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          1               COMMONWEALTH OF MASSACHUSETTS
                   PENSION RESERVES INVESTMENT MANAGEMENT BOARD
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         12
                  Minutes of the October 5, 2006, Board Meeting
         13                  commencing at 9:30 a.m.

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         23
                                      in the
         24                       Board Offices
                                at 84 State Street
         25                   Boston, Massachusetts


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          1                         I N D E X

          2                                                PAGE NO.

          3   Call to Order                                      4

          4   Approval of the Minutes                            4

          5   Financial Report                                   5

          6   Executive Director's Report                       25

          7   Investment Committee                              29

          8   Real Estate Committee                             95

          9   Administration & Audit Committee                  98

         10   Adjournment                                      127

         11   Signatures                                       128

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         25


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          1                   P R O C E E D I N G S

          2   Call to Order:

          3            A meeting of the Pension Reserves Investment

          4   Management Board was held on Thursday, October 5,

          5   2006, at the PRIM Board located at 84 State Street,

          6   Boston, Massachusetts.  Present board members were as

          7   follows:  Treasurer Cahill, Mr. Alex Aikens,

          8   Mr. Robert Brousseau, Mr. Paul Cesan, Ms. Theresa

          9   McGoldrick, Mr. George McSherry, Mr. Peter

         10   Schwarzenbach (9:41 a.m.) and Mr. Ralph White.

         11            Also present were members of the PRIM Board

         12   staff; First Deputy Treasurer Neil Morrison; Mr. Paul

         13   Todisco of the Health Care Security Trust; Mr. Robert

         14   Dennis and Mr. Michael DeVito of PERAC; Mr. Jim

         15   Reinhardt of Pathway Capital; Sven Herbst of Reuters;

         16   Ms. Erin Devine and Al Goduti of BGI; Mr. Peter

         17   Gerlings and Mr. Ben Simonds of NEPC; Mr. Paul

         18   Shanley of Amity; Ms. Kathy Barchick and Mr. Dennis

         19   Sugino of Cliffwater; Ms. Laura Kreutzer of Dow

         20   Jones; Ms. Eileen O'Connor and Mr. Chuck Anderson of

         21   the Treasurer's Office; Mr. A. Greenwood of Fidelity,

         22   Mr. Frank Blaschka of the Townsend Group; Ms.

         23   Elizabeth O'Hara of Wellington; Mr. Bill Deuchler of

         24   Graham Capital; Mr. Bruce Shain of Mellon; Mr. John

         25   Regier of Mintz, Levin; Mr. John Delaney of LJR/BNY


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          1   Brokerage; Mr. Doug Appell of P&I; M. Keenan of

          2   Bloomberg; Mr. Andrew Stimson of Liberty; and

          3   Mr. Andrew Caffrey of the Boston Globe.

          4            The meeting convened at 9:30 a.m.  Treasurer

          5   & Receiver-General Timothy P. Cahill chaired the

          6   meeting.

          7         TREASURER CAHILL:  Okay.  We're going to

          8     start the meeting, October 5th.  Welcome

          9     everyone.  We have a quorum of six members, and

         10     we're waiting on two more.  But we're going to

         11     get started, and I will accept a motion to accept

         12     the minutes of the August 3rd meeting.

         13         MR. BROUSSEAU:  So moved.

         14         MR. McSHERRY:  Second.

         15         TREASURER CAHILL:  Motion is made and

         16     seconded.  All those in favor say aye.

         17         THE BOARD:  Aye.  (Unanimous.)

         18         TREASURER CAHILL:  Opposed?  The ayes have

         19     it.

         20            (VOTED:  That the PRIM Board that the

         21            PRIM board approve the minutes of the

         22            meeting August 3rd, 2006; and, further,

         23            that the Board authorize the Executive

         24            Director to take all actions necessary

         25            to effectuate this motion.)


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          1         TREASURER CAHILL:  And we will move on to

          2     Item 2 on the Agenda, the Financial Report,

          3     beginning with Stan.

          4         MR. MAVROMATES:  Good morning, everyone.  We

          5     have a correction to the report I'm going to go

          6     over.  So if you could just pass those down, I'd

          7     appreciate it.  We today have performance through

          8     August.  September is not ready yet and will not

          9     be ready for probably the middle to towards the

         10     end of September.  So I'm going to go to Appendix

         11     B and go over the August performance.

         12           So if you turn to page 2 of appendix B, and

         13     those papers I handed out are replacements for

         14     pages 5 and 6.  So when I get to those pages,

         15     I'll remind you of that.  Okay, page 2 it shows

         16     that the end of August we ended up with 43.1

         17     billion.  That's up 2.9 billion from the end of

         18     2005.  Pretty healthy increase, a nice upward

         19     trend.

         20           If you turn to page 3, it will show you

         21     what the asset application was at the end of

         22     August.  The reason I say "was" is because there

         23     has been significant changes since that point in

         24     time.  We'll go around the clock here.  Since on

         25     October 1st, we invested about 3 1/2 percent in


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          1     portable alpha.  So this picture has changed.

          2     You know our ultimate goal is 5 percent.  So

          3     they've been calling capital on September 1st and

          4     also October 1st.  Secondarily, you'll notice on

          5     here that real estate is at 10.9 percent.  Lou

          6     will talk about it later, but there was a large

          7     transaction and that allocation is about 10.2

          8     percent now, because a big building was

          9     liquidated on the West Coast.  Other than that

         10     everything else is pretty close to the long-term

         11     allocation, with the exception of alternatives,

         12     which Wayne and his team is doing a great job

         13     putting out as much money, but it's coming back

         14     as fast as he's putting it out.

         15           Page 4 is the performance page of the total

         16     PRIT fund.  Starting on the left, that's the

         17     calendar year-to-date performance.  So this is

         18     again through the end of August.  The fund is up

         19     7.89 percent.  The index is 8.16.  So we're

         20     behind our benchmark by about 27 basis points.

         21     Longer term you can see it's double digit returns

         22     for nearly all time periods with the exception of

         23     five years, that's 9.96.  But more importantly,

         24     all other time periods are exceeding the

         25     actuarial rate of return.


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          1         TREASURER CAHILL:  What's the S&P up for

          2     that same period; do you know?

          3         MR. MAVROMATES:  For what?

          4         TREASURER CAHILL:  For the year to date,

          5     comparative to what we have here.

          6         MR. MAVROMATES:  I know through yesterday.

          7     Let's see, year to date the S&P is up 5.72.

          8     That's through the end of August.

          9         (Mr. Schwarzenbach enters the room.)

         10         MR. MAVROMATES:  Good morning, Peter.  I'll

         11     turn to page 5 to show you who the contributors

         12     are and who the detractors, and then this, page

         13     five, is we handed out a correction earlier.  The

         14     only change on that is Numeric is supposed to be

         15     two basis points.  So that's the only correction.

         16           The major contributors, as usual, Marathon

         17     is at the top of the list.  They've added the

         18     most value.  And Hannah reminded me yesterday

         19     that October 1st was the ten-year anniversary

         20     that Marathon has been managing money for the

         21     PRIT fund, and some of these numbers are

         22     stunning.  Since inception they've returned

         23     11.25 percent on an annualized basis versus the

         24     MSCI EAFE at 6.86.  If we translate that into

         25     dollars, we have contributed $1.1 billion to them


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          1     and taken out $380 million.  And they've added a

          2     value of $1.4 billion over ten years, thus the

          3     2.2 billion.  If you think of it in sort of a

          4     multiple term, that's 2.75 times our money.  I

          5     just think that's stunning, and it's a terrific

          6     firm.  And I just wanted to acknowledge that it's

          7     their ten-year anniversary today.

          8         MR. SUGINO:  If I can just add to that.

          9     Ralph and Bob and others may remember, the

         10     performance hasn't been great every single year.

         11     In fact, just after we hired them they were on

         12     the ropes and on the verge of getting terminated

         13     a couple of times.  And the Board, after going

         14     through its analysis decided to keep them on.  So

         15     it's been a very good decision.

         16         MR. MAVROMATES:  You can read the rest of

         17     your list yourself.  It's a pretty diverse list

         18     of managers and also asset classes.  What you'll

         19     recognize here is there's only two domestic

         20     equity managers on the contributor list.  If you

         21     turn to the next page, these are the major

         22     detractors, and this list is populated with six

         23     domestic equity managers.

         24           I think what's been a little frustrating

         25     for me over the past year is that the active


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          1     domestic equity manager is having a difficult

          2     time beating their benchmarks.  The indexes are

          3     doing quite well.  So there's six of them on this

          4     list, which means that they're lagging their

          5     benchmarks.  Legg Mason is on here, Ariel,

          6     Baillie Gifford, GMO, Putnam, and you can read

          7     the rest.  If you turn to the next page, it will

          8     show you the top five underperformers.

          9         MR. BROUSSEAU:  Stan, there's a big run up

         10     in the market prices in the last week or so

         11     beating all the, you know, the Dow's closing.

         12     Will this impact us down the road?

         13         MR. MAVROMATES:  It's interesting you say

         14     that because I wanted to hand out something that

         15     I thought was very striking because I think you

         16     can be misled by such a statistic.  So I guess

         17     I'll go over that now with you.  What I'm handing

         18     out now is that, you go home every night and you

         19     look at the news, and the Dow hit an all time

         20     high.  What does that mean for the PRIT fund?

         21     It's a good thing, but recognize that the Dow is

         22     only 30 stocks.  And what this page shows you is

         23     that it hit an all time high.  It's previous all

         24     time high was in January 14th of 2000.  So it's

         25     back even since the crash in 2000.  What does


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          1     that mean?

          2           It's got back all its money.  The index

          3     level is the same.  However, there's not a lot of

          4     depth to that market.  The S&P has not recovered

          5     since its peek in March of 2000 at 15.27.  It's

          6     currently at 13.34.  And the NASDAQ, I don't know

          7     when that will recover.  It was at 5,000 and it's

          8     only at 2,200.  So the point there is that it is

          9     good news that the Dow is an all time high, but

         10     it doesn't filter down to the rest of the

         11     indices.  And what I've written here on the left

         12     column is the year to date returns of each of

         13     these indices.

         14           So year to date the Dow, and this is

         15     through yesterday, is up 10.57.  The S&P is up

         16     8.17.  NASDAQ up 3.88.  A pretty big distribution

         17     of return.  Why is that?  I think it has some

         18     good commentary.  NASDAQ is heavily loaded with

         19     technology stocks.  I will tell you, however, in

         20     the Dow.  Of our top ten holdings, nine of those

         21     are in the Dow.  Of that entire domestic plan,

         22     the only exception is Google, which is our tenth

         23     largest holding in the domestic equity portfolio,

         24     is not a component of the Dow.

         25           So it is good news that we do get a benefit


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          1     of that.  However, it's limited and it doesn't

          2     filter down all the way through the portfolio.

          3         MR. BROUSSEAU:  Where is somebody like Legg

          4     Mason?  S&P?  NASDAQ?

          5         MR. MAVROMATES:  Predominantly, S&P.  And

          6     Legg Mason does hold Google, which has done quite

          7     well.  And it owns Amazon and so forth.  So page

          8     7 shows the underperformers long term track

          9     records.  And you can see Legg Mason is still

         10     struggling.  Legg Mason was up about 2.8 percent

         11     for the month of September.  However, the S&P one

         12     was up more than that.  So they're about the same

         13     underperformance at this point.

         14           The good news is Ariel is up about 5

         15     percent for the month of September.  What that

         16     does is it shrinks their undeperformance of 922

         17     basis points down to about an underperformance of

         18     about 500.  So they haven't recouped it.  They

         19     have a long way to go, but at least they're sort

         20     of perhaps turning a corner.  And I'll remind you

         21     that they have no energy ratings.  Ironically, if

         22     you didn't have energy, you probably did pretty

         23     well this September.  Baillie Gifford is lagging.

         24     However, they do have healthy double-digit

         25     returns.  They're more of a growth orientation.


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          1           GMO emerging markets equity is isolated to

          2     the calendar year to date.  Long term they've

          3     done a great job.  And then Putnam is lagging

          4     since we rehired them.  However, they had a very

          5     good September also and that 561 basis points of

          6     underperformance is reduced to about 300 basis

          7     points of underperformance.  So they had a pretty

          8     good September.

          9           Page 8 sort of shows you how all the

         10     different portfolios within the PRIT fund did

         11     during the month of August.  I think what's

         12     interesting about this chart is the alternative

         13     is the highest, but I don't really look at that

         14     number because it's not a quarter end.  We'll get

         15     an update in September.  But international equity

         16     is up 14.61.  And if you compare that to domestic

         17     equity, your return is 4.37.  Nearly half of the

         18     international equity performance is due to

         19     currency appreciation or the dollar weakness.

         20           So the stock markets overseas are not --

         21     you know, they're doing about the same as the US

         22     markets with some exceptions, but over half of

         23     that return is because of dollar weakness

         24     specifically to Euro.  The Euro is up about 7 1/2

         25     percent this year.  So just recognize that.  And


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          1     that's part of diversification.  I think you'll

          2     recall that we did away with our currency overlay

          3     program.  I forget when that was, a year ago.

          4           And that was all I was going to talk about

          5     on performance this morning.  You know, I think

          6     September is up about 1 percent.  It's hard for

          7     me to say because all of the alternative, timber,

          8     real estate is getting value, but I think we'll

          9     be around 8 1/2 percent-ish to the calendar year

         10     to date, maybe a little higher.  Don't quote me

         11     on that.  That's my guesstimate.  And then I

         12     guess Dennis was going to discuss a couple items

         13     here.

         14         MR. AIKENS:  When will the impact of

         15     Amaranth flow through the absolute return

         16     portfolio?

         17         MR. MAVROMATES:  That will be in September,

         18     and I had planned to talk about that in the

         19     Investment Committee Report, if that's agreeable

         20     to the Board, but it will be reflected in

         21     September.

         22         MR. SUGINO:  I'm going to ask you to turn to

         23     Tab D under the risk return report.  This is

         24     something that Hanna spends a lot of time

         25     preparing for the committee and I think it's


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          1     worthwhile looking at on occasion.  And we have

          2     had very good returns, as you know, on both an

          3     absolute and relative to peers, and the question

          4     becomes at how much risk are we achieving these

          5     returns.  The most exciting thing I'll say about

          6     my presentation is I'll try not to be too long.

          7           A couple of caveats is that these numbers

          8     are not what Stan is looking at.  This is only

          9     through June.  It takes a few months to prepare

         10     the report.  So it's actually July of '03 through

         11     June of '06 and in some cases we don't have

         12     manager returns for the PRIT fund, Ariel, for

         13     example that has been here three years, and so

         14     we've linked their historical returns, their

         15     composite returns to our actual returns to come

         16     up with a three-year return.  So to some extent

         17     the returns are manufactured, but it's been in a

         18     logical way.

         19           If I can ask you to turn to page 2 and

         20     maybe in combination with page 3.  As you know,

         21     when we do our asset allocation process, what we

         22     know is that what we know and what we don't know

         23     is that we're going to have asset classes that

         24     perform well at a given time and those that don't

         25     perform well.  So we're putting together a basket


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          1     of asset classes that, in composite, we hope will

          2     give us a good return and sort of minimize

          3     variability.

          4           If you look on page 2, you can see that

          5     going up the chart is return.  If you go right,

          6     that's risk.  And you can see that, in fact, over

          7     this three-year period you have real estate and

          8     absolute return that have done the best.  On page

          9     3 is the actual numbers.  And what hasn't done so

         10     well over the past three-year period or done less

         11     well has been fixed income.  And then off to the

         12     right you can see that the international equity

         13     has had the most risk.  To some extent these

         14     numbers are a little bit deceiving.  Particularly

         15     when you look at the private equity portfolio and

         16     the real estate portfolio, there are some

         17     accounting elements that play into muting the

         18     risk number.  But in essence, that's how we've

         19     been looking over the last three years.

         20           So the question is how much risk for how

         21     much return.  If you look on page 3 and you look

         22     at the second row where it says "total PRIT

         23     fund."  So over this past three years, you can

         24     see that the risk has been this number,

         25     6.26 percent, and the return over the period has


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          1     been 16.7.  So how has that been compared to what

          2     we assume in our asset allocation?  We actually

          3     assumed a risk level that's twice what we've

          4     actually derived.  So our risk number and in our

          5     projections was near 12, at 11.65, and that's

          6     compared over the last three years of 6.26.  So

          7     the risk has been half of what we've been

          8     projecting or half of the long-term risk that

          9     we're projecting over this shorter three-year

         10     period, in terms of a return.  So the return has

         11     been 16.07 over this period, our expectations for

         12     the long-term return is 8.3.  So the risk has

         13     been half and the return, again, I just want to

         14     emphasize just a three-year period, that the

         15     return has been actually double of what our

         16     expectation has been.  So the wind has really

         17     been at our backs.

