assets: Actuarial value of assets reduced by the value of nonvaluation reserves and designations. Actuarial Cost Method: Percentage of Members Married at Retirement: Entry Age Normal Actuarial Cost Method. Entry Age is the age at the members hire date. Actuarial Accrued Liability is calculated on an individual basis and is based on costs allocated as a level percentage of compensation. The Normal Cost is calculated on an aggregate basis by taking the Present Value of Future Normal Costs divided by the Present Value of Future Salaries to obtain a normal cost rate. This normal cost rate is then multiplied by the total current salaries. The total Unfunded Actuarial Accrued Liability is amortized over a declining 26-year period. 80% for male members and 55% for female members Retirement Age for Deferred Vested Members: Miscellaneous Members - 59 Safety Members - 54 Percentage Eligible for Reciprocal Benefits: Miscellaneous Members - 55% Safety Members - 65% Actuarial Section 81

S u m m a r y o f P l a n P r o v i s i o n s Briefly summarized below are the major provisions of the County Employees Retirement Law of 1937, as amended through June 30, 2007, that are applicable to the Sacramento County Employees Retirement System. Membership Miscellaneous employees entering before September 27, 1981 are Tier 1 members. Miscellaneous employees entering after September 27, 1981 and June 27, 1993 are members of Tier 2 or Tier 3, respectively. Safety members entering before June 24, 1995 are Tier 1 members. Safety members entering after June 24, 1995 are Tier 2 members. Final Average Salary Final average salary ( FAS ) is defined as the highest 12 consecutive months of compensation earnable for Tier 1 and highest 36 consecutive months for Tier 2 and Tier 3. Return of Contributions If a member should resign or die before becoming eligible for retirement, his or her contributions plus interest will be refunded. In lieu of receiving a return of contributions, a member with five or more years of service may elect to leave his or her contributions on deposit and receive a deferred vested benefit when eligible for retirement. Service Retirement Benefit Members with 10 years of service who have attained the age of 50 are eligible to retire. Members with 30 years of service (20 years for Safety), regardless of age, are eligible to retire. The benefit expressed as a percentage of monthly FAS per year of service, depending on age at retirement, is illustrated below for typical ages. For members whose benefit is integrated with Social Security, the benefit is reduced by one-third of the percentage shown below times the first $350 of monthly FAS per year of service after January 1, 1956. Disability Benefit Age Miscellaneous Safety 50 1.48% 3.00% 55 1.95% 3.00% 60 2.44% 3.00% 62 2.61% 3.00% 65 and over 2.61% 3.00% Members with five years of service, regardless of age, are eligible for nonservice-connected disability. For Miscellaneous Tier 1 members, the benefit is 1.5% (1.8% for Safety Tier 1 members) of FAS for Actuarial Section 82

Summary of Plan Provisions (Continued) each year of service. If this benefit does not equal one-third of FAS, the benefit is increased by the same percentage of FAS for the years which would have been credited to age 65 (age 55 for Safety members), but the total benefit in this case cannot be more than one-third of FAS. For Tier 2 and Tier 3 members, the benefit is 20% of FAS for the first five years of service plus 2% for each additional year for a maximum of 40% of FAS. If the disability is service connected, the member may retire regardless of length of service, with a benefit of 50% of FAS. Death Benefit (Before Retirement) In addition to the return of contributions, a death benefit is payable to the member s beneficiary or estate equal to one month s salary for each completed year of service under the retirement system, based on the final year s average salary, but not to exceed six (6) month s salary. If a member dies while eligible for service retirement or nonservice-connected disability, the spouse receives 60% of the allowance that the member would have received for retirement. If a member dies in the performance of duty, the spouse receives 50% of the member s final average salary. Death Benefit (After Retirement) If a member dies after retirement, a $4,000 lump burial allowance is paid to the beneficiary or estate. If the retirement was for service-connected disability, 100% of the member s allowance as it was at death is continued to the surviving spouse for life. If the retirement was for other than service-connected disability and the member elected the unmodified option, 60% of the member s allowance is continued to the spouse for life. Maximum Benefit The maximum benefit payable to a member or beneficiary is 100% of FAS. Cost-of-living The maximum increase in retirement allowance is 4% per year for Miscellaneous and Safety Tier I members, 2% for Safety Tier 2 members, and 2% for Miscellaneous Tier 3 members. Miscellaneous Tier 2 members have no cost-of-living benefit. The cost-of-living increases effective in the month of April are based on the change in the Consumer Price Index for the calendar year preceding April. Contribution Rates Basic member contribution rates are based on the age-nearest birthday at entry into the System (single rate for entrants after January 1, 1975). The rates are such as to provide an average annuity at age 55 equal to 1/240 of FAS for Miscellaneous members and equal to 1/100 of FAS at age 50 for Safety members. For members integrated with Social Security, the above contributions are reduced Actuarial Section 83

Summary of Plan Provisions (Continued) by one-third of that portion of such contribution payable with respect tot the first $350 of monthly salary. Cost-of-living contribution rates are designed to pay for one quarter of the future cost-of-living costs. Member contributions are refundable upon termination from the system. The employer contribution rates are actuarially determined to provide for the balance of the contributions needed to fund the benefits promised under the Retirement System. Actuarial Section 84

S c h e d u l e of A c t i v e Member V a l u at i o n Data Valuation Date Plan Type Number Annual Payroll (in thousands) Annual Average Pay (in thousands) % Increase in Average Pay * 6/30/2007 Miscellaneous 12,327 $654,497 $53.1 4.16% Safety 2,389 177,987 74.5 4.53 Total 14,716 $832,484 $56.6 4.18% 6/30/2006 Miscellaneous 12,052 $614,358 $51.0 2.34% Safety 2,360 168,214 71.3 7.88 Total 14,412 $782,572 $54.3 3.24% 6/30/2005 Miscellaneous 11,378 $566,749 $49.8 0.72% Safety 2,350 155,265 66.1 0.08 Total 13,728 $722,014 $52.6 0.70% 6/30/2004 Miscellaneous 11,384 $563,022 $49.5 0.11% Safety 2,288 151,048 66.0 3.47 Total 13,672 $714,069 $52.2 0.66% 6/30/2003 Miscellaneous 11,696 $577,810 $49.4 5.73% Safety 2,437 155,486 63.8 1.12 Total 14,133 $733,296 $51.9 4.72% 6/30/2002 Miscellaneous 11,618 $542,877 $46.7 1.08% Safety 2,415 152,382 63.1 2.24 Total 14,033 $695,259 $49.5 1.39% * Reflects the increase in average salary for members at the beginning of the year versus those at the end of the year. It does not reflect the average salary increases received by members who worked the full year. Actuarial Section 85

R e t i r e e s and Beneficiaries A d d e d to and Removed from Retiree Pay r o l l Plan Year End At Beginning of Year Added During Year Removed During Year At End of Year Annual Retiree Payroll (in thousands) Payroll added During Year (in thousands) Payroll Removed During Year (in thousands) % Increase In Annual Retiree Payroll Average Annual Allowance 6/30/2007 6/30/2006 6/30/2005 6/30/2004 6/30/2003 6/30/2002 7,108 6,784 6,291 5,882 5,742 5,526 563 509 706 786 321 438 207 185 213 377 181 222 7,464 7,108 6,784 6,291 5,882 5,742 $206,887 186,931 171,445 151,593 115,819 108,538 $23,837 18,698 23,273 39,067 9,439 12,623 $3,881 3,212 3,421 3,293 2,158 2,685 10.68% 9.03 13.10 30.89 6.71 10.08 $27,718 26,299 25,272 24,097 19,690 18,762 Note: Participants are counted once for each benefit received. S c h e d u l e of Funding Progress (Amounts Expressed in Thousands) Actuarial Valuation Date Actuarial Value of Assets* (a) Actuarial Accrued of Liability (AAL)* (b) Unfunded AAL (UAAL) (b-a) Funded Ratio (a / b) Covered Payroll (c) UAAL as a Percentage of Covered Payroll ((b - a) / c) 6/30/2007 6/30/2006 6/30/2005 $5,406,461 4,848,953 4,530,583 $5,788,336 5,214,915 4,860,882 $381,875 365,962 330,299 93.4% 93.0 93.2 $832,484 782,572 722,015 45.9% 46.8 45.7 6/30/2004 ** 4,379,514 4,694,009 314,495 93.3 714,069 44.0 6/30/2003 6/30/2002 3,864,400 3,839,081 4,108,294 3,586,250 243,894 (252,831) 94.1 107.1 733,296 695,259 33.3 (36.4) *Includes contingency reserve, retiree health benefit reserve, retiree death benefit reserve, and amount over reserved benefits. **Includes contributions receivable from Pension Obligation Bonds. Actuarial Section 86

