Minutes are not final until approved by the Board of Regents at the April 2009 meeting

VIDEOCONFERENCE BOARD OF REGENTS and its INVESTMENT COMMITTEE NEVADA SYSTEM OF HIGHER EDUCATION System Administration Conference Rooms 5550 West Flamingo Road Suite C-1, Las Vegas 2601 Enterprise Road, Reno Great Basin College, Berg Hall Conference Room 1500 College Parkway, Elko Friday, January 30, 2009 Members Present:

Mr. James Dean Leavitt, Chair Mr. Mark Alden Mr. William G. Cobb Mr. Ron Knecht Mr. Michael B. Wixom

Other Regents Present:

Dr. Raymond D. Rawson

Others Present:

Mr. Bart Patterson, Chief Counsel Mr. Hank Stone, System Counsel and Director of Real Estate Planning Dr. Mike Reed, Vice Chancellor, Finance Ms. Ruby Camposano, NSHE Mr. Jamie Hullman, NSHE Ms. Ginny Wiswell, NSHE Dr. Mike Richards, President, CSN Mr. Carl Diekhans, Interim President, GBC Dr. Fred Maryanski, President, NSC Dr. David Ashley, President, UNLV Dr. Milton Glick, President, UNR Ms. Patty Charlton, CSN Dr. Cleve McDaniel, DRI Dr. Peter Ross, DRI Ms. Delores Sanford, TMCC Dr. Michael Sauer, UNLV Dr. Shannon Ellis, UNR Mr. Tom Judy, UNR Mr. Fred Perrierra, UNR Mr. Chuck Price, UNR Mr. Ron Zurek, UNR Ms. Mary Price, National Judicial College, UNR Mr. Phyllis Whittiker, National Judicial College, UNR Mr. Dan Neverett, WNC Mr. Bill Atlas, Cambridge Associates Mr. David Main, Commonfund

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Chair Leavitt called the meeting to order at 8:30 a.m. with all members present. 1.

Approved-Minutes – The Committee recommended approval of the minutes from the December 2, 2008, and the December 30, 2008, meetings (Refs. INV-1a and INV-1b on file in the Board office). Regent Wixom moved approval of the minutes from the December 2, 2008, and the December 30, 2008, meetings. Regent Alden seconded. Motion carried.

2.

Approved-Asset Allocation and Investment Returns – The Committee recommended approval to split the endowment cash fund and invest $3.75 million each into the Wells Fargo Government (Agency) Money Market Fund and the Wells Fargo Heritage Money Market Fund. If it is not possible to split the funds, the entire $7.5 million will be invested in the Government (Agency) Money Market Fund. The Committee also recommended adopting the modifications to the existing absolute return benchmark and the hedge fund benchmarks, as recommended by Cambridge Associates. Over the next year, both versions of the benchmarks will be reported as a comparison. Mr. Bill Atlas, Cambridge Associates, explained that the first action item was to review and approve a banking service relationship for the endowment fund. NSHE staff has expressed a preference to go with one provider. Taking that into consideration, all the recommendations outlined on page 6 of the report (on file in the Board office) are with Wells Fargo Money Market Funds: Treasury Plus Money Market Fund, which is now yielding very little, the Government (Agency) Money Market Fund and the Heritage Money Market Fund, which allows the manager to invest in credit such as commercial paper, certificates of deposit and floating and variable rate bonds. All will carry a 0.20% annual management fee to Wells Fargo for the oversight of the account. Mr. Atlas proposed investing in the Government (Agency) Fund in terms of risk. Regent Wixom explained that he had to recuse himself because Wells Fargo is a client of his firm. Ms. Ruby Camposano, Director, Banking & Investments, reported that there is $7.5 million cash in the endowment account because the previously approved endowment pool rebalancing to PIMCO in the amount of $7 million was rescinded. Normally the account fluctuates between $500,000 and $1 million. Ms. Camposano explained that the minimum investment for the Government (Agency) Money Market Fund is usually $10 million, but Wells Fargo is making an exception because of the entire investment relationship. Chair Leavitt requested comparative information between the Government (Agency) Fund and the Heritage Fund. Mr. Atlas responded that, in this market,