         18           On page 5, I'm going to ask you to turn

         19     there.  So we don't, as you know, put together a

         20     random number of asset classes in order to

         21     achieve a return, what we do is we look at each

         22     of the asset classes and we look at their how

         23     well or how they behave relative to another.  We

         24     don't want two asset classes that go up together

         25     or two asset classes that go down, because then


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          1     you negate the benefits of diversification.  You

          2     really want asset classes that behave

          3     differently.  And that's part of what we do when

          4     we're doing our asset allocation study.

          5           If you look at on page 5 under the column

          6     total PRIT fund, you can then see the asset

          7     classes in the correlation.  So one would mean

          8     that they're perfectly correlated, that's the

          9     most undesirable impact.  Zero would that be

         10     they're completely uncorrelated, and that would

         11     be the most desirable impact.  You can see that

         12     in the case of domestic equities, international

         13     equities, and emerging markets, we've got high

         14     correlation to the PRIT fund, and that's about

         15     50 percent of your portfolio.  So we're talking

         16     about the direction of the stock market.  And so

         17     you can then say that as we look at the broader

         18     stock market and how it performs, that will have

         19     impact on the PRIT fund.  And I think we've known

         20     that, but you can see that there are other asset

         21     classes that are really less correlated.

         22           And on page 6, and I'll just talk about

         23     one --

         24         MR. SCHWARZENBACH:  Obviously, the

         25     correlation to the total fund is also a function


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          1     of size of the portfolio.  Correlation to each

          2     other I understand is completely different.  But

          3     I mean, if you have 100 percent of your assets in

          4     domestic equity, you're going to have a hundred

          5     percent correlation.  So I mean, one of the

          6     reasons the equities are all highly correlated to

          7     the total is that they're a large proportion of

          8     the fund.

          9         MS. COMMOSS:  Right.

         10         MR. SUGINO:  On page 6 domestic equities,

         11     we've overweighted the index fund in terms of the

         12     large cap and underweighted the index fund in

         13     terms of the small cap with the expectation that

         14     active management will be better in the small cap

         15     area than it will be in the large cap area.  To

         16     some extent that's shown here.  You can see that

         17     the returns for the large cap managers, while at

         18     a good level of 11.11 percent, has been actually

         19     below what the actual returns of the small cap

         20     have been, at about 18 1/2 percent.  So that is

         21     sort of net.  Our capital market assumptions are

         22     the same for small and large in terms of the

         23     market.  We believe that active managers can add

         24     value in the small cap area more than in the

         25     large cap area.  And so we're sort of seeing that


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          1     this meets our expectation with higher returns of

          2     the small cap managers.

          3           Then I think I'll just sort of end it at

          4     that so not to torture you too much.  But again,

          5     I think in that question of risk versus return, I

          6     think what we've had is the wind at our back.

          7     The market has been sort of one direction, a

          8     positive direction, that's why the risk number is

          9     is relatively low.  What we might see going

         10     forward, our expectation going forward is that

         11     risk number will get higher.  But over this

         12     period, things are looking very good.

         13         MR. SCHWARZENBACH:  Just one question, I

         14     mean, when you're talking risk in this, you're

         15     really talking about volatility, not risk?

         16         MR. SUGINO:  Standard deviation.

         17         MR. SCHWARZENBACH:  Right, so it's really

         18     volatility.

         19         MR. SUGINO:  Right.

         20         MR. SCHWARZENBACH:  Because there's also,

         21     obviously, other risks involved, like return of

         22     capital and things of that sort.

         23         MR. SUGINO:  Right.

         24         MR. SCHWARZENBACH:  I mean, obviously, in

         25     the broad portfolio, to the extent that you have


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          1     a junk bond that goes bust or you have an

          2     Amaranth or something like that that doesn't

          3     return, that factors into the overall return, but

          4     individually there's another risk involved.

          5         MR. MAVROMATES:  Yeah, I mean, this is a gut

          6     check on how we do our asset allocation, is it

          7     effective, is it a good method.  And it seems to

          8     be meeting our expectations.

          9         MR. SCHWARZENBACH:  Has anyone done any

         10     analysis of whether how much, you know, in a fund

         11     like ours which we really don't need an awful lot

         12     of capital out-flow, I think we're actually a net

         13     capital in-flow every year; correct?

         14         MR. MAVROMATES:  It's getting worse.

         15         MR. SCHWARZENBACH:  But basically we're

         16     still in that capital in-flow.  Has anybody done

         17     any analysis to how much risk is really

         18     appropriate.  It's not like, you know, if you

         19     could double the risk and triple the average

         20     return, is that a bad thing?

         21         MR. SUGINO:  Well, when we do these, the

         22     asset allocations, that's part of our analysis.

         23     We actually look at the cash flow and the cash

         24     from these other plans and factor the return

         25     expectation based on that as well.  So that's


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          1     another factor of risk.  That's obviously very

          2     important in what we look at.

          3         MR. SCHWARZENBACH:  But I'm asking has

          4     anybody done any analysis as to what is really

          5     the appropriate level of risk for the fund to

          6     carry.  That's sort of a basic question.  But I

          7     mean, you could create a portfolio that has zero

          8     risk volatility.  You could put it in an annuity.

          9     So the question is what is really the appropriate

         10     level of risk for the entire portfolio to be

         11     carrying it, to the extent how much return you

         12     get.  I mean this seems sort of -- the gut seems

         13     about right, what we're doing, but I'm just

         14     trying to understand.

         15         TREASURER CAHILL:  I think it's determined

         16     by us, how much risk we're willing to take as

         17     fiduciaries, because of the public nature of this

         18     fund.

         19         MR. SUGINO:  I think, though, that what we

         20     do is we start looking at what our return

         21     expectation is and looking at the actuarial rate,

         22     we sort of focus on that and then determine

         23     that's what we want to achieve and then take on

         24     that how much risk are we willing to take, as

         25     opposed to driving off of the risk, we're looking


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          1     at the return expectation.

          2         MS. BARCHICK:  And part of the asset

          3     allocation that the Board approved in February,

          4     we did do work on that cash flow analysis and

          5     that was really part of the decision.  So that

          6     was very important.

          7         MR. SCHWARZENBACH:  I was just asking sort

          8     of more generically than for PRIT.  I'm curious

          9     as to what kind of studies are there.  Are there

         10     any kind of analysis out there as to what the

         11     overall levels of risk are, that, to the extent

         12     you could handle risk, are you better off taking

         13     on more risk in a diversified way.

         14         MR. MAVROMATES:  Some of it has to do with

         15     what your funded ratio is and you're in this kind

         16     of quandary of taking on more risk, but if you're

         17     wrong, things are going to get worse, and that

         18     additional risk is going to pay off.

         19         MR. SCHWARZENBACH:  In the short term but

         20     over the long term.  And, again, I'm not

         21     advocating going out and putting more money into

         22     hedge funds.  That's not what I'm suggesting.

         23         MR. AIKENS:  Staying on top of the risk, we

         24     have the flaws of accounting, I should say, or

         25     timing of measurement in two of our larger


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          1     illiquid asset classes, and is this the state of

          2     the art for measurement of risk in those asset

          3     classes?  Are there other ways we can think of

          4     the volatility in those asset class that are

          5     perhaps more volatile than the way we measure

          6     them?

          7         MR. SUGINO:  Well, keep in mind, when we're

          8     doing our asset allocation report, we're not

          9     using just historical standard deviation.  We

         10     sort of take out the accounting impact.  And so

         11     the risk on private equity is actually 25 percent

         12     that we're using versus 17 for equities.  And so

         13     while you're seeing something smaller here, in

         14     our actual work --

         15         MR. AIKENS:  In the asset allocation we're

         16     perhaps a little closer to the reality.

         17         MR. SUGINO:  Correct.  We try to strip that

         18     out.

         19         MR. AIKENS:  Is there any way we can do that

         20     for this report, real estate, as well as

         21     alternatives?

         22         MR. SUGINO:  Well, you'd have to have market

         23     values.

         24         MR. MAVROMATES:  You obviously know the

         25     reason it's accounting is because it's appraisal


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          1     based.

          2         MR. AIKENS:  So this is the state of the

          3     art; we can't do any better than this.

          4         MR. MAVROMATES:  Right.

          5         MR. SMITH:  I would just note for private

          6     equity there is a movement, especially on the

          7     leveraged buyout side for market to market

          8     valuations.  That's not perfect either.  But you

          9     may see some more volatility in those numbers.

         10     It's not going to be as fluid as closed markets,

         11     but directionally you should see some more

         12     movement.  It might be slightly more meaningful

         13     than it is today.

         14         MR. AIKENS:  Nothing in real estate?

         15         MR. SUGINO:  Appraisal based.

         16         TREASURER CAHILL:  Any other questions?

         17     Thank you very much.  Move on to Karen, operating

         18     budget.

         19         MS. GERSHMAN:  Thank you.  If you could turn

         20     to page 5 of the Agenda.  There you'll find the

         21     first month of our Fiscal 2007 budget, July.  The

         22     investment management fees resulted in a 2.9

         23     budget savings with domestic equity and emerging

         24     markets being the two largest contributors, as a

         25     result of performance being slightly lower than


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          1     excepted, as Stan had mentioned, with two of our

          2     performance based managers, Legg Mason and EMM.

          3           The rest estate and timber variances are

          4     simply the result of PRIM booking the actual

          5     performance fees quarterly beginning October.  To

          6     your point, Alex, we need to wait for the

          7     September valuations to book those performances.

          8           Our remaining costs associated with

          9     custody, outside advisors, and operations ended

         10     the month with a $220,000 favorable variance.

         11     All of the operations expense categories are

         12     under budget.  However, we do expect these

         13     variances will diminish as the year goes on.

         14           One item I did want to note as evidenced by

         15     our due diligence travel costs, PRIM staff was

         16     very busy performing due diligence trips in July,

         17     mainly relating to our international and portable

         18     alpha RFPs during that month.

         19         TREASURER CAHILL:  Any questions of Karen?

         20     Thank you very much.

         21         MS. GERSHMAN:  Thank you.

         22         TREASURER CAHILL:  Okay, moving on to Item

         23     No. 3, the Executive Director's Report.  Michael?

         24         MR. TRAVAGLINI:  Thank you, Mr. Chairman.

         25     Good morning, everyone.  Just two updates.  In


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          1     October, the beginning of October, we had nine of

          2     the MACRS systems, nine additional systems, come

          3     in through the segmented hedge fund of funds PRIM

          4     sleeve, which brings our total to 72 now Michael

          5     is telling me, supplementing by hand signal, 72

          6     clients either full or using segmentation

          7     currently, with assets approaching $3 billion.

          8     So Mike continues to be very busy in taking

          9     meetings for those clients, for those systems

         10     that aren't yet clients or that are clients in

         11     one segmented sleeve, and they're looking to get

         12     additional information.  So we'll continue to

         13     keep you posted.

         14           And then the only other item I want to

         15     share with the Board, briefly, Stan and I had the

         16     pleasure of attending the [Masio] conference on

         17     Monday and Tuesday of this week and I don't know

         18     if I have mentioned this before, but this is the

         19     one conference yearly where the CIOs or senior

         20     investment people from all of the state plans

         21     convene and they rotate the location.  It

         22     happened to be in St. Louis this year.  The good

         23     news is there are no vendors.  It is only plan

         24     sponsors.  We don't mean to denigrate the vendors

         25     in the room.  But the point is it's just plan


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          1     sponsors representatives, mainly CIOs, who go and

          2     simply exchange information and talk about the

          3     last year of their fund and what sort of

          4     initiatives have been going on.

          5           And so what I'd like to share with you from

          6     the large scale takeaways is that while everyone

          7     is not getting there the same way, everyone is

          8     grappling with how do you continue to get your

          9     actuarial rate of return, whether it's 8 1/2, 8,

         10     7 1/2, whatever it is, you know, in these current

         11     capital market environments.  So there's much

         12     discussion about what different plans are doing

         13     with their asset allocation in an attempt to stay

         14     north of that bogey.

         15           And the other big thing, which is

         16     underscored by the fact that from last year to

         17     this year, there were ten new chief investment

         18     officers in the room alone.  So recruiting and

         19     retaining and compensating senior investment

         20     people continues to be a challenge, not only here

         21     but with our peers around the country.  So I

         22     leave those with you, be glad to take any

         23     questions.  And, Stan, if you have stuff to add,

         24     you can add it when you talk in the Investment

         25     Committee Report, but those were my two major


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          1     takeaways.  With that, to keep us on track, I'll

          2     take any questions you have, but that's the end

          3     of my Executive Director's Report.

          4         TREASURER CAHILL:  Any questions of Michael?

          5         MR. AIKENS:  Other than portable alpha, were

          6     there any kind of new ideas about how people make

          7     their hurdle rates?

          8         MR. TRAVAGLINI:  Alex, I'm sorry?

          9         MR. AIKENS:  Other than portable alpha type

         10     strategies, were there other major new ideas in

         11     the industry about how you beat your hurdle rate?

         12         MR. TRAVAGLINI:  No, I mean, not in terms of

         13     approaching it vis-a-vis the hurdle rates.  The

         14     relaxing the constraints, you know, one-thirty,

         15     thirty, these are the trendiest things.  There

         16     was also, Stan and I were a little surprised,

         17     infrastructure funds got a significant amount of

         18     discussion and attention.  California in

         19     particular is going to take a targeted effort

         20     into getting exposure to infrastructure funds.

         21     You know, I don't know what the appetite on our

         22     Board is.  I'm not sure where anytime in the near

         23     future we're going to be looking at those.  Not

         24     to say that, Wayne, there are some existing

         25     private equity vehicles that sort of, at the


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          1     margins, get involved in that type of stuff.

          2           So but the bottom line is portable alpha

          3     is the hot one and, again, we do ours in only the

          4     domestic equity space.  There are some funds who

          5     do it sort of across asset classes.  Some are

          6     doing it in their fixed income and whatnot.  So

          7     but tough to generalize.  And then, to Stan's

          8     point, a number of these systems have much

          9     different funded statuses.  So, again, there are

         10     some, we joke every year there's one Texas system

         11     that is a hundred percent fixed income.  And it

         12     has to do with the local regulations and sort of

         13     surrounding that particular plan, but in terms of

         14     the spectrum of variety that you see, it is well

         15     developed.

         16         TREASURER CAHILL:  Anyone else?  Okay.

         17     Investment Committee, Item 4, Stan.

         18         MR. MAVROMATES:  We're going to have a

         19     presentation this morning.  I believe that some

         20     board members asked for the opportunity to have

         21     some managers come in.  So this morning we're

         22     going to have Scott Sperling giving you a brief

         23     presentation.  He's from T.H. Lee.  He is --

         24     Wayne told me this this morning.  He is one of

         25     three co-presidents.  So I said, Well, that


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          1     seems -- "co" usually means two.  So anyway, his

          2     title is co-president, even though I think he's a

          3     tri-president.

          4           T.H. Lee is a large growth buyout fund.  We

          5     currently have about $350 million committed to

          6     them.  We're in four active funds.  So far this

          7     firm has returned at 42 percent return to the

          8     PRIT fund.  So they've done a great job, and

          9     Scott is going to speak with us this morning, and

         10     his bio is in Appendix E.  So you're free to ask

         11     Scott as many questions as you want.

         12         (Mr. Sperling enters the room.)

         13         MR. TRAVAGLINI:  And as Scott is sitting

         14     down, just to remind the Board, we had this

         15     practice historically, and then I don't recall

         16     why we moved away from this.  But for the longer

         17     serving trustees, there's a feeling that we see

         18     managers when we hire them, and we sort of don't

         19     see them at the board level again unless we are

         20     recommending terminating them.

         21           So we're going to try to start this

         22     practice of why we picked T.H. Lee, to get back

         23     to the serious part of it, is simply because they

         24     just raised their newest fund, of which we

         25     continue to be an investor.


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          1           There's also been organizational

          2     development from a management perspective that

          3     Scott's going to address this morning, and

          4     they're here in town, and we've had a long-time

          5     relationship that's been very much in the

          6     interest of PRIM's beneficiaries from an

          7     investment perspective.  So it was a good first

          8     choice to restart this program, but we're going

          9     to continue to try to selectively move around our

         10     portfolio, have managers come back in and talk

         11     with the Board.  So with that, Scott, I hope I

         12     recovered a little bit better.