S o lv e n c y T e s t s (Amounts Expressed in Thousands) Valuation Date 6/30/2007 6/30/2006 6/30/2005 6/30/2004 6/30/2003 6/30/2002 Active Member Contributions $520,420 509,257 474,613 470,567 252,998 370,625 Retired / Vested Members $2,920,508 2,615,466 2,444,406 2,196,690 1,599,899 1,427,334 Active Members (Employer Financed Portion) $2,347,408 2,090,192 1,941,863 2,026,752 2,255,397 1,788,291 Total $5,788,336 5,214,915 4,860,882 4,694,009 4,108,294 3,586,250 Actuarial Value of Assets $5,406,461 4,848,953 4,530,583 4,379,514 3,864,400 3,839,081 Active Member Contributions 100% 100 100 100 100 100 Retired / Vested Members 100% 100 100 100 100 100 Active Members (Employer Financed Portion) 100% 82 83 84 89 100 Events affecting year to year comparability: 6/30/03 - Increased enhanced benefits under Sections 31676.14 and 31664.1 and ad hoc COLA increase under Section 31681.55. 6/30/03 --Inflation assumption decreased from 4.25% to 3.00%. 6/30/04 - Investment assumption decreased from 8% to 7.75%; inflation assumption increased from 3.00% to 4.00%. - Across-the-board salary increase assumption changed from 1.25% to 0.25%. 6/30/05 - Inflation assumption decreased from 4.00% to 3.50%. 6/30/06 - Employee contribution crediting rate is equal to 5-year Treasury rate, assuming sufficient net earnings. 6/30/07 - Investment return assumption increased from 7.75% to 7.875%. - Salary increase assumption increased from 5.45% to 5.65%. A c t u a r i a l A n a ly s i s of Financial Experience (Amounts Expressed in Millions) Plan Years Ended June 30 2007 2006 2005 2004 2003* 2002 Prior Valuation Unfunded Actuarial Liability Salary Increase Greater (Less) than Expected Asset Return Less (Greater) than Expected Plan Improvements Other Experience Economic and Non-Economic Assumption Changes Receivable from Pension Obligation Bonds Ending Unfunded Actuarial Accrued Liability $366 68 (93) - (15) 56 - $382 $330 12 23-1 - - $366 $314 (35) 107 (2) 49 (103) - $330 ($176) 53 102 27 (1) 310 (1) $314 ($253) 2 (13) 460 92 (44) (420) ($176) ($266) 5 (8) - 16 - - ($253) *$420 million in Pension Obligation Bonds was retroactively reflected in June 30, 2003 valuation, which impacted rates for Fiscal Year 2004-05. Actuarial Section 87

N e w Probabilities of Sepa r at i o n Prior t o Retirement Rate (%) Mortality Miscellaneous Safety Age Male Female Male Female 25 0.06% 0.03% 0.06% 0.03% 30 0.08 0.03 0.08 0.03 35 0.08 0.04 0.08 0.04 40 0.10 0.07 0.10 0.07 45 0.15 0.09 0.15 0.09 50 0.23 0.13 0.23 0.13 55 0.40 0.21 0.40 0.21 60 0.71 0.39 0.71 0.39 65 1.29 0.76 1.29 0.76 Note: All pre-retirement deaths are assumed to be nonservice-connected. Rate (%) Disability Age Miscellaneous (1) Safety (2) 20 0.00% 0.20% 25 0.01 0.20 30 0.03 0.26 35 0.06 0.42 40 0.10 0.56 45 0.17 0.72 50 0.26 0.92 55 0.42 1.90 60 0.80 0.00 (1) 20% of Miscellaneous disabilities are assumed to be service-connected disabilities. The other 80% are assumed to be nonservice-connected disabilities. (2) 80% of Safety disabilities are assumed to be service-connected disabilities. The other 20% are assumed to be nonservice-connected disabilities. Actuarial Section 88

New Probabilities of Separation Prior to Retirement (Continued) Rate (%) Withdrawal (<5 Years of Service) Years of Service Miscellaneous Safety 0 15.00% 10.00% 1 9.00 6.00 2 8.00 5.00 3 6.00 4.00 4 5.00 3.00 Withdrawal (5+ Years of Service)* Age Miscellaneous Safety 20 5.10% 3.00% 25 4.85 3.00 30 4.60 3.00 35 4.35 2.70 40 3.80 2.20 45 2.90 1.70 50 2.02 0.00 55 1.58 0.00 60 0.00 0.00 *50% of the Miscellaneous members and 40% of the Safety members are assumed to elect a withdrawal of contributions upon separation, while the remaining 50% and 60% of Miscellaneous and Safety members, respectively, are assumed to elect a deferred retirement benefit. No withdrawal is assumed after a member is eligible to retire. Actuarial Section 89

S tat i s t i c a l S e c t i on

S c h e d u l e of A d d i t i o n s by Source (Amounts Expressed in Thousands) Year Ended June 30: Member Contributions Employer Contributions Net Investment Income / (Loss) Total 2007 $42,871 $156,805 $891,506 $1,091,182 2006 41,959 132,708 527,863 702,530 2005 36,916 529,618* 419,481 986,015 2004 42,864 119,144 525,239 687,247 2003 43,700 52,841 100,839 197,380 2002 38,432 44,547 (194,104) (111,125) 2001 32,964 40,358 (207,580) (134,258) 2000 30,018 42,024 315,790 387,832 1999 30,385 46,745 360,748 437,878 1998 29,930 43,109 464,511 537,550 Source: Audited Financial Statements from June 30, 1998 through 2007 *This total includes $420,000 and $10,535 in proceeds from pension obligation bonds (POB) issued by the County of Sacramento and Sacramento Metropolitan Fire District, respectively. Statistical Section 92

S c h e d u l e of Deductions by T y p e (Amounts Expressed in Thousands) Year Ended June 30: Service Benefits Paid Survivor Benefits Retiree Death Benefits Health and Dental Benefits Administrative And Other Expenses Withdrawals Total 2007 $193,823 $1,681 $492 $1 $5,818 $4,434 $206,249 2006 176,199 1,608 553 2 5,061 4,622 188,045 2005 160,439 1,545 525 2 5,262 3,463 171,236 2004 139,008 1,817 629 12,311 6,653 3,990 164,408 2003 110,326 1,482 441 10,866 31,767 2,906 157,788 2002 102,555 1,274 524 9,111 5,485 3,517 122,466 2001 95,526 1,229 561 8,072 3,831 3,611 112,830 2000 88,103 1,200 293 6,946 3,602 3,181 103,325 1999 79,426 1,190 95 5,973 3,363 3,306 93,353 1998 72,748 1,166 106 5,981 2,868 2,460 85,329 Note: For the years ended June 30, 2004 and 2003, Administrative and Other Expenses include retroactive benefits of $807 and $25,870, respectively, related to a litigation settlement. Source: Audited Financial Statements from June 30, 1998 through 2007 220,000 200,000 180,000 Amounts Expressed in Thousands 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000-1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Service Year Survivor Benefits Retiree Death Benefits Health and Dental Benefits Administrative And Other Expenses Withdrawal Statistical Section 93

S c h e d u l e of Benefits Paid and W i t h d r awa l s by T y p e Last Ten Fiscal Years (Amounts Expressed in Thousands) For the Fiscal Year Ended June 30 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 Type of Benefit Service Retirement Benefits $193,376 $175,745 $160,154 $138,907 $110,243 $102,301 $95,182 $87,826 $79,426 $72,748 Survivor Benefits 1,681 1,608 1,545 1,817 1,482 1,274 1,229 1,200 1,190 1,166 Death Benefits-Before Retirement 447 454 285 101 83 254 343 278 N/A N/A Death Benefits-After Retirement 492 553 525 629 441 524 561 293 95 106 Retiree Health and Dental Insurance 1 2 2 12,311 10,866 9,111 8,072 6,946 5,973 5,981 Total Benefits Paid $195,997 $178,362 $162,511 $153,765 $123,115 $113,464 $105,387 $96,543 $86,684 $80,001 Type of Withdrawal Death $725 $715 $411 $738 $110 $623 Separation 3,492 3,409 2,802 2,878 2,423 2,667 Miscellaneous 217 498 250 374 373 227 Total Withdrawals $4,434 $4,622 $3,463 $3,990 $2,906 $3,517 $3,611 * $3,181 * $3,306 * $2,460 * N/A: Detailed information not available. Payment amounts were included in Service Retirement Benefits. * Types of withdrawal are not available. Source: Audited Financial Statements from June 30, 1998 through 2007 Statistical Section 94

S c h e d u l e of Changes in Net A s s e t s Last Ten Fiscal Years (Amounts Expressed In Thousands) For the Fiscal Year Ended June 30 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 Employee contributions $42,871 $41,959 $36,916 $42,864 $43,700 $38,432 $32,964 $30,018 $46,745 $29,930 Employer contributions 156,805 132,708 529,618 119,144 52,841 44,547 40,358 42,024 30,385 43,109 Net investment income 891,506 527,863 419,481 525,239 100,839 (194,104) (207,580) 315,790 360,748 464,511 Total additions 1,091,182 702,530 986,015 687,247 197,380 (111,125) (134,258) 387,832 437,878 537,550 Benefits Paid 195,997 178,362 162,511 153,765 123,115 113,464 105,387 96,543 86,684 80,001 Withdrawals 4,434 4,622 3,463 3,990 2,906 3,517 3,611 3,181 3,306 2,460 Administrative and other expenses 5,818 5,061 5,262 6,653 31,767 5,485 3,831 3,602 3,363 2,868 Total deductions 206,249 188,045 171,236 164,408 157,788 122,466 112,829 103,326 93,353 85,329 Change in net assets 884,933 514,485 814,779 522,839 39,592 (233,591) (247,087) 284,506 344,525 452,221 Net assets, beginning 5,090,929 4,576,444 3,761,665 3,238,826 3,199,234 3,432,826 3,679,913 3,395,407 3,050,882 2,598,661 Net assets, ending $5,975,862 $5,090,929 $4,576,444 $3,761,665 $3,238,826 $3,199,234 $3,432,826 $3,679,913 $3,395,407 $3,050,882 Source: Audited Financial Statements from June 30, 1998 through 2007 Statistical Section 95