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Approved-Asset Allocation and Investment Returns – (continued) there could be a difference of up to 150 basis points and the Government (Agency) Fund would allow instant access to the investment. Regent Knecht observed that 150 basis points could arguably be perceived as a temporary transient phenomenon. He felt liquidity was important and asked about liquidity differences among the three funds. Mr. Atlas responded that there should be no liquidity differences with the funds. Regent Knecht requested a brief description of the repurchase agreements, the federal agencies and the FDIC guarantee issues. Mr. Atlas provided examples of the federal agencies including Fannie Mae, Freddie Mac and Ginny Mae. They were always perceived to have a moral backing from the Treasury. Mr. Atlas continued that repurchase agreements are usually involved with investment banks that loan money. Interest is paid on the loan at 102% collateralization. These are usually overnight type funds. Regent Cobb observed that the bulk of the commercial paper was at 60%. Mr. Atlas explained that the government stepped in because corporations were having a difficult time rolling over their debt obligations. Mr. Atlas indicated that in making a choice of the three funds, there is probably very little risk in all of them. Chair Leavitt asked about splitting the money between the Government (Agency) Fund and the Heritage Fund. Mr. Atlas felt that a 50%-50% investment in those two funds was feasible and added that the same could be done for the operating fund. Regent Cobb moved approval to split the endowment cash fund and invest $3.75 million each into the Wells Fargo Government (Agency) Money Market Fund and the Wells Fargo Heritage Money Market Fund. Regent Alden seconded. Mr. Bart Patterson, Chief Counsel, advised the Committee that he alerted the Regents that Regent Page works with Wells Capital, which manages both of these funds. Chief Counsel Patterson obtained a written assurance from Regent Page that he does not supervise this line of funds and does not derive any benefit from these funds. Chief Counsel Patterson does not feel there is a conflict of interest or violation of the ethical rules associated with these transactions. He thought the Committee could proceed in the best interest of the System. Ms. Camposano stated that there could be an issue splitting the funds because of the $10 million minimum investment requirement into one fund by Wells Fargo. Regent Alden recommended investing in one fund.

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Approved-Asset Allocation and Investment Returns – (continued) Chief Counsel Patterson explained that the motion could be amended that if it is not possible to split the funds, the entire $7.5 million will be invested in the Government (Agency) Money Market Fund. Regent Cobb amended his motion to recommend that, if it is not possible to split the funds, the entire $7.5 million be invested in the Government (Agency) Money Market Fund. Regent Alden accepted the friendly amendment. Regent Knecht asked about response time concerning adverse developments with the Heritage Fund. Mr. Atlas felt that scenario would be highly unlikely. The public would have to lose complete confidence in the ability of the U.S. Government. Upon a roll call vote, the amended motion carried. Regents Alden, Cobb, Knecht and Leavitt voted yes. Regent Wixom abstained. Mr. Atlas explained that the second action item for the Committee to consider was the implementation of alternate benchmarks for the endowment and operating funds used for the quarterly performance report. This relates to the benchmarks that are used when trying to make a decision as to how well the pool did in the different asset classes of the investments. Mr. Atlas continued that since April 2006, the benchmark used to determine how the absolute return fund has done is Merrill Lynch T-Bill + 6%. This benchmark is extremely hard to beat, especially in a down market, which is when the pool is going to underperform considerably and overstate the loss. Cambridge Associates recommends using the 12% Hedge Fund Research Institute Fund-of-Funds Diversified Index. The investment will be comparing itself to other hedge funds versus an artificial index. In addition, Mr. Atlas recommended adoption of the modifications of the hedge fund benchmarks of 7% Wellington DIH Benchmark and 3% FTSE NAREIT Equity Index instead of what is currently being used for inflation hedging assets, CPI-U + 5%. If the inflation hedging assets are down considerably, as in 2008, it overstates the underperformance versus the benchmark. Cambridge Associates suggests changing that to a market benchmark, which is more reflective. Regent Alden clarified that the only change is the way assets are reviewed through the benchmark.