         13         MR. SPERLING:  Thank you.  It's a great

         14     pleasure to be here.  And, obviously, one of

         15     things that we're most proud of is that we have

         16     been able to contribute to the benefit our fellow

         17     citizens in Massachusetts.  And so we greatly

         18     appreciate the support that you all have shown

         19     us, and we'll guarantee you that we will continue

         20     to work very hard to continue to provide those

         21     kinds of strong returns that you've been able to

         22     give historically.

         23           Let me start with a little bit of, for some

         24     of you who may not know us quite as well,

         25     background on our firm, and then talk a little


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          1     bit about how our firm has evolved over time as

          2     well as what the industry environment is like

          3     right now.  We have been doing this for over 20

          4     years.  We have been focused for the entirety of

          5     that 20-year-period, with very few exceptions and

          6     now no exceptions, on investing in what we call

          7     growth companies.

          8           We are not trying to find situations where

          9     we can break up the assets and sell them at a

         10     profit.  We are not trying to find situations

         11     that are deep turn arounds of companies that do

         12     not have growth potential.  We are trying to find

         13     situations where we can buy a very good company,

         14     a company that can grow better than GDP, make

         15     sure the management team is the best in the

         16     industry.  Sometimes we have crucial elements of

         17     that management team at the company.  Sometimes

         18     we have to bring key members in.  Every now and

         19     then we'll buy a company where we have to totally

         20     upgrade the management team, such as the Warner

         21     Music situation, where we work in partnership

         22     with that management team to put in place

         23     operating plans that can make the free cash flow

         24     model of the business more efficient and more

         25     effective and longer term really accelerate the


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          1     top lying revenue growth of the company.

          2           We have historically made our returns

          3     which, in four of our five funds, as you know

          4     have been top decile in the industry, much better

          5     than 20 percent net return to you.  One fund, our

          6     fourth fund, was an average fund, which was done

          7     in the 98 to 2000 period where the markets were

          8     very difficult.

          9           And that was the only time we actually

         10     strayed from the strategy of investing in growth

         11     companies.  Growth was so expensive at the time,

         12     we felt that we would do asset intensive

         13     companies.  And that worked out okay, but not

         14     achieving of kind of 20 plus percent return and

         15     top decile performance that is always our

         16     objective.  So for us that was a failure, even

         17     though it was an average fund for the industry, a

         18     fund that way outperformed the public markets by

         19     700 to 900 basis points fitting with the public

         20     market index that you have.

         21           But anyway, getting back to what we do, we

         22     partner with these management teams, put together

         23     the operating plans, and then execute that over a

         24     period of time.  And the returns that we are able

         25     to drive have been the result of the improvement


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          1     in the operating results of the company.  When we

          2     do see improvements in the operating results,

          3     when we can accelerate the growth rate of the

          4     company, we often see multiple expansion as well.

          5     And that's why, rather than making 20 percent

          6     returns we make, for example, in our last fund

          7     the $6.1 billion Fund V, a 37 percent return

          8     compound annual return or IRR to date, and a

          9     return that we think will go higher than that.

         10     And that's really driven by that combination of

         11     outperforming our operating plans because we have

         12     the managers we want, we are working with them to

         13     implement those plans, and then we get a little

         14     bit of multiple expansion for those companies.

         15           As we look at the environment today, we

         16     believe that we continue to do what I've just

         17     described.  And in Fund VI, the most recent fund

         18     that you've committed to, we have made five

         19     investments.  Now, four of those investments are

         20     investments that we created on a proprietary

         21     basis.  They happen to be large companies, but we

         22     still have the ability to create exclusive or

         23     proprietary opportunities.  One, Univision, was

         24     the result of a very limited auction between two

         25     groups.  The reason that that's important is that


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          1     we believe our ability to sustain the kinds of

          2     returns that I've described is the result of

          3     being able to add value in every phase of the

          4     investment process.  And that investment process

          5     starts with the sourcing of transactions.  In

          6     Funds II through IV about 65 percent of the deals

          7     that we did were proprietary.  As we move to Fund

          8     V, where the companies on average were larger,

          9     more in the $2 billion to 5 or $6 billion size

         10     range, rather than seeing that number go down, we

         11     were actually able to accelerate that to

         12     78 percent of the fund.

         13           In Fund VI where the average size so far is

         14     more in the -- or the range is in the 2 to $15

         15     billion enterprise value range, 80 percent of

         16     what we've done so far has been proprietary

         17     deals.  Now, that may sound counterintuitive,

         18     because you would think a larger company isn't

         19     going to have it auctioned, but what we have

         20     found is by building on the strength of our

         21     senior partnership group, which continues to

         22     expand, we are able to use those relationships to

         23     create proprietary opportunities and use the

         24     knowledge that we've developed in industries that

         25     we've been studying for 8, 10, 12, 15 years to


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          1     make those opportunities count and become part of

          2     our portfolio.

          3           So that brings us back to the organization.

          4     We have been committed to having a more

          5     senior-heavy organizational structure than I

          6     think any other player in the industry.  We are

          7     committed to that in a couple of ways.  The first

          8     is to make sure that we have more senior partners

          9     who are creating transactions than anybody else.

         10     And that comes out partly as the result of the

         11     focus that we have.  And our focus, again, growth

         12     companies and companies largely domiciled in

         13     North America.  Now, most of them are global

         14     companies.  We're not ignoring the global market,

         15     but we are focused on situations where we have

         16     relationships with management teams.  And most of

         17     our relationships, quite frankly, are here in the

         18     North American market.  We will look at things in

         19     Europe.  We've done a couple of deals there where

         20     we have -- but we'll do it on a what we would

         21     call a rifle shot basis, and that's where we have

         22     a proprietary opportunity because of a

         23     relationship that we do have usually in an

         24     industry we know a lot about.

         25           So we bought ProSiebenSat IMES in Germany,


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          1     which is 45 percent of the entire network TV

          2     market in Germany.  We bought a company called

          3     Grupo UNO, which was a play on consolidating the

          4     Spanish cable market.  Two industries we know a

          5     lot about with management teams that were on the

          6     ground that we have relationships with.  Those

          7     have worked out quite well.  And again, we use

          8     the same pattern.  In ProSieben, when we bought

          9     it 2 1/2 years ago, there was 150 million of

         10     EBIDA or operating cash flow for the company.

         11     After what we were able to do to the company, in

         12     the year that ended last December, we had 417

         13     million of EBIDA.  And the public market analysts

         14     are predicting 460 and I think we'll outperform

         15     that for this year.  So, again, able to do there

         16     exactly what we do here in terms of creating

         17     operating performance well in excess of what the

         18     company has historically been able to provide by

         19     utilizing all of the things that I discussed

         20     earlier.

         21           So let's come back to the organization.

         22     Focus on senior partners.  We have 13 senior

         23     partners who are focused on the North American

         24     buyout market, and we believe that to be the

         25     largest number in the industry, as I mentioned.


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          1     The other important factor is we've been together

          2     for a very long time.  The most junior of our

          3     investment partners has been with us for

          4     11 years.  The reason that that continuity is so

          5     valuable is that the knowledge that we have about

          6     industries and companies and relationships that

          7     we have really are resident not just based in the

          8     firm's representation but also in the

          9     individuals.

         10           So it's important to have those people

         11     involved.  Many of the players in the industry

         12     have evolved more towards a what I would call a

         13     global asset management structure where they have

         14     the core domestic funds, they have European

         15     funds, Asian funds, hedge funds, real estate

         16     funds.  We have decided to stay focused on our

         17     core business, and, as a result, I can spend

         18     99 percent of my time actually working on

         19     transactions as opposed to trying to manage a

         20     variety of global operations.  And we're going to

         21     continue to do that.

         22           We have an apprenticeship approach to

         23     building partners in our firm.  Typically, we are

         24     hiring somebody who has spent two years at a Wall

         25     Street firm to come in and work with us for two


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          1     years as an analyst.  They go back to business

          2     school, and we hire the best of those individuals

          3     back.  It's then an eight-year process for them

          4     to become a partner.  And they are working hand

          5     in hand with the partners of our firm in almost

          6     every meeting in almost every situation.  They're

          7     sitting in on our weekly investment committee

          8     meetings, which take up most of Monday.  We have

          9     the advantage of having one office.  We all have

         10     lunch together every day, if you're around, and

         11     we're talking about the deals.  And, because we

         12     are in one office, we have great communication

         13     amongst the partners, and the younger

         14     professionals really pick up on how we do

         15     business and what works and what doesn't work.

         16     They learn both from the good things that we've

         17     done as well as all the really bad things that

         18     we've done.

         19           So we have an organizational structure and

         20     strategy that I think is consistent with our

         21     overall investment strategy, which, again, is to

         22     lead the industry in proprietary deals and then,

         23     really, to try to find and partner with great

         24     management teams.  As we look at the environment

         25     today, I would say that it's a very interesting


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          1     environment.  As you've seen, there are more

          2     opportunities available to private equity than we

          3     ever would have imagined even five years ago.  We

          4     used to like to say, six months ago could you

          5     ever imagine Time Warner giving somebody like us

          6     an exclusive to buy a $3 billion division.  That

          7     was really big news.  Now you're seeing $30

          8     billion transactions getting done, the largest

          9     healthcare company, the largest company in

         10     another industry, all becoming available to

         11     private equity.

         12           I think the thing that we as an industry

         13     and what we focus on a lot in our firm need to do

         14     is to be very mindful that just because it's for

         15     sale doesn't mean it's a good buy, and just

         16     because it's accessible to us, because the debt

         17     markets are very attractive could be one word,

         18     another word could be frothy, doesn't mean that

         19     you reach and you buy those kind of situations.

         20     One of the things that has worried us is that the

         21     debt markets have become somewhat indiscriminate

         22     in their willingness to offer high levels of debt

         23     to private equity transactions.  They'll offer an

         24     eight times debt package, debt equal to eight

         25     times EBIDA of a company to industries that have


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          1     historically traded at seven or eight times total

          2     enterprise value.

          3           So one of the things we spend a lot of time

          4     doing is looking at the historical range of

          5     trading for these companies, and if we are in a

          6     situation where we have to pay a price outside of

          7     that historical range because the debt is

          8     allowing us to, we'll basically pull back.  We

          9     need to manage the risk, particularly at a time

         10     like we are at today, and I think we've gotten

         11     pretty good at doing that.  And I suspect most of

         12     the larger firms are larger because they've done

         13     a pretty good job of managing those sorts of

         14     things.  But, again, the allure of doing that 20

         15     billion or $30 billion deal is something that we

         16     have to be very mindful of and make sure that

         17     we're, again, sticking to, at least in our firm,

         18     our fundamental approach of very rigorous

         19     analytical due diligence focused on the

         20     fundamentals of the company, looking at returns

         21     based not on exit multiples that may exist today

         22     but on exit multiples that are more normalized

         23     for any environment.

         24           We also spend a lot of time on overall

         25     portfolio risk, and we measure that in a couple


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          1     of ways.  The first is we're not going to put

          2     much more than seven or eight percent of our fund

          3     in any one transaction, and we may underwrite a

          4     deal, to a larger degree.  So, again, in the

          5     Warner music where Dick Parsons didn't want to

          6     deal with anybody else, he basically said, We'll

          7     give you the exclusive, I trust you, but I don't

          8     know anyone else that you might bring in, so you

          9     have to guarantee me that you'll speak for all of

         10     the equity.  And we did that, 1.4 billion.  Now,

         11     we only held 515 million in the fund, staying

         12     within our diversification limits, and then

         13     offered our LPs another 250 million as

         14     co-investor.  So we still controlled the majority

         15     of that company, the majority of the board, and

         16     the majority of the stock, but we have brought

         17     other players in to help take some of the stock.

         18     And we'll continue to look to do those sorts of

         19     things:  underwrite a deal but then make sure

         20     that we don't hold it.

         21           We also look at risk, not just in terms of

         22     the size of the investment we're making, but in

         23     terms of for the portfolio, how much exposure do

         24     we have to similar factors driving revenue or

         25     free cash flow.  So we'll have a diversified


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          1     portfolio by sector, but even within sectors and

          2     across sectors, we're looking at making sure we

          3     don't have too many companies that are correlated

          4     in terms of their exposure to either a type of

          5     consumer or to a specific type of revenue

          6     generation such as advertising or a specific type

          7     of cost structure such as something based on

          8     crude oil or anything else like that.  So we

          9     spent a lot of time on that basis.

         10           As we go forward, we think that the types

         11     of returns that we've seen in the last few years

         12     can be sustained, as long as we stick to the

         13     kinds of risk management systems that I've

         14     described and, again, the very basic strategy

         15     that I've described of investing in the kinds of

         16     good growth companies that I've mentioned.  In

         17     this fund, as I had said, we have five

         18     investments that we've made or committed to.

         19     We've been able to commit to companies as small

         20     as Hawkeye Removals, which is the second largest

         21     ethenol producer in the country.  It's an

         22     industry we looked at for a year.  We were able

         23     to buy that at 5 1/2 times cash flow on a

         24     proprietary basis.  So it's spitting out an

         25     enormous amount of cash as we speak.  But we are,


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          1     in that situation, creating a new type of

          2     leadership in an embryonic industry.  So that is

          3     a pretty interesting situation to us.

          4           We'll buy a VNU, which is a deal that we

          5     worked on on a proprietary basis for 18 months.

          6     VNU is a company that was headquartered in the

          7     Netherlands, but where the operations of the

          8     company were all headquartered in New York.  And

          9     the two main divisions are Nielsen Media

         10     Research, NMR, which measures, as you know, all

         11     the TV viewing for advertisers in the networks,

         12     and that business is about as close to a monopoly

         13     as anything we've seen, which we like.  And

         14     ACNielsen, which is part of a worldwide duopoly

         15     at 60 percent worldwide market share of measuring

         16     the flow of consumer products into and out of the

         17     sell-through of stores for advertisers and

         18     consumer product companies.  They also have a

         19     division that owns magazines and billboards and

         20     Hollywood Reporter, but that's a small part of

         21     the business.

         22           A proprietary transaction, a large

         23     transaction, one that we acquired for about nine

         24     times cash flow, but where we think we can

         25     improve the cash flow dramatically as we take the


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          1     costs of that business and put it in line with

          2     what where it should be, we acquired a company or

          3     are in the process of acquiring a company called

          4     ARAMARK, which is an outsourcer, as you might

          5     know, of food service and facilities management

          6     as well as uniform services.  Again, a

          7     proprietary transaction dating back to, actually,

          8     a deal I did when I was at Harvard Management

          9     back in 1984 for the old ARA Services with Joe

         10     Neubauer, the same CEO.  We acquired that at

         11     under eight times cash flow, again, on a

         12     proprietary basis.  The company is the leader in

         13     North America at outsourcing food and facilities

         14     management and is either one, two, or three

         15     everywhere in the world.  And, again, a company

         16     that has very good growth, 6 percent, on an

         17     organic basis, but where we believe we have the

         18     ability to both improve the free cash flow model

         19     as well as accelerate growth through

         20     acquisitions.  The trend towards outsourcing in

         21     that industry and other industries is something

         22     that we see as a good growth area for the economy

         23     going forward.

         24           Another outsourcing opportunity is a

         25     company called West, which is a $4.1 billion


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          1     transaction, a company we acquired for about 8.4

          2     times EBIDA and about nine times free cash flow.

          3     One of the things you'll notice about our

          4     companies is that because of our focus on free

          5     cash flow, the free cash flow multiples are very

          6     attractive.  We're not as much focused on EBIDA

          7     in terms of the way we look at companies.  We

          8     talk about EBIDA because that's what everyone in

          9     the world does.  But we're really focused on the

         10     federal reserve notes coming out of the business,

         11     what the real cash is.  In that situation it's

         12     the leader in providing voice conferencing

         13     services around the world and one of the top

         14     players in providing inbound call centers.  A

         15     very interesting model, very rapid growth, a

         16     company we did on a proprietary basis, another

         17     situation we spent 18 months working with the

         18     management team trying to get it to the point

         19     where we were able to take this company private.