S c h e d u l e of Retiree Members by Type of Benefit As of June 30, 2007 Miscellaneous Members Service Retirement Monthly Allowances Count Basic COL Total Average Benefit Unmodified 4,026 $6,803,208 $1,816,955 $8,620,163 $2,141 Option 1 288 370,369 102,634 473,003 1,642 Option 2, 3, & 4 368 462,830 93,778 556,608 1,513 Total 4,682 7,636,407 2,013,367 9,649,774 2,061 Non-Service Disability Unmodified 276 232,476 108,535 341,011 1,236 Option 1 25 19,690 6,864 26,554 1,062 Option 2, 3, & 4 12 7,999 2,964 10,963 914 Total 313 260,165 118,363 378,528 1,209 Service Disability Unmodified 162 215,972 137,866 353,838 2,184 Option 1 6 8,090 3,593 11,683 1,947 Option 2, 3, & 4 5 5,567 2,542 8,109 1,622 Total 173 229,629 144,001 373,630 2,160 Beneficiary Total 895 536,933 451,234 988,167 1,104 Total (All Groups) 6,063 $8,663,134 $2,726,965 $11,390,099 $1,879 Safety Members Monthly Allowances Count Basic COL Total Average Benefit Service Retirement Unmodified 888 $3,579,450 $794,403 $4,373,853 $4,926 Option 1 28 98,707 21,563 120,270 4,295 Option 2, 3, & 4 43 135,011 24,601 159,612 3,712 Total 959 3,813,168 840,567 4,653,735 4,853 Non-Service Disability Unmodified 24 56,432 16,048 72,480 3,020 Option 1 1 4,798 439 5,237 5,237 Option 2, 3, & 4 1 1,512 644 2,156 2,156 Total 26 62,742 17,131 79,873 3,072 Service Disability Unmodified 182 411,696 186,691 598,387 3,288 Option 1 7 13,528 6,620 20,148 2,878 Option 2, 3, & 4 6 11,921 3,664 15,585 2,598 Total 195 437,145 196,975 634,120 3,252 Beneficiary Total 221 286,479 196,276 482,755 2,184 Total (All Groups) 1,401 $4,599,534 $1,250,949 $5,850,483 $4,176 Source: Actuarial Report as of June 30, 2007 Note: Refer to page 103 for a description of retirement options. Statistical Section 96

S c h e d u l e of A v e r a g e Benefit Pay m e n t s Last Ten Years Years of Credited Service Retirement Effective Date 0-5 5-10 10-15 15-20 20-25 25-30 30+ 7/1/06-6/30/07 Average monthly benefit $512 $874 $1,536 $2,341 $3,228 $4,756 $5,652 Average monthly final average salary $6,856 $4,747 $5,220 $5,331 $5,884 $6,508 $6,868 Number of retired members 27 55 83 71 74 69 86 7/1/05-6/30/06 Average monthly benefit $381 $917 $1,409 $2,029 $2,838 $4,561 $4,858 Average monthly final average salary $5,824 $5,345 $4,933 $5,069 $5,415 $6,500 $6,150 Number of retired members 25 45 63 73 64 62 83 7/1/04-6/30/05 Average monthly benefit $349 $949 $1,220 $1,800 $2,585 $4,010 $4,871 Average monthly final average salary $5,725 $4,960 $4,361 $4,662 $4,832 $5,732 $5,816 Number of retired members 36 43 90 83 96 84 123 7/1/03-6/30/04 Average monthly benefit $437 $993 $1,368 $1,992 $2,893 $4,136 $5,520 Average monthly final average salary $5,089 $4,719 $4,658 $4,686 $5,211 $5,834 $6,330 Number of retired members 22 45 98 90 85 127 278 7/1/02-6/30/03 Average monthly benefit $488 $678 $1,292 $1,609 $2,033 $3,076 $4,519 Average monthly final average salary $5,543 $4,091 $4,505 $4,252 $4,627 $5,859 $6,214 Number of retired members 23 25 52 47 33 19 51 7/1/01-6/30/02 Average monthly benefit $311 $768 $1,148 $1,449 $2,227 $3,702 $4,101 Average monthly final average salary N/A N/A N/A N/A N/A N/A N/A Number of retired members 17 31 61 42 38 24 54 7/1/00-6/30/01 Average monthly benefit $402 $680 $1,007 $1,487 $2,337 $2,939 $3,513 Average monthly final average salary N/A N/A N/A N/A N/A N/A N/A Number of retired members 23 28 61 31 30 30 34 7/1/99-6/30/00 Average monthly benefit $577 $641 $1,026 $1,537 $2,115 $3,012 $4,022 Average monthly final average salary N/A N/A N/A N/A N/A N/A N/A Number of retired members 12 37 64 41 45 62 56 7/1/98-6/30/99 Average monthly benefit $342 $839 $970 $1,647 $2,009 $2,924 $3,785 Average monthly final average salary N/A N/A N/A N/A N/A N/A N/A Number of retired members 11 35 58 33 43 61 74 7/1/97-6/30/98 Average monthly benefit $568 $954 $978 $1,665 $2,217 $2,810 $3,594 Average monthly final average salary N/A N/A N/A N/A N/A N/A N/A Number of retired members 6 28 42 34 35 57 57 N/A: Detail not available Source: SCERS Retired Member Pension Payroll Data Statistical Section 97

S c h e d u l e of Average Benefit Payments Years Since Retirement Effective Dates 0-5 5-10 10-15 15-20 20-25 25-30 30 + 7/1/06-6/30/07: Average Monthly Benefit $3,041 $2,133 $2,237 $1,948 $1,636 $1,449 $1,120 Number of Active Retirants 2,458 1,383 1,226 930 709 495 263 7/1/05-6/30/06: Average Monthly Benefit $2,871 $2,105 $2,165 $1,749 $1,576 $1,393 $1,049 Number of Active Retirants 2,232 1,365 1,199 921 692 468 231 7/1/04-6/30/05: Average Monthly Benefit $2,806 $2,095 $2,129 $1,736 $1,509 $1,281 $1,007 Number of Active Retirants 1,927 1,402 1,181 913 675 453 233 7/1/03-6/30/04: Average Monthly Benefit $2,574 $2,090 $2,056 $1,693 $1,392 $1,187 $918 Number of Active Retirants 1,793 1,353 1,090 834 650 400 171 7/1/02-6/30/03: Average Monthly Benefit $1,842 $1,854 $1,839 $1,463 $1,207 $972 $819 Number of Active Retirants 1,447 1,312 1,117 849 664 348 145 7/1/01-6/30/02: Average Monthly Benefit $1,804 $1,865 $1,614 $1,376 $1,121 $859 $834 Number of Active Retirants 1,494 1,327 1,024 823 650 324 100 7/1/00-6/30/01: Average Monthly Benefit $1,758 $1,779 $1,439 $1,269 $1,047 $776 $770 Number of Active Retirants 1,433 1,287 1,002 815 610 308 71 7/1/99-6/30/00: Average Monthly Benefit $1,821 $1,675 $1,381 $1,180 $947 $729 $2,125 Number of Active Retirants 1,528 1,249 965 840 561 282 75 7/1/98-6/30/99: Average Monthly Benefit $1,639 $1,552 $1,313 $1,079 $923 $727 $579 Number of Active Retirants 1,667 1,262 979 744 432 179 40 7/1/97-6/30/98: Average Monthly Benefit $1,659 $1,472 $1,228 $1,007 $858 $698 $482 Number of Active Retirants 1,633 1,043 962 700 366 147 33 Source: Actuarial Report from June 30, 1998 through 2007 Statistical Section 98

S c h e d u l e of Principal Participating Employers and Active Members Current Year and Nine Years Ago 2007 1998 Participating Employer Covered Employees Rank Percent of Total System Covered Employees Rank Percent of Total System County of Sacramento 13,199 1 89.69% 10,354 1 95.86% Superior Court 814 2 5.53-12 0.00 S.E.T.A. 598 3 4.06 345 2 3.19 Carmichael Recreation and Park District 27 4 0.18 27 3 0.25 Sunrise Recreation and Park District 24 5 0.16 20 4 0.19 Orangevale Recreation and Park District 15 6 0.10 13 5 0.12 Mission Oaks Recreation and Park District 12 7 0.08 12 6 0.11 Elected Officials* 8 8 0.05 8 8 0.07 Sacramento Metropolitan Fire District 6 9 0.04 10 7 0.09 Fair Oaks Cemetery District 5 10 0.03 1 11 0.01 Elk Grove Cosumnes Cemetery District 4 11 0.03 5 9 0.05 Galt-Arno Cemetery District 3 12 0.02 3 10 0.03 U.C. Davis Medical Center 1 13 0.01 3 10 0.03 Total 14,716 100.00% 10,801 100.00% *Elected Officials consisted of five Board of Supervisors, one Assessor, one District Attorney, and one Sheriff. Source: Actuarial Reports from June 30, 2007, and June 30, 1998 Statistical Section 99

