VERMONT PENSION INVESTMENT COMMITTEE February 14, 2007 Members Present: JEB SPAULDING, Chairman, VT State Treasurer WARREN WHITNEY

, VSERS Vice-Chairman, VSEA member (term expiring September, 2008) DAVID HERLIHY Representing LINDA McINTIRE, VSERS Commissioner of Human Resources JAMES REARDON, VSERS Commissioner of Finance & Mgmt JOSEPH MACKEY, VSTRS Active No. 29334 (term expiring July 1, 2009) JAY KAPLAN, VSTSR Association of Retired Teachers of Vermont, (term expiring July 1, 2008) VAUGHN ALTEMUS, VSTRS representing Commissioner of Education THOMAS CANDON, VSTRS representing Commissioner of BISHCA – later in meeting STEVEN JEFFREY, VMERS Employee Representative (term expiring July 1, 2007) – later in meeting DAVID LEWIS, VMERS Employer Representative (term expiring July 1, 2009) – later in meeting Members Absent: ROBERT HOOPER, VSEA member (term expiring September 2008) TOM GIFFIN, VSEA member (term expiring September 2007) DICK JOHANNESEN, VSERS Governor’s Delegate JOE HEALY, VSERS Retired Vermont State Employees’ Association, (term expiring September 2007) W. JOHN MITCHELL, II, VMERS Employee Representative (term expiring July 1, 2008) JON HARRIS, VSTRS Active No. 25669 (term expiring July 1, 2007) Also attending: Donna Holden, Clerk David Minot, Director of Finance and Investments Bill Rice, Treasurer’s Office Law and Policy Director William Griffin, Chief Assistant Attorney General Kevin Kondry, NEPC Call to Order: The Chairperson, Jeb Spaulding, called the Wednesday, February 14, 2007 meeting to order at 8:45 a.m., which was held at the Capitol Plaza Conference Room #335, 100 State Street, Montpelier, VT. Mr. Spaulding explained that due to the lack of a quorum, the meeting would be held for informational purposes only, unless a quorum became present.

ITEM 1:

Investment Consultant Quarterly Review

Mr. Kondry presented the Q4/06 report. He reported a total fund balance of $3.211 billion in assets. The Committee also reviewed the individual plans’ current and target asset allocations, manager summaries, and plan performance. VSTRS: The fourth quarter 2006 performance reported a market value fund balance at approximately $1.576 billion and a gross quarterly return of 6.0%, an out performance of the 5.8% median public fund with assets over $500M. The one-year return was 15.7% vs. the median public fund at 14.5%, three-year return 11.2% vs. the median public fund at 11.4%, and a five-year return of 9.5% vs. 9.0%.

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VSERS: The fourth quarter 2006 performance reported a market value fund balance at approximately $1.323 billion and a gross quarterly return of 5.5%, an under performance of the 5.8% median public fund with assets over $500M. The one-year return was 14.9% vs. the median public fund at 14.5%, three-year return 10.9% vs. the median public fund at 11.4%, and a five-year return of 9.2% vs. 9.0%. VMERS: The fourth quarter 2006 performance reported a market value fund balance at approximately $316 million and a gross quarterly return of 5.5%, an under performance of the 5.6% median public fund. The one-year return was 14.8% vs. the median public fund at 13.5%, three-year return 10.9% vs. the median public fund at 10.5%, and a five-year return of 8.8% vs. 8.5%. VPIC: The fourth quarter 2006 performance reported a market value fund balance at approximately $3.211 billion with an average gross quarterly return of 5.7%, an under performance of the 5.8% median public fund with assets over %500M. The one-year average return was 15.13% vs. the median public fund at 14.5%, three and five-year returns were not available, based on the July 1, 2004 inception date. The Committee members present agreed the Investment Search subcommittee should discuss the appropriate weighting of allocations to the large cap and international sectors, and whether the current allocation discrepancies should be equalized across the VPIC. ITEM 2: A. No action. B. Investment/Search Subcommittee Report Large Cap & International Equity Investment Manager Update Mr. Spaulding provided information regarding the prior day’s manager presentations. Emerging Markets Investment Recommendation Mr. Spaulding briefed the members present of the Investment/Search subcommittee’s discussion regarding establishing a designated emerging markets allocation. He advised the Committee the Investment/Search subcommittee agreed to defer any further consideration on this matter, pending further education/information. Core Fixed Income Investment Recommendation Mr. Spaulding advised the Committee of the February 13, 2007, Investment Search subcommittee recommendation to convert the current VPIC core fixed income mandate totaling approximately $580M to an allocation of 50% to the Delaware Investments Core Plus fixed income strategy with Committee Action Items Approve the Minutes of November 29, 2006