         20           Univision is the one auction situation in

         21     the portfolio.  As many of you might know, it's

         22     the largest provider of Spanish language

         23     programming in the United States.  It's a company

         24     that has grown at 20 percent compounded for the

         25     last five years, great demographic growth.  They


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          1     also own 71 TV stations.  So very significant

          2     asset value and over 70 radio stations, four

          3     times market share in the TV market of its

          4     closest competitor, very high free cash flow

          5     model, and a situation that we were able to

          6     acquire at below its historic trading multiple.

          7     We're paying 14 times 2007.  We're closing the

          8     deal in 2007, cash flow, which seems like a high

          9     number until you realize that it's always traded

         10     at 16 to 28 times EBIDA.  And then on a free cash

         11     flow basis, because it has much less [cafex] than

         12     most other companies in its business, it actually

         13     trades at a discount to the industry.  So, again,

         14     a very attractive, high growth situation.

         15           So we're going to continue to focus on

         16     those companies as I've described.  Again, they

         17     range in size from 1 billion of enterprise value

         18     to 15 billion of enterprise value.  That's the

         19     market in which we're focused, and if we find

         20     that we can't buy companies at the right price,

         21     we're just not going to buy them at all.  As I

         22     mentioned, after we raised Fund V 2001, which at

         23     the time was the largest buyout fund ever raised

         24     at 6.1 billion, we went about 18 months where we

         25     worked very hard, but because of the economic


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          1     uncertainty, we didn't make any investments.  We

          2     couldn't find a situation where we wanted to put

          3     money to work, given the risk return tradeoff

          4     that we saw.

          5           So we're perfectly happy to wait until the

          6     cycle turns, to look at all of our funds as five-

          7     to six-year investment opportunities, not one- or

          8     two-year opportunities to put money to work.

          9     With that, I'm happy to take any questions that

         10     you might have.  I know I've meandered and

         11     touched on a lot of subjects, but maybe I didn't

         12     cover everything you would like.

         13         TREASURER CAHILL:  Any questions?

         14         MS. McGOLDRICK:  Just one.  What industries

         15     do you focus on, or is it just any industry?

         16         MR. SPERLING:  There are five or six

         17     industries where we have more experience than I

         18     think almost any sector specific fund does, and

         19     those would be media and publishing financial

         20     services, consumer products and services, and

         21     business and information systems and services.

         22           We're not very focused on industrial or

         23     heavy industrial companies.  We generally don't

         24     play cyclical businesses or heavy commodity types

         25     of businesses.  Ethenol is about the closest that


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          1     we've gotten because we think there's a strong

          2     secular growth trend there, even though it's a

          3     commodity within that secular growth trend.  It's

          4     not that those areas aren't good areas.  In fact,

          5     you can look in the last three or four years,

          6     probably if you played natural gas or chemicals,

          7     it's been one of the best places to be in private

          8     equity.  It's just not what we do.  We really

          9     focus on places that we have superior knowledge

         10     and where we can build a great company.

         11         TREASURER CAHILL:  I just want to talk a

         12     little bit about the transition from Tom Lee to

         13     the three of you and how that's taken place.

         14         MR. SPERLING:  Sure.  I think as many of you

         15     know, Tom moved to New York back in the mid-'90s,

         16     and Fund III was the first fund that was

         17     principally, in fact, totally, sourced and run by

         18     the three of us, who are now co-presidents, Scott

         19     Schoen and Tony DiNovi, and myself.  Over the

         20     last few fears or a few years after that, Tom

         21     tried to become engaged from New York, but it's

         22     very difficult, given the culture that we have

         23     overall, together every day, to be very active on

         24     that basis.

         25           And so in 1999 I think again, as you know,


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          1     we did a transaction with Putnam that allowed us

          2     to effectively buy Tom out over the course of

          3     Fund V and then potentially into Fund VI, and

          4     that was finalized last year.  Tom had a couple

          5     of -- he could either completely retire and take

          6     a small residual interest in Fund VI, or he could

          7     do whatever else he wanted and not have any

          8     economic interest in that fund.  And that's the

          9     direction Tom has gone, and he manages a hedge

         10     fund of funds called Blue Star in New York that

         11     he has a very good staff on.  In fact, Tony

         12     DiNovi and I are both investors in that fund.

         13     And he's going to raise a small buyout fund to do

         14     some private equity as well.

         15           In terms of the effect on the organization,

         16     again, since Tom has been gone for so long, it's

         17     really had very little effect on our

         18     organization.  He's a good friend of a number of

         19     us who have been around for a long time, but

         20     organizationally it's not really been much of an

         21     issue.

         22         TREASURER CAHILL:  Any other questions?

         23         MR. WHITE:  Did Greg White grow up with

         24     Thomas Lee?

         25         MR. SPERLING:  Yes.


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          1         MR. WHITE:  Is he still with you?

          2         MR. SPERLING:  Yes.

          3         MR. WHITE:  What is his role?

          4         MR. SPERLING:  He's head of investor

          5     relations for us.  As you know, a kind of

          6     around-the-clock-work-type guy.  So he fits in

          7     well.

          8         TREASURER CAHILL:  Anything else.

          9         MR. REINHARDT:  Scott, can you comment on

         10     your participation with other private equity

         11     firms to buy companies and the reasons for that.

         12         MR. SPERLING:  Sure.  That's a good

         13     question.  We are going to look at a range of

         14     situations in that when you marry the size of

         15     what we're looking at with our risk management

         16     constructs, there will be situations where we are

         17     going to have other private equity investors

         18     either alongside of us or that we will bring in.

         19     We always try to have a leadership position in

         20     our companies.  The one thing we are not willing

         21     to do is go into somebody else's deal as a

         22     smaller investor.

         23           And so if you look at the last fund, 55

         24     percent of our investments or the dollars we

         25     invested in are in situations where we were


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          1     either the sole or the dominant investor, the

          2     majority investor and will bring others in.  In

          3     45 percent, though, we're going to be a co-equal

          4     investor with at least one other player and

          5     sometimes two, sometimes three other players.  In

          6     a third of that 45 percent or 15 percent, we

          7     created the deal, but we brought others in as

          8     co-equal players.  And the other 30 percent we

          9     went into the deal at the same time as other

         10     players, again, equally as large.

         11           I think that percentage will probably be

         12     about the same as we look at this new fund, where

         13     some deals are just too large for to us do.  One

         14     of the things that we're seeing, though, is that

         15     given the ability of our LPs to step up on the

         16     co-investment side, that the size of investment

         17     at which we're willing to not bring anyone else

         18     in to make sure that we don't get stuck holding

         19     more than we should, has increased pretty

         20     dramatically.

         21           And so in Warner Music, where we retain the

         22     majority but we brought Bane Capital in for $300

         23     million and Providence in for $150 million, that

         24     was a $2.5 billion deal.  Today, when we did West

         25     at 4.1 billion, which had a billion-dollar equity


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          1     section, we gave Quadrangle a hundred million

          2     because they had done something for us, but the

          3     900 million, we didn't bring another major

          4     private equity player in; we kept it, and we're

          5     syndicating out the difference between the 450

          6     we're going to hold and the rest of the 850 to

          7     our LPs.  So the size at which we're going to

          8     bring in other players has increased pretty

          9     dramatically, and that's why we think it's

         10     probably going to stay at around 55 percent where

         11     we're sole or dominant and 40, 45 percent where

         12     we do have other partners.

         13           I think the way the industry works, what we

         14     have found works best for us is to stick with a

         15     handful of partners who we believe generally

         16     share the same philosophy about companies and

         17     people who we know we can work with.  What we

         18     don't want to do is create a situation where

         19     we're ever at odds with our co-investing

         20     partners.

         21           The other thing I would comment on is,

         22     unlike many other firms, you won't see in our

         23     portfolio a situation where we took a smaller

         24     share in somebody else's deal or we lost a bid in

         25     a competitive situation and then decided to go


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          1     into somebody else's deal at a higher price.  And

          2     it really isn't, and I think people can tell you,

          3     in a world of where lots of high egos, and I

          4     won't dismiss our ego as reasonably significant,

          5     we're probably very low down on the list.

          6           So we're not doing this because we feel

          7     like we always have to say, you know, we're the

          8     leader; it's because we have the strategy that I

          9     described of wanting to make sure we have the

         10     right operating partners and the right strategy.

         11     And we don't feel as though we can always

         12     effectuate the changes we want or do what we want

         13     if we're really taking the second seat because we

         14     have a smaller investment without a leadership

         15     position.  So we don't mind at all working with

         16     some of the other great firms that I know you're

         17     invested in alongside of them, as long as we're

         18     as large or larger than anybody else.

         19         TREASURER CAHILL:  Thank you very much.

         20         MR. TRAVAGLINI:  Appreciate it.

         21         MR. MAVROMATES:  We're going to go into the

         22     Investment Committee Report, starting on page 9.

         23     I guess I have two suggestions:  One, we can go

         24     through these items, or, secondarily, we can talk

         25     about the hedge fund program at the beginning,


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          1     whatever the preference is with the Board.

          2         MR. BROUSSEAU:  Stick to the Agenda.

          3         MR. MAVROMATES:  Okay.  The first item on

          4     Agenda, we obviously had Mr. Sperling here

          5     presenting Tom Lee.  The State of Israel bond

          6     recommendation, some of the board members may

          7     recall in May 2001 this Board voted to restart

          8     the program that had been started by MASTERS in

          9     1989 and '94, and we made a commitment of $5

         10     million a year per year for a total of five years

         11     or an aggregate amount of $25 million.  And the

         12     way that we organized the program, we tried the

         13     latter, latter meaning the maturities of each of

         14     the bonds are in separate years.  One matures

         15     every year.  And then the Board voted to roll

         16     those over as they mature.  What we're missing

         17     now is we're missing a ladder for 2008.  If you

         18     look there at 2007, 2009, '10, '11 and '13.  So

         19     what we'd like to do today, and the Investment

         20     Committee supported this recommendation, is

         21     purchase an Israeli bond, currently a two-year

         22     bond, a $5 million bond that will mature in 2008.

         23     And then that way our ladder will be complete,

         24     and this thing will go in sort of a perpetuity,

         25     just rolling over continuously.


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          1           The current holdings for those that have an

          2     interest are in Appendix F, and one thing that's

          3     sort of astonishing to me is that most of the

          4     rates are in the 5.75, 5.85.  And just for a

          5     point of reference, during those same time

          6     periods, the Lehman aggregate, which is an

          7     investment grade bond portfolio, the one-year

          8     return on that is 1.71, and three years 3.98, and

          9     five years 4.87.  So this is where this bond

         10     would reside, where the current holdings do

         11     reside.  They are currently rated A2, A- by

         12     Moody's and S&P.  They have been rating for a

         13     while and staff and the Investment Committee

         14     recommend the purchase of a $5 million Israeli

         15     bond in the current calendar year.

         16         TREASURER CAHILL:  Any questions?  Motion.

         17         MR. AIKENS:  We'll be up to 30 million; do I

         18     get that right?

         19         MR. MAVROMATES:  That's correct.

         20         MR. AIKENS:  How volatile are these bonds?

         21     I mean, when Hazbullah shoots off a rocket, do

         22     these bonds reflect that?

         23         MR. MAVROMATES:  The way it works is in this

         24     particular case we purchased a two-year bond, and

         25     you get interest payments along the way, and you


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          1     get your principal back in two years.  So you

          2     don't trade these bonds.

          3         MR. AIKENS:  Are they priced daily?

          4         MR. MAVROMATES:  Well, they're priced at

          5     book value.  So at the end of it, you're going to

          6     get, if your face value is $5 million, you're

          7     getting $5 million in 2000.

          8         MR. AIKENS:  But I couldn't sell it to

          9     somebody else before that.

         10         MR. MAVROMATES:  No.  It's like a, for lack

         11     of a better word, CD.  It's like a two-year CD.

         12         MR. BROUSSEAU:  Are you saying the

         13     volatility of the bonds are not impacted by the

         14     geopolitical --

         15         MR. AIKENS:  No, because they're illiquid.

         16     It's like a CD.

         17         MR. MAVROMATES:  But to that extent, their

         18     credit rating has not changed.  Israel's credit

         19     rating has not changed, even during those times

         20     or even times of conflict.

         21         MR. SCHWARZENBACH:  Can I just ask maybe an

         22     obvious question, why are we even discussing

         23     this?  I'm sorry, maybe I don't understand

         24     something.  This is a bond purchase.  We don't

         25     discuss bond purchases in general, and I'm trying


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          1     to understand.

          2         MR. AIKENS:  We're managing this; right?

          3         MR. SCHWARZENBACH:  This is direct held;

          4     that's the point?

          5         MR. MAVROMATES:  This is parked in, let's

          6     say, for example, Black Rock's portfolio and they

          7     manage the coupon name.  So we don't --

          8         MR. SCHWARZENBACH:  But I'm just trying to

          9     understand why this even exists and why we even

         10     have it.  And I'm not saying that we shouldn't be

         11     investing in Israeli bonds, but I mean, we don't

         12     talk about investing in German bonds or we don't

         13     talk about investing in, you know --

         14         MR. MAVROMATES:  I can't buy these bonds

         15     myself.  I have to have approval.  I'm trying to

         16     be as transparent as possible.

         17         MR. SCHWARZENBACH:  That's what I'm trying

         18     to understand.

         19         MR. TRAVAGLINI:  While we park them in Black

         20     Rock's portfolio, it's not the Black Rock PM

         21     making the buy decisions.

         22         MR. SCHWARZENBACH:  I'm trying to understand

         23     why do we have this portfolio separate from

         24     everything else.  Is it because it's Israel?

         25         MR. MAVROMATES:  It's a legacy portfolio


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          1     that was started in the '80s and '90s, and for

          2     whatever reason people thought it was a good idea

          3     to continue the program.

          4         MR. SCHWARZENBACH:  Again, I'm not trying to

          5     say we shouldn't.  I'm just trying to understand

          6     why we continue -- we wouldn't do this today.  To

          7     start from scratch today, we wouldn't go out

          8     there and sit there and say that we wanted to do

          9     a portfolio.

         10         TREASURER CAHILL:  We might.  It would be

         11     something that the Investment Committee would

         12     decide like the ETI program.  It's a program in

         13     country specific borrowing or lending, and if the

         14     Investment Committee with the support of the

         15     Trustees decided to do it, we would do it, but I

         16     think the idea is that because it's a program

         17     separate from the way we do our other investing,

         18     it should come up separate.

         19         MR. SCHWARZENBACH:  I agree with that.  I

         20     understand that.

         21         TREASURER CAHILL:  And that's why we do it.

         22     And as we said, it's something that previous

         23     Treasurer's have done and we've decided to

         24     continue it and then fix the hole that was there,

         25     which I think makes a lot of sense.


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          1         MR. AIKENS:  Would it be highly unlikely for

          2     this type of instrument to be in any of our fixed

          3     income manager portfolios?

          4         MR. MAVROMATES:  Well, it has the

          5     characteristics of investment trade bonds.

          6         MR. AIKENS:  So we might have a hundred of

          7     Israel, for all we know?

          8         MR. MAVROMATES:  Well, no.  They don't trade

          9     publicly.  In other words, we have other dollar

         10     denominated non-US bonds in our portfolio now.

         11         MR. AIKENS:  All we're trying to do is look

         12     at the concentration in the State of Israel, and

         13     so I'm leaping to the conclusion that our fixed

         14     income managers would not have --

         15         MR. MAVROMATES:  They would not have that.

         16     We do have equities, obviously, and even a lot of

         17     Israeli stocks are listed on the NASDAQ.  It's a

         18     good point.  We don't have any concentration in

         19     Israel.

         20         TREASURER CAHILL:  Is there a motion?

         21         MR. McSHERRY:  Move.

         22         MR. CESAN:  Second.

         23         TREASURER CAHILL:  Motion is made and

         24     seconded.  All those in favor say aye.

         25         THE BOARD:  Aye.  (Unanimous.)


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          1         TREASURER CAHILL:  Opposed?  The ayes have

          2     it.

          3            (VOTED:  That the PRIM Board approve

          4            the purchase of a $5 million State of

          5            Israel Bond maturing in 2008; and,

          6            further, that the Board authorize the

          7            Executive Director to take all actions

          8            necessary to effectuate this motion.)

          9         MR. MAVROMATES:  Okay, the next item is the

         10     quarterly update for the ETI program.  I'll

         11     probably move through this fairly quickly.  As

         12     you know, this Board approved that program

         13     starting in 2003.  There was a study done by

         14     McKenzie.  The Treasurer was heavily involved in

         15     that.  And we started a program in 2004.  We've

         16     made quite a few investments since then.