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Approved-Asset Allocation and Investment Returns – (continued) Regent Knecht indicated that the change would essentially adjust the benchmark based on performance against the benchmark. He felt the benchmarks should be set as a fundamental element of policy oversight as a Committee. Regent Knecht thought that good policy was based on expectations going forward and is not based on the outcome. Past performance is no indicator of future outcomes. Regent Knecht suggested that there be a thorough review of the broad investment policies for both the endowment and operating funds in terms of an orientation to active only, passive only or a combination. It is not just the choice between active and passive strategies, but also the asset allocation approach and chosen benchmarks. Regent Wixom stated that the benchmarks are intended to provide information on a relative basis. He asked about the trend with similar institutions with the same situation. Mr. Atlas responded that most of those institutions are moving their benchmarks because it reports a more accurate view of reality without overstating any market. Chair Leavitt requested reporting on both benchmarks to have a comparison. Regent Knecht indicated opposition to the change because he is skeptical of the fees with any index that involves Fund-of-Funds. Regent Wixom moved approval to adopt the modifications to the existing absolute return benchmark and the hedge fund benchmarks, as recommended by Cambridge Associates. Over the next year, both versions of the benchmarks will be reported for comparison purposes. Regent Alden seconded. Upon a roll call vote, the motion carried. Regents Alden, Cobb, Leavitt and Wixom voted yes. Regent Knecht voted no.

3.

Approved-NSHE Operating Pool Update – The Committee recommended approval to increase the comfort zone of the operating pool cash account from $120 million to $150 million. The Committee also requested that Dr. Mike Reed, Vice Chancellor, Finance, return to the Committee with a liquidation scenario, a contingency plan and an analysis of the liquidity of the operating pool. Vice Chancellor Reed will also address the trade-off between security and the expected return. Vice Chancellor Reed indicated that at the December 2, 2008, meeting, the Investment Committee directed staff to provide an update on the operating pool

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Approve-NSHE Operating Pool Update – (continued) reserve account at every Investment Committee meeting. The account balance as of January 29, 2009, was negative $59.3 million. Vice Chancellor Reed explained that the comfort zone within the operating pool is $120 million, with an operating safety net of approximately six to nine months. Current cash on hand is $177 million. The Committee may want to increase the amount of the comfort zone. Regent Wixom felt it was best to be more cautious given the uncertain nature of the present situation. He suggested increasing the amount to $150 million. Regent Knecht asked about precautionary measures. Vice Chancellor Reed replied that the NSHE receives the monthly draw from the state in the amount of approximately $50 million every first business day of the month. In addition, there are two large revenue streams representing registration fees and tuition that peak each January and August. If there are still problems in meeting the cash requirements from daily operation, only then would the NSHE have to liquidate its investment positions from the other investment vehicles. Vice Chancellor Reed suggested fine tuning the numbers with a liquidation scenario and a contingency plan. Regent Wixom requested an analysis for increasing the comfort zone of the operating pool cash account to $150 million. Regent Knecht requested addressing the trade-off between security and the expected return. Regent Wixom moved approval to increase the comfort zone of the operating pool cash account from $120 million to $150 million. Regent Wixom added that the motion is made with the understanding that Vice Chancellor Reed will return to the Committee and address the questions posed. Regent Knecht seconded. Chief Counsel Patterson stated that there has been a relatively constant deficit position in the investment portfolio, between $55 million and $62 million, over the last several months. The potential problems are the state not paying on a monthly basis, other revenues not coming in, or a big drop in the investment returns, which should not occur very rapidly. Vice Chancellor Reed asked about the disposition of the $27 million remaining in cash in the operating pool. Mr. Atlas recommended that it be left in cash. Upon a roll call vote, the motion carried unanimously.