S c h e d u l e of Principal Participating Employers and Active Members For the Fiscal Year Ended June 30: SCERS Member Agency Plan 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 Carmichael Recreation and Park District Misc. 27 15 17 18 20 18 20 18 18 20 Elk Grove Cosumnes Cemetery District Misc. 4 5 4 4 1 1 1 1 1 1 Fair Oaks Cemetery District Misc. 5 5 5 5 5 3 3 4 4 5 Galt-Arno Cemetery District Misc. 3 3 3 3 3 3 2 2 2 3 Mission Oaks Recreation and Park District Misc. 12 11 10 12 13 13 13 12 12 12 Orangevale Recreation and Park District Misc. 15 14 15 16 14 14 14 14 14 13 Sacramento Metropolitan Fire District Safety 6 6 7 7 7 7 7 9 9 10 S.E.T.A. Misc. 598 562 544 549 513 520 520 409 445 345 Sunrise Recreation and Park District Misc. 24 29 28 26 27 29 29 28 28 27 U.C. Davis Medical Center Misc. 1 1 1 1 1 1 1 2 3 3 Misc. 7 7 7 7 7 7 7 7 7 7 Elected Officials* Safety 1 1 1 1 1 1 1 1 1 1 Total Special District Members Misc. 696 652 634 641 604 608 610 497 534 436 Safety 7 7 8 8 8 8 8 10 10 11 Misc. 814 - - - - - - - - - Superior Court Safety - - - - - - - - - - Misc. 10,817 11,400 10,744 10,743 11,092 11,010 10,171 9,720 8,816 8,430 Sacramento County Members Safety 2,382 2,353 2,342 2,280 2,429 2,407 2,202 2,008 1,994 1,924 Misc. 12,327 12,052 11,378 11,384 11,696 11,618 10,781 10,217 9,350 8,866 Safety 2,389 2,360 2,350 2,288 2,437 2,415 2,210 2,018 2,004 1,935 Total Members Total 14,716 14,412 13,728 13,672 14,133 14,033 12,991 12,235 11,354 10,801 *Elected Officials consisted of five Board of Supervisors, one Assessor, one District Attorney, and one Sheriff. Source: Actuarial Reports from June 30, 1998 through 2007 Statistical Section 100

S c h e d u l e of Employer Contribution Rat e s Actuarial Report for Year Ended COUNTY SPECIAL DISTRICTS Miscellaneous Safety Miscellaneous Safety Tier 1 Tier 2 Tier 3 Tier 1 Tier 2 Tier 1 Tier 3 Tier 1 6/30/2007 15.04 12.58 15.43 34.71 30.61 21.98 22.41 41.15 6/30/2006 15.89 12.95 15.73 36.01 31.67 22.26 22.13 41.94 6/30/2005 16.10 13.14 15.88 35.18 30.84 22.78 22.56 39.71 6/30/2004* 15.29 11.49 13.94 33.23 28.57 20.87 19.56 38.19 6/30/2003* 13.49 9.16 11.32 24.39 20.24 18.84 16.73 30.72 6/30/2002 15.84 11.47 13.85 31.69 26.31 17.89 18.20 30.89 6/30/2001 6.86 3.41 5.26 16.04 11.96 17.54 15.90 23.12 6/30/2000 5.85 2.90 4.53 14.52 10.37 16.44 14.94 21.75 6/30/1999 5.89 2.94 4.56 14.56 10.29 14.63 14.54 20.64 6/30/1998 5.85 2.91 4.55 14.57 10.30 14.58 14.91 20.45 Source: Actuarial Reports from June 30, 1998 though 2007 Note: Actuarial Valuation Reports are prepared subsequent to a fiscal year-end and determines rates which pertain to the following fiscal year. For example, the Actuarial Valuation as of 6/30/07 presented current rates for the fiscal year 2007-2008 and was used to determine rates for the fiscal year 2008-09. * Rates were adjusted to reflect the proceeds from Sacramento County's pension obligation bonds that were received on July 1, 2004. Statistical Section 101

G r o w t h of System Membership Year Ended June 30: Members Retirees Deferred Total 2007 14,716 7,464 2,437 24,617 2006 14,412 7,108 2,192 23,712 2005 13,728 6,784 2,135 22,647 2004 13,672 6,291 2,110 22,073 2003 14,133 5,882 1,885 21,900 2002 14,033 5,742 1,944 21,719 2001 12,991 5,526 2,146 20,663 2000 12,235 5,488 1,828 19,551 1999 11,354 5,303 1,739 18,396 1998 10,801 4,884 1,658 17,343 System Membership at a Glance 25,000 20,000 15,000 10,000 5,000-1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Members Retirees Deferred Statistical Section 102

S c h e d u l e of Distribution of Retired Members and Beneficiaries by T y p e and by Monthly A m o u n t As of June 30, 2007 Amount of Monthly Benefit Type of Retirement* Option Selected** Number of Retired Members 1 2 3 4 5 6 7 8 9 10 11 12 Unmodified 1 2 3 4 $1 - $499 872 622 22 5 13 1 97 27 34-33 - 18 679 57 115 8 13 500-999 1,263 818 72 15 2 1 154 84 74 2 22 2 17 1038 96 96 12 21 1,000-1,499 1,147 787 87 24 21 7 115 36 36 6 13 3 12 1004 50 78 9 6 1,500-1,999 891 653 49 17 50 14 61 12 11 9 7-8 768 58 57 3 5 2,000-2,499 754 592 8 4 46 14 61 9 2 12 3-3 670 30 38 6 10 2,500-2,999 579 428 9 2 54 34 30 6-11 2-3 517 24 33 1 4 3,000-3,499 428 327 2 1 42 18 16 4 1 13 1-3 389 17 14 0 8 3,500-3,999 330 290 1 1 12 5 7 5-9 - - - 309 9 9 1 2 4,000-4,499 273 245 2-11 2 6 2-3 2 - - 256 4 7 3 3 4,500-4,999 211 196 1-5 2 4-1 1 1 - - 192 6 8 4 1 $5,000 & over 716 683 2 5 15 4 2-1 4 - - - 673 24 9 5 5 Total 7,464 5,641 255 74 271 102 553 185 160 70 84 5 64 6,495 375 464 52 78 * Type of Retirement: ** Option Selected: 1 Service Retirement 2 Nonservice-Connected Disability, age 55 and older 3 Nonservice-Connected Disability, under age 55 Unmodified: Qualified service retirement or nonservice-connected disability retirement beneficiary receives 60 percent continuance. Qualified service-connected disability retirement beneficiary receives 100 percent continuance. 4 Service-Connected Disability, age 55 and older The following options reduce the retired member's monthly benefit: 5 Service-Connected Disability, under age 55 Option 1 - Beneficiary receives lump sum or member's unused contributions. 6 Beneficiary of Service Retiree Option 2 - Beneficiary having an insurable interest in member's life receives 7 Survivor Death Benefits 100 percent of member's reduced monthly benefit. 8 Beneficiary of Nonservice-Connected Disability Retiree Option 3 - Beneficiary having an insurable interest in member's life receives 9 Beneficiary of Service-Connected Disability Retiree 50 percent of member's reduced monthly benefit. 10 Divorce-Receiving Benefits Option 4 - Benefits paid to person having an insurable interest in member's 11 Interim Nonservice-Connected Disability Retirement life as nominated by member's written designation. 12 Non-Member Receiving Benefits Source: SCERS Retired Member Pension Payroll Data Statistical Section 103

S c h e d u l e of Administrative Expenses For the Year Ended June 30 (Amounts Expressed in Thousands) Type of Expenses 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 Salaries and Benefits $3,352 $2,718 $2,734 $2,663 $2,416 $2,077 $1,818 $1,464 $1,418 $1,300 Professional Fees 629 808 440 583 578 420 433 634 753 783 Equipment Purchases and Maintenance 85 70 73 89 198 314 242 156 111 109 Rent and Lease Expense 648 612 596 596 560 416 204 171 155 151 Depreciation Expense 5 3 27 14 18 42 42 25 - - Other Administrative Expenses 1,099 850 1,392 1,901 2,127 2,216 1,092 1,152 926 525 Total $5,818 $5,061 $5,262 $5,846 $5,897 $5,485 $3,831 $3,602 $3,363 $2,868 Source: Audited Financial Statements from June 30, 1998 through 2007 Statistical Section 104

Sacramento County Employees Retirement System 980 9th Street, Suite 1800 Sacramento, CA 95814 www.scers.org

ASSET ALLOCATION The decision of how to distribute the Fund assets among broad asset categories of domestic and international equities, private equity, domestic and international fixed income, real estate, hedge funds and opportunities is based upon a number of factors including, but not limited to: Financial condition of the Fund SCERS' risk tolerance Expected long-term capital market outlook. Cash flow requirements Participant growth Actuarial requirements SCERS has assumed the following long-term capital market returns for the asset allocation model. These assumptions are based on historical long term returns, the forecast economic environment and recommendations from SCERS' External Investment Consultant, Independent Actuary, and Chief Investment Officer. EXPECTED CAPITAL MARKET RETURNS ASSUMPTIONS: 10 Year Horizon, 2.5% Inflation Asset Class Real Rate of Return Total Return Expected Risk Domestic Equity 5.7% 8.2% 18.6% Domestic Long/Short 5.7% 8.2% 15.1% Hedge Fund International Equity 5.7% 8.2% 19.5% Private Equity 7.0% 9.5% 28.4% Domestic Fixed 2.8% 5.3% 5.5% Income Real Estate 4.7% 7.2% 13.7% Opportunities Portfolio 2.0% 4.5% 18.0% Cash 1.2% 3.7% 1.3% These factors establish the basis for SCERS' long-term strategic asset allocation targets and ranges. Importantly, the long-term strategy includes ranges for each asset category in order to take advantage of market opportunities. The aggregate of the investments in each asset class is intended to match the characteristics of the returns used in the asset allocation model. Deviations from the characteristics represent strategic shifts to add value over these returns. SCERS Investment Policy and Objectives, January 2008 Page 8