         17           If you go to page 10, you'll see the list

         18     of commitments that we've made to date.  We've

         19     committed $170 million and the capitals been

         20     called on about $109 million of that.  A couple

         21     of the residual benefits of this, a lot of home

         22     mortgages have been provided for low and moderate

         23     income home buyers.  We have invested in

         24     affordable rental housing units, small business

         25     loans.  We invested in a health center in Holyoke


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          1     that created about 300 jobs.  On the real estate

          2     front, Canyon Johnson is developing a mixed use

          3     property in Charlestown that's going to have

          4     about 15 affordable condo units, and then New

          5     Boston had a ground breaking in Olmstead Green.

          6     And then of course there's the venture side,

          7     which has created quite a few jobs, about 183

          8     jobs.  Flagship has invested in nine

          9     Massachusetts companies.

         10           The hallmark of this program is to invest

         11     within Massachusetts.  We recently did an RFP.

         12     We do this on an annual basis.  And part of the

         13     minimum criteria is that they have to guarantee

         14     us to 50 percent is going to be invested in

         15     Massachusetts.  Unfortunately, one of the most

         16     recent investments that this Board approved, and

         17     there has been no capital called for and the

         18     terms of that agreement have not be signed, is

         19     DFJ New England.  They are merging with DFJ

         20     Atlanta and they can no longer guarantee us a

         21     50 percent exposure to Massachusetts investments.

         22     Therefore, it is unlikely that this transaction

         23     will move forward, because that's one of our

         24     commitments is to have half the monies going

         25     here.  I will say, however, the only exception to


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          1     that rule was Canyon Johnson, because they invest

          2     across the country, and we felt, for

          3     diversification reasons, that it was a prudent

          4     thing to do in our real estate portfolio.

          5     There's a profile to be included in Appendix G.

          6           And then the other new hire was CRA fund

          7     advisors, which was funded technically on the

          8     first day of July, and they have been quite busy,

          9     Laura, I asked her to look into this.  They also

         10     have low and moderate income borrowers and they

         11     have 685 portable rental units.  They bought a

         12     Ginnie Mae REMIC Trust which helped to fund low

         13     income housing for senior citizens in two

         14     different Massachusetts facilities, Websters

         15     Meadows and Slater Estates in Webster and then

         16     Townsend Elderly in Townsend.  So they're already

         17     making an impact.  Additionally, they have

         18     invested in environmental remediation and a

         19     neighborhood revitalization project in Chelsea

         20     and they've invested about 1.2 million in

         21     rehabilitation in numerous rental housing

         22     complexes.

         23           I guess sort of an obvious point is the

         24     ones that we're getting returns from are the

         25     fixed income returns where we buys these bonds.


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          1     The real estate properties are mainly

          2     developments.  You're not going to see returns

          3     from those for quite a while.  And then in the

          4     venture funds you're also not going to see

          5     returns for quite a while just so you don't think

          6     it's a normal portfolio.

          7           So hopefully that's provides you with a big

          8     enough update.  And if you have questions,

          9     comments, would like additional information,

         10     please give us a call.

         11         MS. McGOLDRICK:  I didn't see it, maybe I

         12     missed it, on Canyon Johnson, the investment in

         13     the South End.  Is that happening?

         14         MR. MAVROMATES:  They're actually in

         15     Charlestown.

         16         MS. McGOLDRICK:  Isn't there something else

         17     that they were looking at?

         18         MR. TRAVAGLINI:  They have the state

         19     hospitals.

         20         TREASURER CAHILL:  Are you talking about

         21     Canyon Johnson?

         22         MS. McGOLDRICK:  The Canyon Johnson project.

         23         TREASURER CAHILL:  They are a bidder on the

         24     project in Roxbury.

         25         MS. McGOLDRICK:  That's it, okay, and that's


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          1     going forward?

          2         TREASURER CAHILL:  That has not been

          3     approved by the BRA.  They are the number one and

          4     the supported neighborhood bidder, supported by

          5     the community, but that gets approved by the BRA.

          6     I've heard that it's going to go back out to bid

          7     because they didn't like the bids.  But it's up

          8     to the BRA whether they'll be designated.  If

          9     they're designated, then they'll be drawing more

         10     money down from us and they'll be a developer.

         11         MS. McGOLDRICK:  Thank you.

         12         MR. SCHWARZENBACH:  We will continue to

         13     watch the overall returns versus the market

         14     returns since all of these are losing money.

         15         MS. McGOLDRICK:  But they're helping people.

         16         MR. SCHWARZENBACH:  And that's not our

         17     mission.  Our mission is not helping people.

         18         MS. McGOLDRICK:  I know, secondary.

         19         MR. SCHWARZENBACH:  Our mission is to help

         20     people and get market rate of return.

         21         MR. MAVROMATES:  It's too early in most

         22     instances.

         23         MR. SCHWARZENBACH:  But I don't want to let

         24     that go by that as of right now, these are not

         25     even not returning benchmark, they're losing


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          1     money.

          2         MS. McGOLDRICK:  But it's also less than a

          3     half percent.

          4         MR. SMITH:  It might interest the Chairman,

          5     this goes back over 20 years when we made several

          6     forays into this area, for publicity purposes, I

          7     guess, it did last for a year or two and would

          8     fizzle out.  And I would hope that we can

          9     maintain the continuity and even expand on this.

         10     I think it's great for the PRIT Fund and

         11     investors in the PRIT Fund for the city and towns

         12     to be part of this.  And if it's possible to,

         13     within reasonable ability, to undertake for

         14     further expansion, I would really like to see

         15     that.

         16           I know it's difficult because we're limited

         17     to we have fiduciary responsibility, we have to

         18     get market returns on this, even though some of

         19     the housing is below market rates, but we still

         20     have to have the return on our investment, the

         21     same as any real estate investment.  But I hope

         22     we can stay on top of this in the future and

         23     expand on it wherever possible.

         24         MR. TRAVAGLINI:  Well, we will plan, as we

         25     did this year, right after the first of the year,


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          1     we will open the RFP window again, but to Peter's

          2     point there's no set aside, okay, so we'll open

          3     that window.  We'll review the proposals if there

          4     are proposals that we think merit further review

          5     and ultimately being brought to this Board, we

          6     will do that.  If we don't see proposals that we

          7     think pass our screens, then we will take the

          8     steps necessary.

          9           So I just want to make clear and remind

         10     everybody that the program is there and

         11     available, but it's more confined to the merits

         12     of the proposals that PRIM Staff sees and not to

         13     any number.  PRIM Staff is not working toward a

         14     number.  So I think to your point, we will do

         15     this annually.  So we didn't do it to put out a

         16     press release and then say, okay, check that box.

         17     We will do it on an annual basis, but it will

         18     really depend on the groups that come forward and

         19     respond to the RFP and demonstrate that they have

         20     a rightful place in the investment portfolio.

         21         MR. BROUSSEAU:  And you mentioned do not

         22     expect returns, especially the venture parts of

         23     this, for quite a few years for a long time.

         24     What's a long time?

         25         MR. MAVROMATES:  Well, similar to the other


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          1     venture investments, it's anywhere from seven to

          2     twelve years.  It's a long --

          3         MR. BROUSSEAU:  Long, long term.

          4         MR. MAVROMATES:  And that's similar to most

          5     of our -- is that about accurate, Wayne?

          6         MR. SMITH:  Yeah, I think three to five

          7     years for the J-curve situation, and then the way

          8     the fee structure works in the asset class, and

          9     because you don't mark things up right away, you

         10     get a fee drag for the first several years.  So

         11     that's generally three to five years, and you

         12     start to see some development thereafter.  And

         13     we've been fortunate with our new investments

         14     that they perform quite well in the most recent

         15     environment, but that J curve's been mitigated a

         16     bit.

         17         TREASURER CAHILL:  Venture generally takes a

         18     little longer than private equity.

         19         MR. SMITH:  And healthcare exposure takes

         20     even a little bit longer.

         21         TREASURER CAHILL:  Any other questions?

         22         MR. MAVROMATES:  An organizational update,

         23     one of our managers, Ashmore, managed the

         24     emerging debt portfolio.  They're listing

         25     25 percent of their company on the London Stock


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          1     Exchange.  That can be a good and bad.  I guess

          2     it's a watch and see type of event.  They manage

          3     over $300 million for us in emerging debt, and

          4     they've done a terrific job.  So that's just an

          5     organizational update.

          6           I guess the next item is does anyone want

          7     to talk about hedge funds?  If not, we can move

          8     to alternative investments.  So I'll leave it to

          9     the discretion of the Board.

         10         TREASURER CAHILL:  Any questions?

         11         MR. AIKENS:  Well, I guess, is Amherst

         12     perhaps our largest historical loss?

         13         MR. MAVROMATES:  In the hedge fund program?

         14         MR. AIKENS:  Anywhere.  Have we ever lost

         15     more money?

         16         MR. SMITH:  No, not even close.

         17         MR. AIKENS:  That's good.

         18         MR. MAVROMATES:  Why don't I go over the

         19     highlights of this transaction.  I did -- and

         20     while I'm doing that we'll pass the exhibit that

         21     Cliffwater's put together and Kathy will go over

         22     that.

         23           As you know I sent a memo to the Board and

         24     Investment Committee on September 22, regarding

         25     our investment in Amaranth, and hopefully you had


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          1     an opportunity to read that.  I attached some

          2     articles.  It's an evolving story.  But these are

          3     the highlights of that memo.

          4           The PRIT Fund has $56.5 million in Amaranth

          5     as part of its $2.2 billion absolute return

          6     portfolio.  The investment accounted for about

          7     2.6 percent of that portfolio and about .13

          8     percent of the entire PRIT fund.  I would

          9     characterize that as a small amount in the

         10     aggregate.  These two investments were made by

         11     two of our absolute return fund of hedge fund

         12     managers.  Those are Ivy and Rock Creek.  Ivy had

         13     an investment of 34 million, which accounted for

         14     about 7 percent of their portfolio, and then Rock

         15     Creek had an investment of 22.5 million, which

         16     accounted for five percent of their portfolio.

         17           I will, however, say that they did not --

         18     that was the current value before it declined.

         19     So they didn't originally put it -- Ivy didn't

         20     originally put in 7 percent.  It had appreciated

         21     to that amount.  They do not normally make that

         22     kind of investment.  From this $56.5 million we

         23     expect to lose at least 70 percent of that

         24     investment or about $40 million.  There is a

         25     possibility we're going to lose the whole thing.


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          1     I don't know.  This is a moving target.  This

          2     loss will be reflected in the September

          3     performance report, to your point, Alex.

          4           The impact on that on the absolute return

          5     portfolio, the return, if we were to have

          6     everything remaining equal, would decline by

          7     1.82 percent or 182 basis points, at the

          8     aggregate level.  So what was the hit to the

          9     entire PRIT fund?  About 10 basis points, if you

         10     assume about a 70 percent loss.  If you assume a

         11     100 percent loss, it's going to be around 13, 14.

         12           And then this is what wasn't in the memo,

         13     based upon discussions with Ivy, Rock Creek,

         14     Cliffwater and their general available

         15     information, the Amaranth losses were simply due

         16     to a poor investment decision.  There has been no

         17     talk of any sort of fraud or no indications of

         18     that to our knowledge.

         19         MR. CESAN:  Do you know if they're looking

         20     into it at all, Stan?

         21         MR. MAVROMATES:  I'm sorry?

         22         MR. CESAN:  Is the Federal Government

         23     looking into it?

         24         MR. MAVROMATES:  I believe the SEC is

         25     looking into it, from what I understand, and I'm


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          1     sure some of the -- I think it's the Chicago

          2     Board of Trade, is probably looking into it, and

          3     I'm sure -- I believe the Attorney General of the

          4     State of Connecticut is looking into it.  So this

          5     thing changes.

          6         MR. WHITE:  Are they registered with the

          7     SEC?

          8         MR. MAVROMATES:  This fund was not, was not

          9     registered, which, that has been changing over

         10     time, but it was not registered.  So a couple

         11     comments that weren't in the memo, please be

         12     reminded that PRIM decided to use a fund of hedge

         13     fund structure.  Remember we had this debate

         14     about fund of hedge funds double layer of fees.

         15     Do we go direct or not?  We're in a fund of hedge

         16     funds structure.

         17           We have five fund of hedge funds, which

         18     those hedge funds have full discretion to pick

         19     direct hedge funds.  That's what we pay them for,

         20     and we pay them handsomely for that.  This is not

         21     unique.  This is similar to all other parts of

         22     our portfolio.  We don't tell Scott Sperling to

         23     buy Burger King or not or Dunkin' Donuts.  They

         24     just do what they do.  What we're responsible for

         25     is we're responsible for recommending which


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          1     managers to hire.  We do searches.  Wayne spends

          2     a lot of time just deciding which funds to invest

          3     in alongside with Pathway, Lou and her team, you

          4     know, sort of have conversations with real estate

          5     managers, but they can buy and sell whatever they

          6     want.  The point being is we don't have a lot of

          7     discretion in exactly what is purchased here.  As

          8     with all other asset classes, we rely heavily on

          9     the information provided by the managers.  We do

         10     have a custody database which shows us how much

         11     Microsoft we have every day and who's trading

         12     that, et cetera, but for the most part we rely

         13     heavily on information, especially in the less

         14     liquid asset classes.  That's true in the timber

         15     and so on.

         16           We try to recognize the risk we can

         17     control.  But while at the same time we do not

         18     want to set investment guidelines which inhibit

         19     the ability of the manager to add value.  That is

         20     a delicate balancing act.  For obvious reasons,

         21     if we prevent you from doing something, they're

         22     going to come back and say, Well, if you let me

         23     do that, I could have done a lot better.  So we

         24     work with those managers.

         25           In the hedge fund program, what we are


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          1     working on with Cliffwater is that initially we

          2     set guidelines for our fund of hedge funds.  We

          3     are going back to reexamine those guidelines to

          4     see if there's anything we can change.  And in

          5     fact, you know, if any of those changes would

          6     have prevented this, I don't know.  We may not

          7     change anything.  We are in the process of doing

          8     that.  We do this type of exercise frequently

          9     with all our managers.  Probably the best example

         10     is PIMCO comes to us every other month wanting a

         11     little bit more leeway and investing in Euro

         12     futures.  And we examine that.  We look at it.

         13     We have Kathy and her team look at it.  We have a

         14     discussion with PIMCO and decide whether we

         15     approve that and then off they go and running.

         16     We approve maybe a third of what they ask for.

         17           I guess a couple of obvious points Amaranth

         18     is not the first poor investment decision made by

         19     this Board or by our investment managers, to be

         20     specific, and it's not going to be the last one.

         21     And that I think is, you know, across asset

         22     classes.  I think the important lesson here is to

         23     learn from it.  You take steps to identify the

         24     risks you can and cannot control.  I couldn't

         25     tell them not to buy Amaranth, but I could maybe


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          1     sort of formulate their guidelines a little more

          2     stringently.  And you can make changes when

          3     warranted.

          4           And then, lastly, and then I'll sort of

          5     open it up for questions.  Finally, investing is

          6     not easy.  Continually trying to return 8 1/4

          7     inherently has risk.  In order to return 8 1/4,

          8     you have to take risk.  And I think that we must

          9     always try to achieve that goal in a thoughtful

         10     and prudent fashion, and try to improve our

         11     probability of getting that 8 1/4, but at the

         12     same time controlling the things we can control.

         13     I guess, you know, and I guess we can open it up

         14     to questions, and we have a handout there that is

         15     sort of a snapshot as of the end of August on the

         16     whole hedge fund program.  And I hope that was a

         17     good overview of what the impact of the situation

         18     was.

         19         TREASURER CAHILL:  Any questions of Stan or

         20     Kathy?

         21         MR. AIKENS:  How much of Ivy did you say

         22     Amaranth represented?

         23         MR. MAVROMATES:  Seven percent.

         24         MR. AIKENS:  Seven percent and part of that

         25     was the uplift from the original cash.


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          1         MR. MAVROMATES:  Right.  They originally had

          2     about four.

          3         MR. AIKENS:  Did they have limits on the --

          4     just like Scott had, limits on how much of this

          5     capital he'll put into any single deal.  Does Ivy

          6     have those sorts of limits?

          7         MR. MAVROMATES:  Yes, it's about 3 1/2 to 4

          8     percent.

          9         MR. AIKENS:  But they'll leave the hundred

         10     percent of the uplift exposed.