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Information Only-Cash Management Practices – Dr. Mike Reed, Vice Chancellor, Finance, and System Office staff, provided a report on the current NSHE cash management protocol. The presentation focused on NSHE practices, current public entity standards, especially as they relate to security issues, and associated best practices (Ref. INV-4 on file in the Board office). Vice Chancellor Reed reported that the auditors were concerned with the internal controls of the cash account. Mr. Jamie Hullman, Senior Investment Accountant, has been hired as the second person in the department to address the segregation of duties to eliminate the auditor’s concerns. Best practices have been reviewed and instituted where possible and hours of labor have decreased considerably. Regent Wixom asked about situations where one person had access to, or made decisions about, large amounts of money in relation to additional controls. Ms. Camposano replied that, although there was a period of time where the Banking & Investment Department was staffed by one person, there were compensating controls in place to ensure timely detection of errors or irregularities. The controls in place included limiting the direction of cash transacted by one person. In addition, the department’s procedures require two persons to complete a trade transaction, where one person approves and another initiates the trade. Regent Alden suggested that no action be taken at this time.

5.

Approved-System Administration Endowment Accounts – The Committee recommended approval to assess a 1.5% management fee from the System endowment accounts held in the NSHE endowment pool and allocation of the fee to the designated campus beneficiaries (Ref. INV-5 on file in the Board office). Vice Chancellor Reed requested approval of a 1.5% management fee for the 12 campus accounts held at the System Office. This management fee is for the campus to directly support enhancing their development and fundraising activities. Regent Knecht moved approval to assess a 1.5% management fee from the System endowment accounts held in the NSHE endowment pool and allocation of the fee to the designated campus beneficiaries. Regent Wixom seconded. Motion carried.

4.

Approved-Cash Management Practices – (continued) Mr. Atlas noted that Cambridge Associates does not get involved with wiring instructions. He reported that Ms. Camposano receives those instructions directly from the manager.

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Approved-Update on Underwater Accounts – The Committee recommended approval to suspend the endowment spending distribution on all underwater accounts effective July 1, 2009, or immediately upon the request of the institution. Vice Chancellor Reed explained that these are endowment accounts that are underwater, with current market values less than the book value or less than the original cost. Vice Chancellor Reed continued that the Committee may take action to suspend distribution or continue to distribute. However, many of these accounts are scholarship accounts and, if suspended, there is a possibility that the students receiving scholarships may not receive the necessary funds through June 30, 2009. The total value of the scholarships is $120,000 System-wide. Given the nature of the endowments, and the accounts being underwater, the issue is whether to suspend the scholarships on July 1, 2009, as opposed to December 31, 2008. Regent Knecht asked about donor stipulations. Chief Counsel Patterson responded that there could be legal issues. The Uniform Prudent Management Act deals with the generalized endowment accounts that are unrestricted, but this does not trump the donor’s request for the use of the money. Contacting the donors and requesting their approval is recommended but it will take some time. Vice Chancellor Reed said that Ms. Camposano will be in contact with the campuses to apprise them of the situation. The campuses will then contact the donors directly to see if they wish to continue providing the scholarships, perhaps from alternative sources, or to override the initial language of the document. Ms. Camposano added that if income is suspended as of July 1, 2009, those campuses who have expressed a desire to suspend now could get the distribution and reinvest it. Regent Wixom moved approval to suspend the endowment spending distribution on all underwater accounts effective July 1, 2009, or immediately upon the request of the institution. Regent Knecht seconded. Ms. Patty Charlton, Senior Vice President, Finance & Facilities, CSN, explained that CSN does not require additional time and would like the distributions terminated as of December 31, 2008. The difference will be compensated by the cooperative agreement with the CSN Foundation using access funding and Foundation funds. There is a commitment with the Foundation to continue with the scholarships. Regent Wixom clarified that he does not want the motion to mandate distributions and undermine any institution. The institutions should have maximum flexibility.