EXHIBIT E Investment Policy 38

SCERS SACRAMENTO COUNTY EMPLOYEES RETIREMENT SYSTEM Serving County Employees Since 1941 INVESTMENT POLICY AND OBJECTIVES January 17, 2008 Board of Retirement Sacramento County Employees' Retirement System

Sacramento County Employees Retirement System Foreword The Sacramento County Employees Retirement System ( SCERS ) was created on July 1, 1941, by Sacramento County Ordinance #283 as adopted by the Board of Supervisors on April 30, 1941, pursuant to the County Employees Retirement Law of 1937. SCERS provides retirement, disability, and death benefits for qualified employees of Sacramento County and eleven participating special districts. A nine member Board of Retirement (Board) governs SCERS. The Board has sole and exclusive fiduciary responsibility over the assets of the retirement system. The Board has the sole and exclusive responsibility to administer SCERS in a manner that will assure prompt delivery of benefits and related services to the participants and their beneficiaries. The authority of the Board in the above matters is plenary or absolute. See California Constitution at Articles XVI Section 17. While the Board has the above authority noted above, the organizational structure of SCERS focuses the attention of the Board on governance and policy and not on the management of the system. Thus, the primary responsibility of the Board is strategic in setting the direction of SCERS. This includes enunciation of the mission and setting of goals and objectives. SCERS' Chief Executive Officer (CEO) has the responsibility for the overall management and administration of the system in accordance with the direction, policy and goals set by the Board. Reporting to the CEO as part of the executive staff is the Chief Investment Officer (CIO). The CIO has primary responsibility in cooperation with the CEO for SCERS' investment program. An annual actuarial valuation commissioned by the Board determines contributions into the Sacramento County Employees' Retirement Fund (Fund). The growth of the Fund results from a combination of employer and employee contributions and the net return, less the administrative and investment costs, achieved from investing the assets. The Purpose of this Investment Policy and Objectives is to: 1. Articulate the Board s views on SCERS' investment objectives and risk tolerance for the investment portfolio. 2. Establish performance standards to measure the success of achieving the objectives. 3. Formulate the Board s policies and guidelines on: a) asset allocation and diversification of investments; b) identification of permissible investments; c) the structure and framework for the investment portfolio; d) implementing the policies; e) prudently monitoring and evaluating the performance and risk of the investment portfolio: and f) investment manager termination SCERS Investment Policy and Objectives, January 2008 Page 2

SCERS Investment Goals 1. Provide for Present and Future Benefit Payments - The overall purpose of SCERS is to invest pension assets, solely in the interest of providing benefits to the participants and their beneficiaries, while attempting to minimize the employer contributions and defraying the administrative costs. The investment of contributions and other fund assets in accordance with the investment policy described herein will accomplish this and maintain adequate funding of SCERS' liabilities over time. The goal of the Board is to design an investment portfolio that will achieve and exceed the actuarial rate of return assumption of 7.875% over a market cycle. The Board will strive to achieve this level of return with a high level of certainty. 2. Make Prudent Investments - With care, skill, prudence and diligence the Board will strive to produce an investment return based on levels of liquidity and investment risk that are prudent and reasonable under present circumstances. Such circumstances may change over time. 3. Diversify the Assets - The Board will diversify the investments of the Fund to maximize the investment return with acceptable investment risk. 4. Create Reasonable Pension Investments Relative to Other Pension Funds - The pension investment program must operate in compliance with all applicable State and Federal laws and regulations concerning the investment of pension assets. SCERS judges its selection of investment vehicles and policies against other private and public pension funds, with special emphasis on comparisons with public funds. 5. Establish Policy and Objectives Review Process - Annually, SCERS will conduct a formal review of its Investment Policy and Objectives and will develop an updated financial projection at least every five years. RISK vs. RETURN In general, research has shown that investments that involve greater risks offer a higher expected return. The Board will seek to achieve the performance goals previously outlined with the lowest acceptable level of risk. To achieve the actuarial target earnings goal with a high level of certainty, the Board has adopted a strategic asset allocation plan with an expected annualized passive return of 7.96% over a 10-year period. This asset allocation is expected to have an annualized standard deviation of 11.56%. SCERS will utilize active investment management strategies to add the additional return required to achieve the target earnings rate. The Board strives to seek a balance between the certainties of obtaining a set return over time with the risks inherent in higher return investments. The annualized passive return for the strategic asset allocation is different from the target earnings rate because the asset allocation capital market assumptions are for a shorter forecast time horizon and the inflation assumption used in the developing the actuarial rate of return is lower. SCERS Investment Policy and Objectives, January 2008 Page 3

PERFORMANCE OBJECTIVES SCERS' performance objectives provide the Board with benchmarks to measure the performance of the investment policy and the guidelines. The performance objectives are divided into three components: first level objectives for the Total Fund; second level objectives for each asset class; and, third level objectives for the individual portfolio components. The performance evaluator will incorporate all three levels in its quarterly review of the Fund's performance. The first level: Total Fund (Detailed Below) The Total Fund has both an absolute and several relative performance objectives. 1. Achieve the actuarial rate of interest. The Fund will strive to earn a net investment return equal to or in excess of the assumed annualized actuarial rate of interest of 7.875% over rolling five year periods. 2. Relative to the asset allocation targets, generate a return in excess of the passive benchmark portfolio. The Board will establish a passive benchmark index, which reflects SCERS' unique asset allocation policy. Exceeding this benchmark indicates that the investment management structure of the various portfolio components has added value over a passively managed fund with a similar asset mix. 3. Exceed the rate of inflation. 5% more than Consumer Price Index, All Items- U.S. City Average, All Urban Consumers (CPI-U) as reported by the Bureau of Labor Statistics. 4. Comparison relative to peer group of similar funds. Exceed the median return at a comparable or lower level of risk compared to a similar peer group of public employee pension funds. The investment consultant will provide a comparative analysis of the Fund's comparable risk versus return. SCERS Investment Policy and Objectives, January 2008 Page 4

FIVE YEAR PERFORMANCE OBJECTIVES Total Fund 1. Annualized Return to Exceed the Assumed Actuarial Rate of Interest: Return above 7.875%. 2. Return to Exceed the Return of the Passive Benchmark Portfolio: 30% x Russell 3000 5% x Annualized 91-day T-Bill Rate plus 5% 20% x Lehman Aggregate Bond Index 20% x MSCI EAFE Index 12% x NCREIF Property Index 3% x NAREIT Equity Index 5% x Private Equity Benchmark 5% x Dow Jones AIG Index 3. Return Relative to Inflation: 5% more than Consumer Price Index, All Items- U.S. City Average, All Urban Consumers (CPI-U) as reported by the Bureau of Labor Statistics. 4. Return Relative to Similar Public Employee Retirement Systems: Rank in the top forty percent of the State Association of County Retirement Systems (SACRS) performance comparison. Rank below the median portfolio risk in SACRS and other appropriate peer performance comparisons. The second and third level: Asset Classes and Individual Investment Managers To achieve SCERS' performance objectives the Board has developed second and third level performance objectives to review the details of the investment portfolio. These second and third level performance objectives cover each asset class and each individual manager. These performance objectives are relative to each asset class benchmark; each investment manager specified benchmark and appropriate style peer group. The objectives for each asset class are listed below. The objectives for each investment manager are listed on pages twenty (20) and twenty-one (21). The asset allocation accounts for at least 90% of the investment return. Differences in the strategic asset allocation will at times make performance comparisons with other plans difficult. Experience has shown that investment managers do not always meet their objectives. Recognizing this, it is important to keep in mind that the attainment of the five-year performance objectives may be very difficult. Meeting the five-year performance objectives is SCERS performance goal. Performance that is close to the objectives will be of significant financial benefit to SCERS' financial condition. Failure to reach the goal may not necessarily reflect a deficiency in SCERS' investment objectives SCERS Investment Policy and Objectives, January 2008 Page 5

FIVE YEAR ASSET CLASS INVESTMENT RETURN OBJECTIVES (NET OF FEES) As a subset of the Total Fund Objective EQUITIES: Domestic Equity Large Cap Domestic Equity Small Cap Equity Long/Short Hedge Fund International Equity Emerging Markets Private Equity FIXED INCOME: Fixed Income REAL ESTATE: Private Market Core Private Market Value Added Public Equity Securities OPPORTUNITIES: Opportunities Strategies CASH: Cash Strategic Overlay Russell 1000 Index plus 100 basis points for active managers and 60 basis points overall, including the passive allocation. Russell 2000 Index plus 150 basis points 91 Day T-Bill plus 500 basis points MSCI EAFE index plus 100 basis points MSCI EMF index plus 150 basis points S&P 500 plus 200 basis points Lehman Aggregate Index plus 70 basis points NCREIF Index plus 100 basis points NCREIF Index plus 200 basis points NAREIT Equity Index plus 100 basis points Dow Jones AIG Index plus 100 basis points State Street STIF Passive Return of SCERS Asset Allocation excluding the real estate asset class. The objectives established in the three levels set a high standard of performance for SCERS' investments. The attainment of these objectives is dependent upon the SCERS' matching its asset allocation, and upon SCERS' investment managers generating superior rates of return. SCERS Investment Policy and Objectives, January 2008 Page 6