         11         MR. MAVROMATES:  Well, what ends up

         12     happening in this particular situation is they

         13     tried to trim it.  And depending upon when they

         14     went in, there's usually a lockup involved.  So

         15     you can sort of say I want to trim it, but you're

         16     not going to be able to trim it for perhaps a

         17     year.  You can make a decision on whether or not

         18     to pay a penalty to get out early, which is

         19     usually 2 1/2 percent of the investment.

         20         MR. AIKENS:  So, presumably, they had that

         21     option which they chose not to exercise?

         22         MR. MAVROMATES:  I would say that's correct.

         23         MR. AIKENS:  We use hedge fund of funds

         24     structures.  So the duplication of exposure

         25     between Rock Creek and Ivy is something we


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          1     knowingly went into.  We also have information

          2     from all of our hedge fund exposure so that we

          3     can look at any exposure to any single entity; is

          4     that correct?

          5         MR. MAVROMATES:  That's right.  Sometimes

          6     the data is about six weeks old, but in general

          7     it doesn't move a lot.  And I think what you're

          8     alluding to, Alex, is probably overlap.

          9         MR. AIKENS:  Right.

         10         MR. MAVROMATES:  On a percentage of assets

         11     basis or capitalization basis, we have about 9

         12     percent overlap of that overall plan, which is

         13     138 unique managers.  And we have a total of 147

         14     positions.  So there's about a dozen of them.

         15     And on Numeric's it's overlap, but on capital

         16     your base is about nine percent.

         17         MR. AIKENS:  Amherst we have 55 million.

         18     How have we accounted that from an overlap

         19     perspective?  Would that have been a $55 million,

         20     overlap or would that have been a $25 million?

         21         MR. MAVROMATES:  Fifty-five.

         22         MR. AIKENS:  What would our next largest

         23     overlap position be?

         24         MR. MAVROMATES:  It was [Atticus], which is

         25     about a -- aggregate I think is about a six.


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          1         MR. AIKENS:  Six million?

          2         MR. MAVROMATES:  Six percent.

          3         MR. AIKENS:  Six percent overlap.

          4         MR. MAVROMATES:  Yes, so two times six is

          5     twelve.

          6         MR. SCHWARZENBACH:  Of the portfolio?

          7         MR. AIKENS:  We couldn't figure out kind of

          8     what the dollar amount of that is?

          9         MR. MAVROMATES:  It's about --

         10         MR. SCHWARZENBACH:  Thirteen million?

         11         MR. MAVROMATES:  Yeah.

         12         MR. TRAVAGLINI:  The other point of overlap,

         13     Peter, just to remind you we have separate

         14     accounts with all of these managers.  So this is

         15     something that Amy and Stan track and manage and

         16     when our fund of funds managers are suggesting a

         17     name, replacing a manager with a new one, if we

         18     already have what we feel is sufficient exposure,

         19     we can work with them in saying substitute

         20     another name because we don't want to increase

         21     our exposure that we have presently.

         22         TREASURER CAHILL:  Theresa?

         23         MS. McGOLDRICK:  I just had two points.  One

         24     is I understand we don't have discretion in

         25     choosing the managers and that's the fund of


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          1     funds structure, but if we can improve upon the

          2     risk policy that we set, I'm sure we have

          3     discretion over that, and what is that right now

          4     currently?

          5         MR. MAVROMATES:  Well, that's what I alluded

          6     to.

          7         MS. McGOLDRICK:  When they come you work

          8     with them?  Is it just an ad hoc, or is there a

          9     policy that's set into place?

         10         MR. MAVROMATES:  Well, in general we create

         11     investment guidelines.  And what I was alluding

         12     to earlier, which is our risk parameters, if you

         13     will, it will put limitations on how much they

         14     can invest, how much the liquidity is.  In other

         15     words, we don't want a certain level liquidity on

         16     the types of strategies they go in.  There's

         17     limits to that, because when we roll it all up we

         18     don't want different items.  In the new program,

         19     we want these guys to have a beta of less than

         20     .20.  So there are parameters around that and

         21     then Cliffwater helps us monitor those through

         22     two methodologies, they send information to us

         23     and Cliffwater, and then Cliffwater grinds some

         24     numbers, and we have an extensive report they we

         25     go through in sort of checking that all the time.


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          1         MS. McGOLDRICK:  So it's more reactive; you

          2     see what they have and you look at it?

          3         MR. MAVROMATES:  Yeah, I mean, it's probably

          4     a horrible analogy, but I guess I'm known for

          5     that.  The speed limit's 55, right, people speed,

          6     Paul writes out tickets all the time, but these

          7     are the rules and we try to make sure that they

          8     keep within that.  And if they sort of puncture

          9     those rules, it creates a conversation and an

         10     understanding.

         11           Amy does a great job and Greg Hegerich on

         12     Karen's staff, along with Cliffwater.  We have a

         13     call with these people every single month.  And

         14     the highlight of that call is, you know, okay,

         15     what's the performance, what strategies are you

         16     getting in and out of, what managers have you

         17     terminated and added?  And anything that comes up

         18     on the risk report, it looks like this fund has

         19     gone up a lot or gone down a lot, what do you

         20     think of that?  And that same drill is true with

         21     most of the investments around here.  I think Amy

         22     does that and Lou's team does that.

         23         MS. McGOLDRICK:  And secondly, what's the

         24     energy exposure these days?  What's the

         25     percentage?  It's so volatile.  Is there a move


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          1     to limit that?

          2         MR. MAVROMATES:  It's a hard question

          3     because -- I don't mean to -- these people invest

          4     in commodities, and in our particular case, the

          5     commodity, that indices that we're in, is natural

          6     gas, which is about 15 percent.  This is for a

          7     separate program.  We characterize it as a

          8     strategy, what type of strategies there are.

          9           We don't have, really, sector-specific, but

         10     what we do know is what their primary focus is.

         11     In this particular case Amaranth, and you

         12     probably read this, started as a multi-strategy

         13     portfolio, which means they go in a lot of

         14     different places.  And that's usually limited to

         15     a third in any one.  And this overwhelmed them.

         16     They got so excited it was doing so well, they

         17     let it go up to 50 percent.  Energy is in -- it

         18     is in a couple other places in our portfolio in

         19     the hedge funds.

         20         MS. McGOLDRICK:  Right, because my

         21     understanding was it was a small amount.  That's

         22     my fear.  Maybe we should be looking at that

         23     rather than strategies.

         24         MR. MAVROMATES:  That's that a good point.

         25     I think that's the struggle here is that we get


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          1     data that's normally six weeks old.  We are

          2     working continuously to try to refine the report,

          3     and we've talked to Steve and Kathy about trying

          4     to provide some useful information such as what

          5     you're suggesting.

          6         TREASURER CAHILL:  I think, just to make a

          7     point on the energy piece, because I remember we

          8     had this discussions a few months ago about

          9     making money because energy was going up and how

         10     that didn't maybe look or feel good, because we

         11     were making money and people were having a hard

         12     time buying gas or paying for their heating oil.

         13     And as we learned what goes up will eventually

         14     come down.  We made a lot of money in this one

         15     investment.  There was money that was lost.  And

         16     I think that we have other managers that did not

         17     have an energy play, both in the hedge fund area

         18     as well as in our public equities, that weren't

         19     exposed to energy that made a lot of money when

         20     natural gas prices dropped.

         21           So I think the whole reason that we have

         22     come up with this strategy and philosophy is to

         23     be as diversified as possible, to have managers

         24     who can make money when certain things happen, as

         25     well as will not make money when certain things


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          1     happen, but they tend to balance each other off.

          2     And I think that if we were to really drill down

          3     on the hedge fund area, we will find that we have

          4     plenty of managers who made a lot of money in the

          5     month that these two managers lost money, who

          6     were not in energy or shorted natural gas and

          7     made money.  And generally speaking, hopefully

          8     when we net it out, it will be a positive number.

          9           And I think that's really the key.  We

         10     certainly do, even though we might not have the

         11     actual percentages, the reason we're diversified,

         12     the reason we have five different managers and

         13     we're in 140 different investments, if we do it

         14     right, and I think we have done it right, we've

         15     got people on both sides.  That's the whole idea

         16     of the absolute return piece of it.  In the end,

         17     and I think these numbers will bear out, even

         18     through this Amaranth situation, we will have

         19     made money in our hedge fund portfolio overall,

         20     even though this one has been painful.

         21         TREASURER CAHILL:  Bob?

         22         MR. BROUSSEAU:  Probably it's a process

         23     question, Stan.  As I was reading this that you

         24     sent us, the Wall Street Journal article that was

         25     included in depth, was less than praiseworthy


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          1     about the trader who executed these trades,

          2     needless to say.  I guess my question is when we

          3     do a private equity, we get a real thorough

          4     report from Pathway.  They go into the

          5     individuals and so forth and all of this.  To

          6     what extent do these hedge fund of funds, be it

          7     Ivy or Rock Creek in this case or any of them, do

          8     this kind of in depth analysis of the people in

          9     these hedge funds who are the traders, the deal

         10     makers and the shakers, because obviously, I

         11     don't necessarily believe everything I read in

         12     the Wall Street Journal, but, obviously, there

         13     was a lot here that should have been available to

         14     these people with information on this particular

         15     individual, if that was true.

         16         MR. TRAVAGLINI:  Let me see if I can address

         17     that, because I want to make sure we stay on

         18     point.  The hedge fund of funds do an enormous

         19     amount of due diligence on every underlying

         20     investment they make, okay, they use third

         21     parties.  But what they're doing diligence on are

         22     sort of the integrity of the organization.

         23     Right?  They're also doing due diligence on the

         24     track records, but here you have an individual

         25     who's had an incredible investment track record


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          1     for a long period of time.  So this isn't

          2     somebody who then started stealing clients' money

          3     or doing sort of outside the box type of things.

          4           What I want to make clear here is despite

          5     the due diligence, right, there are investment

          6     strategies that might not make money when they're

          7     pursued, and there's no amount of due diligence

          8     that can insulate you or us from having being

          9     invested in some strategies that ultimately

         10     aren't going to prove out to make a return on the

         11     investment.

         12           So I don't want to let this take away from

         13     the fact that these fund of funds firms do an

         14     inordinate -- they all have hundreds of employees

         15     that themselves who do nothing but review

         16     managers on a constant basis, and they utilize

         17     background checks.  And if someone has an

         18     outstanding college loan, that could be a reason

         19     for disqualification from investing.

         20           So try to keep them in their spheres.

         21     There's an incredible amount of work that goes on

         22     in the front end.  Because, as we see, the risk

         23     is if you have something like this, there's a

         24     credibility risk to Ivy and Rock Creek from

         25     people that invest with them.  I mean, what


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          1     they're selling is their ability to put you in

          2     investments that don't do this.  But, again, each

          3     of these funds has 30 or 40 other names in their

          4     portfolio, to the Treasurer's point, that are

          5     presumably continuing to generate absolute

          6     returns.

          7           So just try to keep it in context.  It's

          8     the sexy current topic that is splashed all over

          9     the investment pages, but I think it's important

         10     for us, as long-term investors, to Stan's point,

         11     we are trying to see what we can learn from a

         12     process structure perspective, and if there are

         13     things we can take away from that, we certainly

         14     will, but we're never going to insulate ourselves

         15     from somebody pursuing an idea from an investment

         16     perspective that they think is going to payoff

         17     and it ultimately doesn't.

         18         MR. BROUSSEAU:  At least the Wall Street

         19     article appears to say it was a loose cannon, and

         20     I just wondered to what extent people like Ivy

         21     and Rock Creek, if they had done their due

         22     diligence, would have known this kind of

         23     information.

         24         MR. MAVROMATES:  They've met with this

         25     individual.  They've interviewed him.  They


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          1     continuously go there and talk to them, and they

          2     were both concerned about the size that this had

          3     gone to.

          4         MR. McSHERRY:  The commodity market is not

          5     for the faint of heart anyhow.  When you're

          6     future trading -- and energy is -- no one

          7     anticipated a $20 a barrel drop in oil prices.  I

          8     mean, these people jump out windows because they

          9     can't forecast it.  So by being so well

         10     diversified, I think Mike's right, by being

         11     diversified and having this, we don't get hit as

         12     hard, but these aren't criminal acts.  This is

         13     just a play in the market.  It's up and down.

         14     It's like orange juice, you know.  The commodity

         15     market is a dangerous market.

         16         MR. SCHWARZENBACH:  If you think of any

         17     other alternative investments you've got out

         18     there, I guarantee you that Thomas Lee has deals

         19     that went bust, deals that they lost money on.

         20     It's what happens.  I think the real key is the

         21     process issue.  Stan, I totally agree with that.

         22     Is there a systemic risk here that we aren't

         23     watching?  Is there something that all of these

         24     are subject to a similar risk that we haven't

         25     dealt with.  But I think that's the real question


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          1     is just, you know, not to assume that these guys

          2     have eliminated the risk out of their portfolios.

          3     They haven't.

          4         MR. MAVROMATES:  I guess Kathy will give you

          5     a quick snapshot of the overall program.  I guess

          6     we'll probably move through that very quickly,

          7     Kathy.

          8         MS. BARCHICK:  Very quickly, one page.  We

          9     tried to do a snapshot of the absolute return

         10     program, stepping back and looking at whether or

         11     not we're meeting our overall objectives.  If you

         12     go halfway down, you'll see a line that's called

         13     PRIM Total HFOF Portfolio.  So that's the

         14     absolute return portfolio, which is the

         15     aggregation of the five managers.  If you go to

         16     the fourth column of numbers in.  This is the

         17     since inception return, annualized since July of

         18     2004, and it's been a little bit over 8.6 percent

         19     annualized for the past two years.

         20           If you go down that column, you'll see the

         21     next row down is HFRI fund of funds index.

         22     That's returned 8.1.  What this index is is an

         23     average of all the fund of funds return out

         24     there.  So it's essentially a peer universe.  And

         25     so what you see is that your program has


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          1     outperformed the peer universe by about 50 basis

          2     points.  And the next row down is your investment

          3     objective.  T-Bills plus four.  So it's

          4     outperformed that.  And the next row down is some

          5     market indices, and in particular the S&P 500

          6     over the same time period has returned

          7     8.35 percent.  So this program has done very well

          8     against several different measures.  And that's

          9     reflected in the growth of the dollar chart in

         10     the lower left-hand corner of this page.

         11           Now, if you go to the next column of

         12     numbers over, this is the other important reason

         13     why we are in this program is for a lower risk.

         14     The standard deviation since inception in this

         15     program has been about 3 1/2 percent.  If you go

         16     down the index or the peer universe, it's been

         17     4.3.  So we're lower than peers.  And the stock

         18     market the S&P 500 over the same time period, the

         19     standard deviation has been 7.4, and the bond

         20     market has been a little bit over 3.

         21           And so if you remember a big picture when

         22     we did the asset allocation, we were trying to

         23     get equity-like returns or a little bit less than

         24     equity, about 50 basis points less than equity,

         25     but with bond-like risk.  And so even though this


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          1     is a short time period, about two years or so,

          2     that's what we're seeing play out.  So from a big

          3     picture perspective, things are meeting their

          4     objectives.

          5           And finally, we're doing so with less

          6     market risk.  You can see the beta numbers here.

          7     And remember if you see a beta of one, it means

          8     it has the exact same exposure as that index.

          9     And in particular, in the S&P 500, this program

         10     has about a quarter of the exposure to the stock

         11     market.

         12         MR. SCHWARZENBACH:  These are net returns?

         13         MS. BARCHICK:  These are all net, net of all

         14     the fees.

         15         MR. AIKENS:  You cut across our industry

         16     fairly broadly, Kathy.

         17         MS. BARCHICK:  Yes.

         18         MR. AIKENS:  And there's a fair amount of

         19     capital that has flowed into this style over the

         20     past 18 months.  Have we seen anything to suggest

         21     there's a rapid flow of capital out of this style

         22     of management as a result of some of whatever

         23     this thing was called, Amaranth, and the other

         24     ones that are blowing up now?

         25         MS. BARCHICK:  No.


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          1         MR. AIKENS:  We haven't see any really

          2     change; the flows are still --

          3         MS. BARCHICK:  There's still flows.  I mean,

          4     admittedly, there are a number of different types

          5     of strategies besides this year that are

          6     struggling, but, just like last year, there were

          7     a whole set of others as well.

          8         MR. AIKENS:  No, I was startled by I think

          9     San Diego or somebody who just got in the

         10     business.

         11         MS. BARCHICK:  Nobody's doing a massive

         12     pull-out as a result of this.

         13         MR. BROUSSEAU:  Kathy, some of the articles

         14     in the pension journals indicate that there is

         15     too much money at this point in this asset class

         16     chasing too few deals.