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a 10% bank overlay, and to research and consider allocation of the remaining 50% to the Mellon Global Alpha II Strategy with the recommended benchmark of the Lehman Aggregate. Mr. Jeffrey and Mr. Lewis arrived during the next item. The Chairperson, Jeb Spaulding, called the quorum of the Board to order at 11:55 a.m. C. Terrorist/Genocidal Policy Follow-Up and Possible Action

Mr. Spaulding provided a report to the Committee on the status of manager holdings and compliance with the VPIC Policy on Investments in Terrorist or Genocidal Linked Countries. The Committee reviewed the policy and agreed it would be prudent, from a fiduciary position, to divest from companies on the Sudan Divestment Task Force "Highest Offenders" list, and instruct appropriate managers to divest from holding or purchasing companies on that list. They further agreed that many other states would likely take similar affirmative action to sell holdings on the list and that the value of the VPIC portfolio could suffer if VPIC continues holding those securities. Mr. Spaulding also distributed information regarding the Conflict Securities Advisory Group. The members present supported the Treasurer's request to explore and review the VPIC portfolio with that organization and establish criteria necessary to develop a potential divestiture list for companies substantially supporting terrorist activities as outlined in the Policy on Investments in Terrorist or Genocidal Linked Countries. On a motion by Mr. Kaplan seconded by Mr. Altemus, the Committee unanimously voted, for fiduciary reasons, to direct the appropriate VPIC managers to divest from any holdings on the Sudan Divestment Task Force highest offenders list. Mr. Jeffrey and Mr. Lewis left the meeting. D. No action. Mr. Spaulding advised that the VMERS Board approved moving forward with the process. Mr. Rice advised that he and Mr. Griffin were continuing to work on governing documents for the Committee’s approval. Tom Candon joined the meeting via conference call. Mr. Whitney left the meeting. E. Private Equity and Other Contracting Issues Municipality Participation in VPIC

Mr. Griffin and Committee members present discussed contracting concerns specifically in nontraditional areas, i.e. private equity, real estate, global allocations, etc. He asked for consideration for his Private Equity Contract Process suggestions. Mr. Spaulding expressed his concern that due to VPIC’s inability to successfully consummate investment decisions on a regular and timely basis as a result of contracting and other legal concerns,

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that VPIC should put further consideration of such investments on hold, until and unless a process was developed that would allow investment in top-tier funds on a regular and timely basis. The Treasurer’s Office will work with the AG's Office to come up with a way to proceed. F. ETI – RFP Proposal Schedule

Mr. Spaulding advised the Board of the following schedule. ETI Policy Notice and News Release by March 15 Release RFP - May 15 Proposals due - July 1 Investment Search RFP review/evaluation meeting - July 15 Selected vendor interviews - August 1 Quarterly VPIC Meeting - Aug 15 Funding of ETI investment - September 1 ITEM 3: A. None Committee Discussion Item Director of Finance and Investments Report

ITEM 4: None Adjournment

Any New or Other Business to Come Before the Board

The Chairperson declared the meeting adjourned 1:55 p.m..

Next Meeting Date: April 10, 2007 - Full VPIC meeting

Respectfully submitted,

Donna Holden, Clerk