RISK MEASURED BY VOLATILITY RISK CONSTRAINT STATEMENT There are numerous risks inherent in every asset class. The quantitative measurement of most, but not all, of these risks is done by evaluating the volatility of the asset class returns over time. The key is measurement over enough time to pick up some of the long-term risks, which are not apparent on a short-term basis. Volatility is a statistical measure of the frequency and size of deviations from an average return. The typical measure of volatility is standard deviation. One standard deviation is the range that returns will fluctuate within two-thirds or 66% of the time. RISK MEASURED BY FUNDAMENTAL FACTORS There are risks inherent in various asset classes, especially those that do not trade regularly or are not regularly marked to market, that do not show up in the short-term pricing of assets. These fundamental risks such as credit risk, defaults, interest rate sensitivity, investment duration and economic cycles do show up over longer periods. Many of these risks are qualitative in nature. As such, they are measured by individual perception. Long-term measurements of price volatility over periods of 20 to 30 years will encompass the greatest percentage of both fundamental, qualitative risks and shortterm price volatility. Asset classes and individual investments must be measured over long time periods to attempt to encompass all the various risk factors. The Board will measure risk by both volatility and fundamental factors. TOTAL FUND RISK OBJECTIVES Standard Deviation Risk A standard deviation of investment returns over a rolling 5-year period no greater than the Fund s passive benchmark portfolio. Liquidity Risk No more than 25% of the Fund shall be invested in instruments which are not regularly publicly traded on a daily basis. Maximum Investment No more than 2.5% of the Fund may be invested in any one security, with the exception of United States Treasury or Agency Obligations, a commingled fund or mutual fund, or a total return swap for an index or other derivative used to replicate an asset class exposure. SCERS Investment Policy and Objectives, January 2008 Page 7

ASSET DIVERSIFICATION Based upon the SCERS' capital market assumptions and those factors outlined by the Policy Statement, the Board retains an external investment consultant to create an asset allocation model. Based upon the performance objectives and risk constraints, the current SCERS' Asset Allocation Policy is: SCERS' ASSET ALLOCATION POLICY RANGE ASSET CLASS TARGET MINIMUM MAXIMUM DOMESTIC EQUITY 30.0% 27.0% 33.0% CORE Index 10.0% 9.0% 11.0% CORE Enhanced Index 3.0% 2.4% 3.6% CORE Active Short Extension 3.0% 2.4% 3.6% Value 7.0% 6.3% 7.7% Large 4.0% 3.2% 4.8% Small 3.0% 2.4%.3.6% Growth 7.0% 6.3% 7.7% Large 4.0% 3.2% 4.8% Small 3.0% 2.4% 3.6% LONG/SHORT HEDGE FUND 5.0% 4.5% 5.5% PRIVATE EQUITY 5.0% 4.5% 5.5% INTERNATIONAL EQUITY 20.0% 18.0% 22.0% MSCI EAFE Developed Markets 13.0% 11.7% 14.3% Small Cap S&P/Citibank EMI Index 2.0% 1.6% 2.4% Emerging Markets 5.0% 4.0% 6.0% FIXED INCOME 20.0% 18.0% 22.0% Enhanced Index 6.7% 6.0% 7.4% Active Core Plus 13.3% 12.0% 14.6% REAL ESTATE 15.0% 13.5% 16.5% Private Market Core 9.0% 7.2% 10.8% Private Market Value 3.0% 1.5% 4.5% Public Equity Securities 3.0% 1.5% 4.5% OPPORTUNITIES 5.0% 4.5% 5.5% CASH 0.0% 0.0% 2.0% The ranges for each asset class are set to ensure strict adherence to the asset allocation policy within optimum variances. The ranges for each individual style are wider because of the normal volatility within any given asset class. Because of the larger percentage ranges for each style, the maximum and minimum ranges do not add up to the maximum and minimum for the asset class. Maintaining the assets within the asset class ranges is critical to the Fund s ability to meet its performance objectives. SCERS Investment Policy and Objectives, January 2008 Page 9

PERMISSIBLE INVESMENTS Listed below are the investment vehicles specifically permitted under this Statement of Investment Policy and Objectives for separately managed accounts. They are categorized as equity, fixed income, real estate and derivatives to indicate how they are classified for purposes of the asset class structure guidelines in the following section. Unless given authorization in writing, managers are allowed to invest only in the investment vehicles listed below for the asset class for which they have been hired. Equities Investments include publicly-traded common stocks, preferred stocks, covered stock option calls, equity securities of foreign companies traded on registered U.S. stock exchanges, NASDAQ, or non-us stock exchanges and convertible securities (preferred or corporate bonds) and private equity funds, and private equity funds of funds. Fixed Income Investments include the full universe of fixed income instruments within different sectors of the U.S. and international bond markets including US government and agency debt, Treasury Inflation-Protected Securities, corporate debt instruments, mortgage and other asset-backed securities, municipal debt, high yield bonds, convertible debentures, certificates of deposit, non-dollar debt securities and fixed income mutual funds consisting primarily of the permissible investments. Also included in fixed income are privately placed debt instruments, and debt funds and funds of funds. Real Estate Investments include private market participation in commercial, industrial and residential real estate properties. These investments may comprise both open end commingled funds, closed end commingled funds and separate direct ownership accounts. Investments may also include publicly traded real estate equity securities including issues of Real Estate Investment Trusts (REIT) or Real Estate Operating Companies (REOC). Derivatives Investment managers may be permitted through individual investment guidelines to use derivative instruments to control or manage portfolio risk. Derivatives are contracts or securities whose returns are derived from the returns of other securities, indices or derivatives. This definition includes collateralized mortgage obligations, futures, forwards, options, options on futures, swaps and swaptions. Managers may not utilize derivatives for speculative purposes. In no circumstances can derivatives lever any positions in SCERS portfolio, except as expressly authorized in writing. No derivatives positions can be established that create portfolio characteristics outside of current portfolio guidelines. Examples of appropriate applications of derivative strategies include hedging interest rate and currency risk, and maintaining exposure to a desired asset class while effecting asset allocation changes. SCERS Investment Policy and Objectives, January 2008 Page 10

Other Financial Instruments Other financial instruments include investments in currency, currency derivatives, commodities and commodities futures as permitted in individual investment manager guidelines. ASSET CLASS STRUCTURE AND STYLE DOMESTIC EQUITIES 33.3% Passive Management / 66.7% Active Management SCERS' domestic equities emphasize broad security and style diversification. The portfolio is equally weighted between the Value and Growth style. The aggregate portfolio will be designed to be neutral in capitalization and style to the characteristics utilized by the Asset Allocation Model. The goal of the active managers is to outperform their respective market segments and as a group exceed the passive benchmark portfolio. U.S. Equity Benchmark Index --The Russell 3000 index tracks the 3000 largest U.S. equities. This segment is a broad passive index of publicly traded stocks representing 98% of the investable U.S. equity market. Growth Stocks --This segment is characterized by higher risk, lower yield, and higher P/E ratios. Growth stock portfolios display above-market performance in rising markets. Over the course of a market cycle, the active managers will exceed the return of their passive segment of the market. Smaller capitalized stocks will exhibit even higher rates of return. The growth stocks are divided into 57.1% large to mid cap and 42.9% small capitalization companies. Value/Defensive --This segment attempts to outperform the market in down and flat markets, while obtaining market or lagging market performance in "up" markets. Over the course of a market cycle the active managers will exceed the return of their passive segment of the market. Value/defensive portfolios are usually characterized by Price to Book ratios and P/E ratios below the Russell 1000 index for large cap stocks and below the Russell 2000 index for small cap stocks and by dividend yields above the Russell 1000 index for large cap stocks and above the Russell 2000 index for small cap stocks. The value stocks are divided into 57.1% large to mid cap and 42.9% small capitalization companies. EQUITY LONG/SHORT HEDGE FUNDS 100% Fund of Hedge Funds This category of investment is intended to diversify SCERS domestic equity investment portfolio and improve overall portfolio risk/return characteristics. These investments will be correlated to the domestic equity markets at a ratio of.4 or less and are expected to provide downside protection in negative equity markets. The portfolios will employ strategies with a long bias in the range of 30-50% and with gross leverage of less than 2x at the portfolio level. SCERS Investment Policy and Objectives, January 2008 Page 11

PRIVATE EQUITY 100% Active Management This category of investment includes limited partnerships, funds and funds of funds that invest in domestic and international private venture capital, mezzanine capital, buyouts and distressed debt. INTERNATIONAL EQUITY 100% Active Management This category emphasizes diversification, seeking to attain net returns in excess of international index returns, which are not highly correlated to other assets in the portfolio, thereby reducing the SCERS' overall risk. The exposure to emerging markets creates added return and diversification from other assets increasing expected investment return and reducing risk. International Equity Benchmark Indexes -- SCERS' utilizes the Morgan Stanley EAFE indexes for developed countries and the MSCI EMF index for emerging markets. The emerging markets are 25% of the international equity allocation. Active International Equity --These investments will be allocated between the regions, countries, developed markets and emerging markets consistent with the managers assignment. The determination of the allocations is at the discretion of the managers but regional weightings should vary no more than 20% from the Benchmark weights. Managers can actively hedge the currency exposure at any time. FIXED INCOME 33.3% Enhanced Index Management / 66.7% Active Core Plus Management This category includes actively managed investments in U.S. treasury and agency securities, corporate bonds, mortgage-backed and asset-backed securities, non-dollar denominated sovereign debt and corporate debt and fixed income derivatives. The active portion is split between two core managers, to provide an asset class duration similar to the benchmark index. The use of a twenty percent or less exposure to Non- Dollar bonds and high yield debt increases the expected return and the diversification of the portfolio. Risk Control - The aggregate fixed income portfolio will have a duration which is +/- 20% of the duration of the Fixed Income Index, and an average minimum credit quality of A-, as determined by a major rating agency, with a return in excess of the index used by the Asset Allocation Model. Fixed Income Enhanced Index - The Lehman Aggregate Bond Index, which represents a broad passive holding of all segments of rated U.S. fixed income is enhanced by varying the portfolio characteristics for duration, allocation to sectors and credit quality of the holdings in comparison to the benchmark. Active Core Plus Fixed Income - The active Core core plus will have a duration that will range within 50% plus or minus the duration of the index. Also, the portfolio will have a minimum average credit quality of A/A. The active core plus portfolio can invest up to 20% un-hedged in Non-Dollar bonds and 20% in high yield or below investment grade debt. SCERS Investment Policy and Objectives, January 2008 Page 12