         17         MS. BARCHICK:  Each of these managers employ

         18     different strategies.  These are more investment

         19     strategies.  Different asset class.  So when you

         20     invest in here, as you can see by the paper,

         21     there's exposure to the stock market, the bond

         22     market, the high yield market.  So there's a lot

         23     of market opportunities, and what you're really

         24     doing and what you're relying upon these fund of

         25     funds to do is to select managers that over long


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          1     periods of time have a competitive advantage in

          2     adding value, because you're really -- the key

          3     here is you're not getting market exposure, but

          4     you're investing in investment teams that could

          5     add value irrespective of what the markets do.

          6           And so that's the focus and that's why we

          7     have these professional groups designed to put

          8     together portfolios to add value, and they will

          9     monitor that.  And we can see it.  It will be

         10     demonstrated in these numbers, whether or not

         11     they're successful.

         12         TREASURER CAHILL:  Any other questions of

         13     Kathy and Stan?  We'll move onto Wayne.  Thank

         14     you.

         15         MR. MAVROMATES:  Thank you.

         16         MS. BARCHICK:  Thank you.

         17         MR. SMITH:  Alternative Investment materials

         18     are in Appendix I of your package.  I will just

         19     provide a summary of year to date information,

         20     the return on the fund and the cash flows.  And

         21     we continue to have a cash flow positive program

         22     where we're getting back more capital than we're

         23     putting out.  And just a quick background number,

         24     in the last 12 months we've gotten about $865

         25     million back from the program.  So it's been a


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          1     good time to be in private equity.  The returns

          2     have been strong, and we've gotten a lot of

          3     realized results as well as unrealized

          4     appreciation.

          5           The next page just gives you our

          6     alternative summary to date.  We're currently at

          7     about $1.2 billion and are quickly headed our way

          8     to $1.5 billion, which was our goal for the year.

          9     And there will be a couple of things that follow

         10     up or happen, but we're going to be pretty close

         11     to 1.5 at the end of the year.  You all have

         12     received an interim recommendation for Hellman

         13     and Friedman, which we are not going to cover

         14     here, but if you have any questions or comments,

         15     I'm more than welcome to take them now or at your

         16     leisure.  Any questions on where we are to date?

         17           All right, then.  I will move on to the new

         18     investment opportunities.  We have one investment

         19     opportunity today, which is KKR 2006 Fund.

         20     Pathway's report is in Appendix J of your

         21     package.  KKR is regarded as a pioneer in the

         22     leveraged buyout business and has extensive

         23     experience executing large buyout transactions

         24     with over 45 investments greater than $1 billion

         25     in enterprise value.  KKR is raising between 14


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          1     billion and $16 billion for KKR 2006 Fund.

          2           PRIM is a long-term investor with KKR from

          3     1986 through 1996.  However, PRIM Staff did not

          4     participate in the KKR Millennium Fund, which was

          5     raised in 2002.  PRIM Staff 2002 declined KKR in

          6     2002, due to performance reasons at the time and

          7     the firm's philosophy of holding securities for a

          8     long periods of time.  KKR will invest between

          9     150 million and 750 million in equity in large

         10     global companies with market leading positions

         11     primary within North America.

         12           KKR has built a talented team of 76

         13     investment professionals and has the support of a

         14     captive consulting firm, Capstone Partners, to

         15     assist the firm's portfolio companies.

         16           KKR has made a number of positive changes

         17     since the decline to invest in 2002.  The firm

         18     has created an expanded investment committee, a

         19     management committee, an operating committee,

         20     which has allowed them to make better firm and

         21     investment decisions.  They have integrated

         22     Capstone Partners, which has been very helpful to

         23     their portfolio companies.  They've expanded the

         24     leadership of the firm.  And lastly, they've

         25     greatly improved their performance since their


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          1     last investment decision.  Pso based on these

          2     factors PRIM Staff and the Investment Committee

          3     felt comfortable bringing forward for their new

          4     fund.  Overall, KKR has generated a gross IRR of

          5     27.1 percent since its inception.  Additionally,

          6     the firm has been in the top quartile performance

          7     in its last three funds and four of its six funds

          8     since 1986, with available benchmarks.  PRIM

          9     Staff believes that KKR is one of the most

         10     experienced firms operating at the large end of

         11     the buyout market.  PRIM Staff and the Investment

         12     Committee recommend an investment of $75 million

         13     for KKR 2006.

         14         TREASURER CAHILL:  Any questions?  Motion?

         15         MR. BROUSSEAU:  Move the recommendation.

         16         MR. CESAN:  Second.

         17         TREASURER CAHILL:  All those in favor that

         18     we invest up to $75 million in KKR 2006 Fund.

         19         THE BOARD:  Aye.  (Unanimous.)

         20         TREASURER CAHILL:  Opposed?  The ayes have

         21     it.

         22            (VOTED:  That the PRIM Board approve an

         23            investment of up to $75 million in KKR

         24            2006 Fund; and, further, that the Board

         25            authorize the Executive Director to


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          1            take all actions necessary to

          2            effectuate this motion.)

          3         TREASURER CAHILL:  Alternative investment

          4     consultant.

          5         MR. SMITH:  Yes.  We need approval to issue

          6     an RFP, which really actually issues today, for

          7     RFP consultant services that we do every three

          8     years.  So we need your approval for that.

          9         MR. BROUSSEAU:  Move the recommendation.

         10         TREASURER CAHILL:  Make the recommendation

         11     to issue an RFP for alternative --

         12         MR. BROUSSEAU:  Investment consultant.

         13         TREASURER CAHILL:  Alternative investment

         14     consultant.  Second?

         15         MR. AIKENS:  Second.

         16         MS. McGOLDRICK:  Second.

         17         TREASURER CAHILL:  All those in favor say

         18     aye.

         19         THE BOARD:  Aye.  (Unanimous.)

         20         TREASURER CAHILL:  Opposed?  The ayes have

         21     it.

         22            (VOTED:  That the PRIM Board approve

         23            the issuance of an RFP to seek

         24            alternative investment consulting

         25            services; and, further, that the Board


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          1            authorize the Executive Director to

          2            take all actions necessary to

          3            effectuate this motion.)

          4         MS. CANLAS:  Good morning.  The real estate

          5     report starts on page 11 of the Agenda.  As of

          6     August 31, the portfolio was valued at 4.7

          7     billion, and that's about 10.9 percent of

          8     the total PRIM fund.  Seventy-two percent of the

          9     portfolio is in direct investments, mostly in

         10     core quality institutional quality products, and

         11     that portfolio generated 24 percent return for a

         12     one-year period, which is about 400 basis points

         13     above the NCREIF.  The other 28 percent are in

         14     REIT investments, and that generated 27 percent

         15     over a one-year period, exceeding NAREIT by 300

         16     basis points.

         17           The combined portfolio generated about 24

         18     percent, exceeded our benchmark, our asset class

         19     benchmark, by 300 basis points.  The timber

         20     portfolio was valued at about 1.4 billion

         21     3.4 percent of total PRIT fund.  Returns for a

         22     one year period is 21 percent, also exceeded the

         23     NCREIF timber index by about 170 basis points.

         24     So that's the snapshot of real estate portfolio,

         25     at least as of August 31st.


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          1         TREASURER CAHILL:  Any questions?

          2         MS. McGOLDRICK:  I just have one on timber.

          3         MS. CANLAS:  Yes.

          4         MS. McGOLDRICK:  Is at 3 percent now?

          5         MS. CANLAS:  3.4 percent.

          6         MS. McGOLDRICK:  And is there a reason that

          7     that's down?

          8         MS. CANLAS:  Well, we have an allocation of

          9     4 percent and the reason that there has been no

         10     investments is because the market has been really

         11     pricey and there's a lot of capital chasing

         12     timberland.

         13           So I'm going to move onto Section B, the

         14     sales update.  We have a list of properties that

         15     are to be sold in the year 2006, and they're at

         16     different stages of the sale process.  But I'm

         17     very happy to inform the Board that on Monday

         18     October 2nd Warner Center, our biggest property,

         19     closed.  It sold for $311 million.  The proceeds

         20     to the fund was about 307 million.  The internal

         21     rate of return from this investment was in the 16

         22     and 17 percent, about twice what they projected

         23     that acquisition.  They said you were going to

         24     earn 8.6 percent.  We generated 16, 17 percent on

         25     this investment.  We made about 50 million in


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          1     about a year and a half.

          2           So if you remember, the reason for the sale

          3     was because of the strength of the capital

          4     market.  There were a lot of capital chasing

          5     trophy office property, especially in primary

          6     markets like the LA area so we achieved that.

          7     The second reason was we were trying to rebalance

          8     the portfolio.  So as a result of this sale, we

          9     will be closer to 10 percent, as far as the

         10     portfolio.  And our exposure to the office sector

         11     will go down from 37 to low 30s, and our exposure

         12     to the West Coast will go down from 37 to low

         13     30s.  So are there any questions about that.

         14         TREASURER CAHILL:  Good work.

         15         MS. CANLAS:  Thank you.  Section C we have a

         16     few items that are described under Section C,

         17     which, in the interest of time, I will not

         18     discuss, but I will be happy to answer any

         19     questions either now or after the board meeting.

         20         TREASURER CAHILL:  Administrative and Audit

         21     Committee.

         22         MS. GERSHMAN:  Now we're onto the

         23     interesting stuff.  As always we save the best

         24     for last.  Believe it or not, we're here once

         25     again to discuss our financial statements for


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          1     PRIT and PRIM.  KPMG is here.  Brock Romano is

          2     here for a very short discussion.  He met in

          3     length with the Administration and Audit

          4     Committee going over the financial statements and

          5     the presentation that is in Appendix O.

          6           We will not be going over that so you don't

          7     need to worry, but the good news is our financial

          8     statements we have unqualified opinion, we have

          9     no internal control issues, all things I'm quite

         10     proud of.  Greg Hegerich spearheaded this and put

         11     an enormous amount of work together with our

         12     staff.  I also want to mention that the Committee

         13     met with Brock independently of the Staff to

         14     discuss any issues, we're not aware of any, that

         15     there were.

         16           So I'm going to ask Brock to spend, very

         17     short, making some key points, and obviously

         18     we're here to answer any questions that you may

         19     have.  Brock, you've got, like, one minute.

         20         MR. ROMANO:  Thanks, Karen.  Karen actually

         21     summarized most of my points.  But let me just

         22     cut to the chase, we rendered unqualified

         23     opinions of both PRIT and PRIM.  Karen covered a

         24     lot of the highlights.

         25           There was an item that came up with the


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          1     Audit & Administration Committee that was a new

          2     auditing standard that goes into effect next year

          3     that basically redefines the definitions of

          4     material weaknesses and reportable conditions.

          5     And there was some dialog as to if we were under

          6     the current standards today, would there be more

          7     items to report.  And I don't think I quite

          8     clarified the question that was raised at the

          9     Audit Committee, but let me just clarify here,

         10     there would be no items, if we were under that

         11     new, more stringent standard that we will be next

         12     year, if we were in that standard today, we

         13     wouldn't have any items that would have met that

         14     lowered threshold.

         15           So once again, confirmation of the work

         16     that the accounting and finance staff does here.

         17     I really don't want to drag on your meeting any

         18     longer than it has to.  I think Karen kind of

         19     summarized the highlights.  If there's any

         20     questions.

         21         TREASURER CAHILL:  Any questions?  Great

         22     work.

         23         MS. GERSHMAN:  And just one last point on

         24     that, we're now working on our CAFR.  This will

         25     be the second year that we'll be submitting for


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          1     that.  So we're underway with that and at the

          2     next Board meeting, we'll bring that for your

          3     review.  Thanks, Brock.  So the next item on the

          4     Agenda is --

          5         TREASURER CAHILL:  Do we need a motion?

          6         MS. GERSHMAN:  Oh, I'm sorry.  Yes, thank

          7     you.

          8         MR. BROUSSEAU:  That the Board approve the

          9     Fiscal 2006 financial statements and audit

         10     report.

         11         MR. CESAN:  Second.

         12         TREASURER CAHILL:  All those in favor say

         13     aye.

         14         THE BOARD:  Aye.  (Unanimous.)

         15         TREASURER CAHILL:  Opposed?  The ayes have

         16     it.

         17            (VOTED:  That the PRIM Board accept the

         18            financial statements and audit report

         19            for the fiscal year ended June 30,

         20            2006, of PRIM and PRIT, prepared by

         21            KPMG LLP; and, further, that the Board

         22            authorize the Executive Director to

         23            take all actions necessary to

         24            effectuate this motion.)

         25         MS. GERSHMAN:  I'm going to turn it over to


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          1     Greg, and he's going to talk about the search

          2     that we had for our real estate, timber, and

          3     hedge fund auditors.

          4         MR. HEGERICH:  Thanks, Karen.  Attached as

          5     Appendix P is the Search Committee's report.

          6     I'll briefly go over the process and our

          7     recommendation for real estate and timber

          8     auditors, tax advisor, as well as the hedge fund

          9     of funds portfolio auditors.

         10           Deloitte & Touche's three-year contract was

         11     up this year.  So we went out to bid again for

         12     the real estate and timber audit services as well

         13     as a tax consultant.  Deloitte had been providing

         14     that service for the last six years.  In

         15     addition, we decided to add the hedge fund of

         16     funds audits to the RFP this year.  Previously,

         17     each of the fund of funds advisors had used their

         18     auditors to perform the audits of our separate

         19     accounts.  We decided, similar to real estate and

         20     timber, to take ownership of that process, to

         21     have it in-house and to manage the process here.

         22     We think it's a valuable experience for timber

         23     and real estate, and we wanted to bring the hedge

         24     fund of funds audits on board as well.

         25           So we issued the RFP on August 3rd with a


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          1     proposal deadline of September 1.  We received

          2     three responses prior to the deadline.  They were

          3     KPMG, Deloitte & Touche, and E&Y.  And any of the

          4     services were up so the respondents could respond

          5     to all of the services, or they could just

          6     respond to one or more of the services outlined

          7     in the RFP.  They all responded to all three of

          8     the services.

          9           The Search Committee met and decided to

         10     bring in all three firms for an interview because

         11     they all met the minimum qualifications, and on

         12     the Search Committee was myself, Karen, Bob

         13     Brousseau, Tony Falzone, and Tom Hanna.  After

         14     the results and interview process we decided that

         15     KPMG and Deloitte & Touche really stood out in

         16     terms of their presentation and their

         17     capabilities for these audits.  After having

         18     discussed that, we dismissed E&Y and we made

         19     further analysis of the two firms.

         20           So after considering the respondents, we

         21     have two recommendations today that we presented

         22     to the Audit Committee.  The first is

         23     recommending Deloitte & Touche to remain as the

         24     real estate and timer auditors and tax advisors,

         25     and the second is to hire KPMG to perform the


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          1     hedge fund of funds audit services for the

          2     periods ending 2006, 2007, and 2008.

          3           The reason for Deloitte & Touche to retain

          4     as timber and real estate audit providers as well

          5     as the tax provider, I think there are two main

          6     reasons, one it's a complex audit, it's

          7     multi-locations, our advisors are across the

          8     country.  They've done a great job in managing

          9     that process.  We've made a lot of progress in

         10     the last three years of streamlining it and

         11     getting more involved, getting good value-added

         12     feedback from Deloitte & Touche on the audits and

         13     the advisors, and I think it's been a valuable

         14     experience.  And due to the complexity, the team

         15     for Deloitte & Touche is stable, and I think in

         16     all those areas led us to believe to retain

         17     Deloitte & Touche as the advisor or the auditors

         18     for those audits, as well as the tax advisor.  I

         19     think there's a lot of synergy between having the

         20     same audit firm do the real estate and timber

         21     audits as well as the tax services, because

         22     there's a lot of overlap there, and they've done

         23     a great job in providing the tax services as

         24     well.

         25           Regarding the hedge fund of funds audits,


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          1     we decided to go with KPMG again for two main

          2     reasons:  One, the lead partner and manager

          3     proposed for the account is Brock, as well as Amy

          4     Staunton, who is the manager on the PRIT and PRIM

          5     audits.  We think there's some synergy there.

          6     They know our portfolio.  They know the hedge

          7     fund of funds program.  So we think there's some

          8     synergy there.  And, secondly, they demonstrate a

          9     strong commitment to, again, coordinating across

         10     offices.  We're going to be having eight audits

         11     due to the increase in fund of funds due to

         12     portable.  So we'll have eight separate audits

         13     across the country coordinated here out of

         14     Boston.  Brock will be here coordinating that

         15     effort reviewing the process, and I think they'll

         16     add a lot of value to us in terms of what each of

         17     our advisors in their practices and processes.