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Regent Alden left the meeting. 6.

Approved-Update on Underwater Accounts – (continued) Chief Counsel Patterson recommended the motion be amended to allow the suspension of distributions on underwater accounts effective July 1, 2009, except when an institution contacts the System Office and requests immediate suspension of the distribution for an account, and further, that the suspension be contingent upon contacting donors who have specific restrictions as to whether the expenditure can continue. Regent Wixom amended his motion as recommended by Chief Counsel Patterson. Regent Knecht accepted the friendly amendment. Upon a roll call vote, the motion carried unanimously. Regent Alden was absent.

Agenda Items 7 and 8 were taken together. 7.

Approved-Lease with Role Model, LLC, for Retail Space in the Joe Crowley Student Union (JCSU) – UNR – The Committee recommended approval of a lease with Role Model, LLC, to operate a retail food operation in the JCSU at UNR (Ref INV-7 on file in the Board office).

8.

Approved-Lease with Spudistros, Inc., for Retail Space in the Joe Crowley Student Union (JCSU) – UNR – The Committee recommended approval of the lease with Spudistros, Inc., to operate a retail food operation in the JCSU (Ref. INV8 on file in the Board office).

Regent Alden returned to the meeting. Dr. Shannon Ellis, Vice President, Student Services, UNR, explained that this is a 3, 444 square foot facility that is being leased for approximately $90 per square foot. Role Model, LLC, will also be paying 8% of their average gross sales per month. Regent Alden asked about parking. Mr. Hank Stone, System Counsel and Director of Real Estate Planning, said there are parking provisions which are stipulated in the lease. Regent Wixom moved approval of the leases with Role Model, LLC, and Spudistros, Inc., to operate retail food operations in the JCSU. Regent Cobb seconded.

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7.

Approved-Lease with Role Model, LLC, for Retail Space in the Joe Crowley Student Union (JCSU) – UNR – (continued)

8.

Approved-Lease with Spudistros, Inc., for Retail Space in the Joe Crowley Student Union (JCSU) – UNR – (continued) Mr. Ron Zurek, Vice President, Administration & Finance, UNR, responding to a question from Regent Knecht, added that when there was no formal response to the RFP, UNR went out to generate interest in the space. It was then that Role Model, LLC, answered. Motion carried.

9.

Approved-Capital Assets “Flow Process” Checklist – The Committee recommended approval of an update to the Land Use section of the Capital Assets “Flow Process” Checklist (Ref. INV-9 on file in the Board office). Vice Chancellor Reed felt a more complete statement of issues was necessary prior to consideration of any capital project and before that project proposal was brought to the Committee. This places the burden on the campuses to complete the items in the document, as appropriate, prior to submission. Each of the campuses’ business officers was part of the process. Regent Alden moved approval of the update to the Land Use section of the Capital Assets “Flow Process” Checklist. Regent Cobb seconded. Motion carried.

4.

Information Only-Cash Management Practices – (continued) Regent Knecht was concerned regarding the security issues. He felt it was possible to improve business management and business innovation by linking them with technology. There is potential, over time, with technological progress and business innovation, to do more with less, as the System staff has demonstrated.

10.

Public Comment – None.

11.

New Business – Regent Alden requested an information item be placed on the agenda concerning less meetings, shorter meetings and fewer items on the agenda. He felt that four meetings a year would be acceptable for monitoring and meeting the fiduciary responsibility of the Board.

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New Business – (continued) Ms. Ginny Wiswell, Director of Facilities Planning, Management & Analysis, NSHE, said the Committee requested a policy that relates to addressing, through a formula mechanism, deferred maintenance projects to increase and/or improve the life of existing structures. A draft policy has been created and will be presented for final review to the business officers. It will then be brought to the Committee.

The meeting adjourned at 10:34 a.m.

Prepared by:

Nancy Stone Administrative Assistant IV

Submitted for approval by:

Scott G. Wasserman Chief Executive Officer of the Board of Regents

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