REAL ESTATE 100% Active Management This segment is intended to provide diversification from SCERS' holdings in equities and fixed income. Some of these investments are not marked to market each day and are not highly correlated to any of the other assets in the portfolio. In addition, some of these investments are very illiquid in nature. As such, the Board will establish a limit on the total allocation to the asset class. A portion of these investments are privately placed and their value is based upon an independent evaluation at regular intervals until actually sold. Real Estate Private Market -- The majority of the real estate allocation will be held in private placements, which entail equity participation in commercial, residential and industrial real estate properties. These investments may comprise both open end commingled funds, closed end commingled funds and separate direct ownership accounts. The NCREIF Property Index represents real estate owned by tax-exempt institutions and held in a fiduciary environment and will be the index against which manager performance is measured Real Estate Public Equity Securities A portion of the portfolio will be invested in issues of Real Estate Investment Trusts (REIT) or Real Estate Operating Companies (REOC) managed by an experienced real estate securities investment manager. Only equity REIT securities and REOC securities which are broadly classified as institutional quality issues are eligible for inclusion in the portfolio. All securities held in the portfolio should be publicly traded and have sufficient marketability to permit prompt, orderly liquidation under normal circumstances. The NAREIT Equity Index will be the benchmark against which manager performance is measured. OPPORTUNITIES This segment includes a mix of investment securities that offer good risk/adjusted investment returns and are expected to have a low correlation with SCERS public equity and debt investments. Investments which may be included in this asset class are commodities and commodity futures, Treasury Inflation Protected Securities (TIPS), timber or agriculture land, real return strategies, direct private equity, debt securities and other unique strategies. Investments will be assigned to this asset class based on the recommendation of the CIO and the Investment Consultant. STRATEGIC OVERLAY This investment strategy utilizes SCERS available cash to replicate the target asset allocation on a periodic basis for the purpose of assuring compliance with SCERS Asset Allocation, excluding the real estate asset class. In addition, at least monthly, the Manager will overlay a replication of SCERS Asset Allocation to rebalance the total portfolio, utilizing the Permissible Investment or other investments authorized in writing in the Manager s investment management guidelines. The strategy is expected to reduce the drag of excess cash on total portfolio investment return and to reduce tracking error with SCERS Asset Allocation. The performance objective is to provide 10-25 basis points in annualized return to the SCERS Portfolio. SCERS Investment Policy and Objectives, January 2008 Page 13

IMPLEMENTATION OBJECTIVES IMPLEMENTATION The CIO will establish procedures to ensure consistent operational compliance with Board policies and the efficient handling of investment duties. PERIODIC REVIEW OF ASSET ALLOCATION POLICY With the input from the Investment Consultant and the Actuary, SCERS will review the appropriateness of its asset allocation targets and ranges in light of changes in SCERS' liabilities and general market conditions. Such review, including an updated projection of assets and liabilities, shall be conducted at least every five years. The Chief Investment Officer will review the actual versus target Asset Allocation each quarter and provide a report to the Board indicating differences. REBALANCING THE ASSET ALLOCATION The Strategic Overlay Manager (Manager) under the supervision of the Chief Investment Officer will monitor the overall asset allocation to assure compliance with the target exposure to the asset classes and related target weights as defined by the SCERS Asset Allocation, excluding the real estate asset class. At least monthly the Manager will overlay a replication of SCERS Asset Allocation target exposure to the asset classes and related target weights utilizing the permissible investments approved in the Manager s investment management guidelines and objectives for the strategic overlay assignment. The CIO will re-balance the asset allocation to the target ranges at least annually or at any time the allocations go outside the minimum and maximum ranges on page nine (9). Income and dividends are withdrawn from the Investment Managers accounts each quarter except for trusts, commingled funds and public real estate portfolios. This cash flow and the net contribution cash flow will be used first to adjust the asset allocation. Any additional re-balancing required will be accomplished by shifting assets from one asset class to another. The CIO will consider transaction costs and the illiquidity of some asset classes when making the re-balancing decision. Given the volatility of the capital markets, constant minor adjustments will be avoided to reduce excessive turnover and transaction costs. The goal will be to re-balance to each asset allocation target when actual allocations are outside the policy range. Any re-allocation of assets between asset classes will be reported to the Board as part of the quarterly asset allocation report. The Board has established certain style balances and risk controls within each asset class. The CIO will monitor the structure within each asset class to maintain the intended structure. The CIO, in consultation with the Investment Consultant, will shift assets between investment managers within an asset class to maintain the Board directed style balances and risk controls. After any transfer between investment managers, the Chief Investment Officer will notify the Board at its next available meeting. SCERS Investment Policy and Objectives, January 2008 Page 14

The procedure for rebalancing is outlined below: At least annually or when the asset allocation is outside the policy target range the CIO will, in consultation with the Strategic Overlay Manager: 1. Rebalance each Asset Class, which exceeds or is below the range. 2. Fully allocate the balance of uncommitted cash. 3. Utilize the Fund's cash flow as the first source of funds for re-balancing. 4. The final source will be shifts among asset classes. At least semi-annually the Chief Investment Officer, in consultation with the Strategic Overlay Manager, will review the allocation of assets to individual investment managers and if determined to be necessary will: 1. Rebalance within each asset class the Board approved style tilts and risk controls. 2. Rebalance any individual Investment Manager that exceeds their range. 3. Report any shift of assets between investment managers to the Board at its next meeting. INVESTMENT MANAGER AGREEMENTS SCERS will use SCERS' standard investment management agreements, unless business practice requires a specialized contractual agreement. The manager will be a Registered Investment Advisor under the 1940 Investment Act, unless exempt from registration as a bank, and must agree to be a fiduciary. The contract will detail the fee schedule, the investment guidelines and the portfolio restrictions. INVESTMENT COST CONTROL Annually the CIO shall present to the Board a review all the investment costs of SCERS. INVESTMENT MANAGER REPORTING To assist SCERS in maintaining adequate and accurate accounting for the assets of the fund, and to provide for the monitoring of investment managers portfolios for compliance with investment guidelines and restrictions, the managers will be required to reconcile their investment holdings, transaction activity and income with SCERS custodian bank on a monthly basis. Such reconciliation shall be provided to the custodian and SCERS in writing and be prepared in accordance with SCERS standard reporting format. Any change in the report format will be provided to the manager in writing before being implemented SCERS Investment Policy and Objectives, January 2008 Page 15

PERFORMANCE REVIEW The CIO, with assistance from the external investment consultant, will prepare an investment performance report to the Board on a quarterly basis. Performance will be measured for the total portfolio and individual components including equities, hedge funds, fixed income, real estate and opportunities portfolios, as set forth on page six (6). In addition, the performance of each component will be broken down into individual portfolios, as set forth on pages twenty (20) and twenty-one (21). Comparisons will be made against market indices defined in this document. A variance from the stated performance objective will be calculated each quarter. Additionally, each individual portfolio s actual investment approach will be monitored against its assigned investment style to determine whether the investment manager is adhering to it. The quarterly investment performance report will compare the total fund, each asset class and individual portfolio return to appropriate market indices and a representative peer group of similar funds or similar style investment managers. The report will note significant changes in the attribution of investment manager performance. Every six months, the CIO with the assistance of the investment consultant will provide the Board with a review of one of the four major asset categories of the total investment portfolio in detail. Therefore, during a two-year period the CIO and the investment consultant will conduct a detailed review of each of the four asset categories in which SCERS' invests. INVESTMENT ACTIVITY COMPLIANCE AND INVESTMENT MANAGER MONITORING Individual investment managers will be continually monitored on performance and adherence to the firm s philosophy, process, style, and the terms and conditions of the investment management agreement. In addition, the investment managers' organization and operations will be qualitatively monitored on a continual basis. The CIO will prepare a monthly investment activity and compliance report. The report will note individual investment manager statistical compliance to their investment guidelines, objectives and portfolio restrictions. The CIO will review the investment manager purchases and sales for each month, and note in the report any deviations from the investment guidelines and restrictions, as outlined by the investment manager agreement, or significant changes in: portfolio composition sector weights portfolio turnover general trading activity changes in market value changes in cash position Quarterly, the CIO will review the performance characteristics and the dispersion of the investment managers returns within the investment style and the portfolio managers. Annually, the CIO will request and review the Investment Manager ADV Part II form and inform the Board of significant changes in the firm or apparent conflicts of interest. SCERS Investment Policy and Objectives, January 2008 Page 16

INVESTMENT MANAGER WATCH LIST The Board has delegated the ongoing monitoring of investment manager performance and the contractual relationship to the CIO and the Investment Consultant. From time to time, when in the opinion of the CIO s and Investment Consultant a significant or material adverse event occurs, an Investment Manager will be placed on a Watch List. Reasons for an investment manager to be placed on the Watch List include: Persistent underperformance of specified benchmarks or peer groups; a significant change in the firms ownership and/or structure; loss of one or more key personnel; significant loss of assets under management and loss of clients; shifts in the firm s investment philosophy or process; persistent lack of responsiveness to SCERS requests; regulatory investigations; recurring violations of the Investment Policy, investment guidelines or instructions; any other issue or situation of which the staff, investment consultant and/or Board become aware this deemed material. If an investment manager is placed on the Watch List the CIO will notify the investment manager in writing that it has been placed on the Watch List, an explanation of the adverse event resulting in the placement of the investment manager on the Watch List and informing the investment manager of what the investment manager needs to do to be removed from the Watch List. The placement of an Investment Manager on the Watch List will be reported to the Board at the next regular Board meeting along with an explanation of the adverse event resulting in the placement of the investment manager on the Watch List, conditions needing to be met or improvement required to remove a investment manager from the Watch List and an indication of the length of time for the conditions to be met or improvement to occur for the Watch List status to be removed or for consideration that a investment manager be terminated. At least quarterly, and whenever the Board deems it appropriate, the CIO and the Investment Consultant will prepare a report to the Board on the investment manager s on the Watch List and the progress being made on improving performance or correcting other non-performance related concerns. The report will include a recommendation by the CIO and the Investment Consultant on whether the investment manager should be removed from the Watch List, continue on the Watch List or be terminated. By being placed on the Watch List, the investment manager will be under close review by the CIO, the investment consultant and the Board. The purpose of the Watch List is to formally notify the investment manager of SCERS concerns. The CIO and the investment consultant will contact the investment manager to address the events resulting in the investment manager s being place on the Watch List and the CIO and the investment consultant may require the investment manager to meet with them or SCERS Investment Policy and Objectives, January 2008 Page 17

visit the investment manager s offices. The Board may request the investment manager appear in person before the Board before acting on a recommendation from the CIO and investment consultant for an investment manager to be terminated. Performance Investment manager performance is measured against their respective portfolio benchmark and relative to a peer group of similar style investment managers. Over any rolling three year and five year periods the investment manager is expected to generate an annualized net return in excess of the portfolio benchmark and rank in the top 40th percentile for their style peer group. Significant deviations from the performance objective, even over shorter time periods, will place the investment manager under closer observation, called the Watch List. When an investment manager s annualized portfolio investment performance for two consecutive quarters for trailing three year and five year periods is below the investment manager s portfolio benchmark and the investment manager s ranking is below the 40 th percentile for a peer group of similar style investment managers the investment manager will be placed on the Watch List. The portfolio performance benchmarks are included at the end of the Investment Policy and Objectives in the table entitled Performance Objectives for Individual Portfolio Components and is included in the attached amendment. An investment manager may also be placed on the Watch List for poor performance over shorter time periods. If an investment manager s portfolio performance for the trailing one year period is more than twenty-five percent below the portfolio benchmark (.25 x the portfolio return) and the investment manager s peer ranking is below the 75 th percentile for two consecutive quarters the investment manager will be placed on the Watch List. Investment manager investment performance is expected to improve within twelve to eighteen months from the time of being placed on the Watch List. The CIO and the Investment Consultant will make a recommendation on removing the investment manager from the Watch List, continuing the Watch List status or termination at least once each quarter from the date the investment manager is first placed on the Watch List. Non-Performance Events Significant gains or losses of key personnel, assets under management, or clients, nonresponsive communication, changes in ownership structure, among other factors, may place the investment manager on the Watch List. These changes are subjective in nature and will require a review by the CIO and the Investment Consultant and a written report being made to the Board. If any change is found to significantly impact or impair SCERS' objectives, the Investment manager may be immediately terminated by the Board on the recommendation of the CIO and the Investment Consultant. The termination of an investment manager shall be carried out in accordance with the process and procedure set out below. SCERS Investment Policy and Objectives, January 2008 Page 18

A Watch List designation resulting from a non-performance event should be addressed and any conditions met within six to nine months. INVESTMENT MANAGER TERMINATION SCERS may immediately terminate a manager for any reason without prior notice. In most cases any action to terminate a manager should be taken by the Board upon the recommendation for termination of the CEO or the CIO, with the concurrence of the investment consultant. If the CEO, with the concurrence of the Board President, determines that to protect the assets of the Retirement Funds immediate or emergency action by the Board is required to act on the recommendation for termination between regular Board meetings, the SCERS Board President shall call a Special Board meeting. The Special Board meeting shall be called in compliance with legal requirements governing open meetings and notice requirements. If the CEO and the CIO, or one such officer if the second is unavailable, determine, in consultation with the investment consultant and the General Counsel, and with the concurrence of the Board President or one or more Vice-Presidents if the President is not available, that: (1) it is necessary to immediately terminate an investment manager in order to protect the assets under the control of the investment manager; (2) it is not feasible to convene a meeting of the Retirement Board for that purpose in a timely manner; and (3) delay could result in detrimental impact to SCERS assets or interests, the CEO or the CIO may terminate the agreement with the investment manager. The CEO or the CIO shall immediately report such termination to the Board, along with a report of the circumstances that prompted such action. Whenever the CEO or the CIO exercise the authority to terminate an agreement with an investment manager as provided above, he or she may also take whatever actions he or she may determine, in consultation with the investment consultant and the General Counsel, and with the concurrence of the Board President or one or more Vice- Presidents if the President is not available, are reasonable and necessary to transition the assets under the control of the investment manager to alternate management, including, without limitation: (1) temporarily assigning the assets to another existing contracted investment manager; (2) identifying and engaging an alternate investment manager to manage the assets until a permanent replacement for the terminated manager can be engaged; or (3) contracting for the services of a transition manager to facilitate an efficient and cost effective transition of the assets between the former and interim manager. The CEO, or in his or her absence, the CIO, may execute any and all agreements reasonably necessary to facilitate an orderly and efficient transition of the affected assets, so that they will be managed and protected until they are assigned to one or more alternate investment managers as determined by the Board. The CEO, or in his or her absence the CIO, shall immediately report any and all steps taken to transition the assets and to protect the interests of SCERS to the Board. SCERS Investment Policy and Objectives, January 2008 Page 19

PERFORMANCE OBJECTIVES FOR INDIVIDUAL PORTFOLIO COMPONENTS DOMESTIC EQUITY (80% large to mid and 20% small) Large Cap Core Index - (33.3%) Return equal to Russell 1000 Index, net of fees. Enhanced Index - (10.0%) Return equal to Russell 1000 Index plus.50%, net of fees. Large Cap Short Extension - (10.0%) Return equal to Russell 1000 Index plus 1%, net of fees. Large Cap Growth-(13.3%) Return equal to Russell 1000 Growth index plus 1%, net of fees. Small Cap Growth-(10.0%) Return equal to Russell 2000 Growth index plus 1.5%, net of fees. Large Cap Value-(13.3%) Return equal to Russell 1000 Value Index plus 1% net of fees. Small Cap Value-(10.0%) Return equal to Russell 2000 Value Index plus 1.5% net of fees. INTERNATIONAL EQUITY (75% Developed and 25% Emerging Markets) Developed Markets - (86.7% large 13.3% small) Large - Value - (20.0%) Return equal to MSCI EAFE Value Index plus 1%, net of fees. Large - Core - (25.0%) Return Equal to MSCI EAFE Index plus 1% net of fees. Large Growth (20.0%) Return equal to MSCI EAFE Growth Index plus 1% net of fees. Small Cap (10.0%) Return equal to MSCI small cap or other comparable index plus 21.5% net of fees. Emerging Markets - (25.0%) Emerging Markets Growth Return equal to the MSCI EMF index plus 1.5% net of fees. (Manager Objectives Continued on the next page) SCERS Investment Policy and Objectives, January 2008 Page 20

PRIVATE EQUITY Continued PERFORMANCE OBJECTIVES FOR INDIVIDUAL PORTFOLIO COMPONENTS 100% of the asset class is allocated to Return is equal to S&P 500 plus private equity managers 200 basis points, net of fees. FIXED INCOME Enhanced Index - (33.3%) Enhanced Lehman Aggregate. Active Core Plus - (66.7%) Return equal to Lehman Aggregate Bond Index plus 0.25%, net of fees. Return equal to Lehman Aggregate Bond Index plus 0.7%, net of fees. REAL ESTATE Private Market - (80% of asset class) Core Funds or Separate Accounts Value Added Funds Public Equity (20% of asset class) Separate Accounts Return equal to the NCREIF plus 1.0%, net of fee. Return equal to the NCREIF plus 2.0%, net of fees. Return equal to the NAREIT plus 1.0%, net of fees. EQUITY LONG/SHORT HEDGE FUNDS 100% of the asset class is allocated to Return is equal to equity long/short fund of funds managers the annualized 91-day T-Bill Rate plus 5.0%, net of fees. OPPORTUNITIES This segment includes a mix of investments that offer good risk/adjusted returns and have a low correlation with SCERS public equity and debt investments, such as commodities Return is equal to Dow Jones AIG plus 100 basis points, net of fees. STRATEGIC CASH OVERLAY Daily available cash is to be invested permissible investments as authorized by this Policy excluding real estate. Return that is equal to the target in weights in SCERS Asset Allocation SCERS Investment Policy and Objectives, January 2008 Page 21

EXHIBIT F Minimum Audit Requirements and Reporting Guidelines for California Retirement Systems 39

STATE OF CALIFORNIA OFFICE OF THE CONTROLLER MINIMUM AUDIT REQUIREMENTS AND REPORTING GUIDELINES FOR PUBLIC RETIREMENT SYSTEMS