         18           So those are our two recommendations.  I'm

         19     happy to answer any questions in terms of the

         20     process or our selection and, again, happen to

         21     take on any questions.

         22         TREASURER CAHILL:  Any questions of Greg or

         23     Karen?  Motion, Bob?

         24         MR. BROUSSEAU:  I'll move that the Board

         25     hire Deloitte & Touche for the real estate,


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          1     timber auditors and tax consultant, and that KPMG

          2     be hired for the hedge fund of funds auditors for

          3     the three years ending December 31st of 2006,

          4     2007, and 2008.

          5         MR. CESAN:  Second.

          6         MS. McGOLDRICK:  Second.

          7         TREASURER CAHILL:  All those in favor say

          8     aye.

          9         THE BOARD:  Aye.  (Unanimous.)

         10         TREASURER CAHILL:  Opposed?  The ayes have

         11     it.

         12            (VOTED:  That the PRIM Board hire

         13            Deloitte & Touche for real estate and

         14            timber auditors and tax consultants and

         15            KPMG for hedge fund of funds auditors

         16            for the three years ending December 31,

         17            2006, 2007, and 2008; and, further,

         18            that the Board authorize the Executive

         19            Director to take all actions necessary

         20            to effectuate this motion.)

         21         MS. GERSHMAN:  This next item on the Agenda,

         22     I'm going to ask that we take a few minutes on

         23     this because we think it's a really important

         24     initiative that we're going into, which is our IT

         25     review of our whole entity.  Back in June the


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          1     Board approved to hire PA Consulting.

          2           They really kicked off their project on

          3     July 31.  We had surveys that we sent out to all

          4     the Staff, which really helped describe what

          5     their role was here at PRIM, how they touched

          6     technology, how they wished they could touch

          7     technology.  PA Consultants came in and

          8     interviewed every single save staff member that

          9     was here to really get a great understanding of

         10     kind of what we do.  We had weekly meetings.

         11           This was about an eight-week process.

         12     Weekly meetings that consisted of myself, Mike,

         13     Stand, and Greg, where we met with PA

         14     representatives and discussed what they had done

         15     in the prior week, what they were about to do in

         16     the following week, and any issues that they may

         17     have.  So it was very well monitored.  And we had

         18     three very long meetings for that date, about

         19     half of the staff, a subsection across all

         20     functions of PRIM, again, so that we could make

         21     sure that the consultants understood, because I

         22     think that's the biggest challenge, right, do

         23     they really understand what we do, do they

         24     understand how we do it, and our priorities and

         25     how we want to become more efficient?


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          1           They came in and made a presentation to the

          2     Audit and Administration Committee.  We're asking

          3     them to do that again.  It's fairly short and

          4     brief.  They're very good at being very concise

          5     with their presentations.  They use a lot of

          6     graphics, which I think is very helpful.  But

          7     they're here today to present to you kind of what

          8     we've done in our Phase A of this project, and

          9     then their recommendation and where we're going

         10     to go, where we think we want to go going

         11     forward.

         12           And then we're going to step back and

         13     discuss this with the Board to see if the Board

         14     agrees with that approach.  So they're here today

         15     and I encourage you to ask questions and help

         16     understand where this project is going.  Mike,

         17     did you want to make a point.

         18         MR. TRAVAGLINI:  Let me just set the tone by

         19     being blunt.  This is long overdue and PRIM has

         20     under invested in information technology for much

         21     longer than it --

         22         MR. SCHWARZENBACH:  Like most entities.

         23         MR. TRAVAGLINI:  Like most entities.  So

         24     let's listen to PA and then we can have another

         25     discussion.


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          1         (PA enters the room.)

          2         MR. STEEL:  Thank you for inviting us in.

          3     First of all, let me introduce myself.  My name

          4     is Chris Steel.  I've been a partner in charge of

          5     the work we've done for PRIM.  My colleagues,

          6     Karl Boone and Matthew Marx.  You may recall at

          7     the Board meeting on June 8th earlier this year,

          8     you approved the start of this program that we're

          9     about to tell you the results of.

         10           Following a consultant selection program,

         11     we were the consultant selected and we've been

         12     working with PRIM for the last eight weeks doing

         13     a number of things.  We have interviewed all of

         14     PRIM's staff to really get a good understanding

         15     of how the people, process, and technology in the

         16     current organization work.  We've built a

         17     strategy setting out how the improvement

         18     opportunities we've identified will provide

         19     benefit to the business, and we've evaluated a

         20     number of technical factors and developed some

         21     functional requirements for providing solutions

         22     to the issues we've identified.  And to finish

         23     off with, we've created some recommendations upon

         24     going forward, technology, architecture, and a

         25     cost benefits analysis of the work proposed.


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          1           So what I'd like to do is I'm going to ask

          2     Matthew to take you through a summary of the work

          3     we undertook, Karl is going to take you through

          4     our recommendations, and then I'll finish up with

          5     a summary of the cost benefit analysis.

          6         MR. MARX:  Thanks, Chris.  So to back us up

          7     a bit, I want to tell you about a summary of the

          8     current situation at PRIM.  PRIM is approximately

          9     20 years old and has a track record proving

         10     delivering consistent high performance returns

         11     and services to their clients.

         12           Over the last several years, PRIM's

         13     investment portfolio has grown significantly more

         14     complex while as the investments have grown more

         15     diverse and the number of clients it serves has

         16     grown, as more and more towns look to take

         17     advantage of PRIM's success.  Throughout this

         18     time PRIM has invested in minimal IT, and we have

         19     found some business-critical issues are beginning

         20     to surface at PRIM.

         21           If you look at the picture on the left-hand

         22     side of the page here on Slide 3, this picture is

         23     something we draw based on surveys that we've

         24     given throughout PRIM to all of the staff,

         25     interviews we've held with all PRIM Staff, and


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          1     several key external parties, and it's intended

          2     to show a picture of how people, process, and

          3     data interact with technology throughout PRIM,

          4     how PRIM uses technology, throughout their

          5     day-to-day work.

          6           You can see this picture is quite complex.

          7     It's not intended to kind of show you each piece

          8     of this -- each process by how which PRIM goes by

          9     their work, but I have outlined -- we've outlined

         10     six improvement opportunities to allow you to see

         11     this a little bit better along the outside of

         12     this diagram.

         13           I'll take you through those now in

         14     clockwise form.  You can see No. 1 at the top of

         15     this diagram, data interaction with Mellon is

         16     fragmented.  You can see there's quite a bit of

         17     complexity there on the diagram.  To the right,

         18     centralized performance is not real time,

         19     performance reporting that is.  Contact

         20     management and client communication logs are

         21     distributed, not centralized.  Multiple document

         22     formats across PRIM lead to complex approval

         23     processes.  Document management and storage is

         24     decentralized and ad hoc.  Data is stored across

         25     PRIM in many electric forms.  Financial


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          1     calculations are spreadsheet-driven.

          2           These again are improvement opportunities.

          3     We've mapped into the top right image of the page

          4     that maps out these improvement opportunities

          5     against three key categories or business drivers.

          6     It's intended to show the implications of these

          7     business drivers mapped against the improvement

          8     opportunities.

          9           Looking across the right side of this

         10     picture we have mapped across annual time cost of

         11     the annual analytics or how much these processes

         12     cost PRIM, operational risk implications of doing

         13     business in this way, and the stakeholder

         14     implications of that.  Just picking a few pieces

         15     of this as examples so that I don't get into all

         16     of the minute detail with you, if you look down

         17     the improvement opportunities to Bubble 5, data

         18     is stored across PRIM in many electronic forms,

         19     financial calculations are spreadsheet-driven,

         20     and you go across into the operational risk

         21     implications column, the first bullet there is

         22     entry and reporting of contractually stipulated

         23     fee calculations are non-standard and not visible

         24     enough.  And so that leads to the potential for

         25     error in calculations.  So we certainly haven't


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          1     seen any indications of error to date, but the

          2     complexity is there to provide for the

          3     opportunity for that.

          4           One more example for you on this diagram.

          5     If you look at Bubble 2, contact management and

          6     client communication logs are distributed and

          7     look under stakeholder implications, multiple

          8     uncoordinated contacts with stakeholders leads to

          9     confused messages.  So that's the potential for,

         10     again, error in communicating with PRIM's

         11     stakeholders.

         12           So going down to the bottom of this

         13     diagram, under the annual time cost of manual

         14     analytics, you can see this number of just over

         15     $2 million.  This is the total time cost or total

         16     economic costs of manual operations, which

         17     provides the opportunity to save a portion of

         18     this money through simplification of the process

         19     in applying specific technology to these areas.

         20     So these things all bleed us down into we

         21     developed a strategy to address this complexity

         22     for PRIM.

         23           Three main components of this picture, you

         24     can see on the bottom right-hand portion of this

         25     page.  Again, this is we deal in big pictures.


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          1     But this is a small version of the big picture.

          2     So this, of course, blows up into a larger form.

          3     But you can see three main categories on there

          4     that I want to call out to you.  We've drafted

          5     the desire future operational state to what we

          6     want this picture to look like in the future,

          7     what we recommend it to look like in the future

          8     for PRIM.

          9           Business drivers.  So in addition to the

         10     three business drivers that I gave to you

         11     earlier, there's a full set of those, including

         12     risk and manual analytics or reducing manual

         13     analytics.  And then those bleed into identified

         14     project initiatives that achieve the future

         15     desired operational state for PRIM.  So this is,

         16     again, in taking a look at PRIM, interviews,

         17     holding interviews, surveys, and doing a lot of

         18     research around how PRIM operates today, building

         19     out a strategy for addressing that, we have come

         20     to this conclusion that the level of operational

         21     risk at PRIM is becoming unacceptably high at the

         22     current state.

         23         MR. BOONE:  So Matt has mentioned a future

         24     state.  So what does that actually look like?  So

         25     over on page 4, we've drawn what this operation


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          1     might look like in two years' time.  So how much

          2     simplified will it be?  Some of these processes

          3     have been duplicated.  A lot of the data has been

          4     centralized.

          5           So this 2-B world that we call has been

          6     drawn up here.  And if I just go around the

          7     outside like Matt did and just pick out some of

          8     these, some of these things that will be

          9     different.  So the first one, No. 1, contact

         10     management is going to be centralized.  So this

         11     means every interaction that PRIM Staff have with

         12     external stakeholders will be recorded centrally

         13     and accessible to all.  So there will be no

         14     confused messages, there will be no repeating the

         15     terms that have gone before.

         16           Next one down, as we centralize data there

         17     is going to be a portal, a single view onto all

         18     of that data that PRIM Staff will be able to

         19     access.  So whenever they want the latest version

         20     of a document, it will be in one central place.

         21     As things are centralized and all that data is

         22     coordinated, obviously, real time reporting is

         23     possible.  We recommend a dashboard be

         24     implemented that will allow PRIM Staff to look at

         25     current investment portfolios, investment


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          1     performance, funds manager details, and so on.

          2           A lot of the redundant, a lot of the manual

          3     data entry can be removed.  So because there are

          4     multiple spreadsheets holding a lot of this

          5     important data that are entered and maintained

          6     different places.  So we'll remove a lot of that

          7     and implement error checking so that only needs

          8     to be done once.

          9           We also recommend that PRIM processes are

         10     reengineered so that we make use of document

         11     management technology and automated work flow.

         12     So if a document has to go from A to B and it has

         13     to be approved by three people along the way,

         14     that process can be automated.  So that as soon

         15     as the first authorization is complete, a trigger

         16     is sent to the next person.  That will speed up

         17     the process and make sure that everything is

         18     central.

         19           So that's some of the milestones that we

         20     recommend along this program of change.  At the

         21     top right there's a picture there of the future

         22     architecture.  The only thing I'll point out here

         23     is it's based on standard, off-the-shelf

         24     components.  Because of PRIM's very specific

         25     nature, there is some customization required, but


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          1     this is a modular architecture so that as new

          2     investments come on board, this is scalable and

          3     can be adapted to grow with PRIM as PRIM grows.

          4           If you look at the road map here, we've

          5     designed this so that benefits are delivered

          6     throughout the project lifetime.  So we're not

          7     recommending a program of work start and in 18

          8     months you get some benefit out of it.  So there

          9     are a number of work streams that we've defined

         10     with benefit milestones along the way.  And just

         11     to highlight some of the principles of that

         12     approach, we've recommended a solution

         13     architecture.  That's been I think bought into by

         14     the Admin. Committee and the PRIM core team that

         15     have been working with us.  We need to socialize

         16     that with the wider PRIM Staff so the

         17     recommendation is that the specific vendor

         18     solutions are confirmed and the detailed plans

         19     drawn up at each stage of this process.

         20           We're also recommending that requirements

         21     are gathered throughout.  So rather than trying

         22     to specify everything now and expecting the

         23     requirement to be the same in 18 months, we've

         24     designed a number of checkpoints in this process

         25     so that we can revisit those requirements.  We


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          1     recommend that prototyping is used wherever

          2     possible.  It's much easier to see and feel

          3     something and know that it is the right thing

          4     rather than read a lengthy Word document.  And

          5     also we recommend that there are regular

          6     checkpoints along this process so that PRIM can

          7     confirm the scope and the costs of each

          8     subsequent phase as the program progresses.

          9         MR. STEEL:  So if we move onto the final

         10     slide.  Karl touched on costs.  Let's look at the

         11     costs and benefit of what we're recommending

         12     here.  The cost of the recommended improvements

         13     was presented to the Admin. Committee last month

         14     and is estimated to be some $3 million over

         15     18 months.  That includes a 20 percent

         16     contingency that we have built into that at the

         17     request of PRIM.

         18           The table on the left here sets out how

         19     that's broken out, hardware, software, services,

         20     and contingency is also included in that.  If we

         21     look at the right side, if we look at the

         22     benefits coming out of that and again, against

         23     the business drivers that Matthew alluded to

         24     earlier, so not only will this provide a better

         25     service to stakeholders, for example, helping


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          1     management have greater visibility into all fee

          2     calculations but the key drive to the project,

          3     keeping operational risk under control, will also

          4     be addressed.  Entry and reporting, for example,

          5     of contractually stipulated fee calculations will

          6     be standardized and accessible and financial

          7     reporting and fund analytics capabilities will be

          8     significantly improved.  And in addition to all

          9     of that, we believe the project will have an

         10     economic payback between about three and five

         11     years based on using a 10 percent discount rate.

         12           So to put that in context, on average,

         13     financial services organizations in industry

         14     right now are spending about 6 percent of

         15     revenue, 10 percent of expenses on IT.  PRIM over

         16     the last five years has been spending about $60

         17     thousand a year, which is .05 percent of annual

         18     revenue.  So our recommendation based on what

         19     we've set out here is that the time is right to

         20     increase that investment over the next 18 months.

         21         TREASURER CAHILL:  Any questions?

         22         MS. McGOLDRICK:  I just have one.  So we're

         23     going to be eliminating the operating cost of

         24     over 2 million by implementing this; right?

         25         MR. TRAVAGLINI:  Right.


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          1         MS. McGOLDRICK:  Right now it cost over $2

          2     million.

          3         MR. BROUSSEAU:  2.2.

          4         MR. TRAVAGLINI:  I think it would go,

          5     Theresa, as saved in efficiency.  There's no

          6     money coming back.  Let me make sort of three

          7     broad points, which I think are very important.

          8     One, a testament to Tom, Greg, Tony, Jennifer,

          9     Eileen, Cathy, Veronica, the fact that operating

         10     this way that we haven't -- that there is an

         11     exposure but we haven't had any actual problems.

         12     So as you see on the earlier page, but the amount

         13     of time that it takes people to work in this sort

         14     of antiquated fashion is an efficiency cost.  So

         15     that's what we've tried to quantify.  So that's,

         16     one, a testament to good people paying attention.

         17     That's going to continue.

         18           The other point I want to make is this is

         19     not an automation project that's going to result

         20     in head count reduction.  We need the resources

         21     we have.  We just need people to be allowed to

         22     work much more efficiently and, therefore, more

         23     productively.  And the last one is we talk a lot

         24     about risk.  We spend a lot of time in the

         25     investment program.  This is a significant


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          1     operational risk that we now have as a large plan

          2     sponsor of $42 billion that we want to try to

          3     address in the very near term.

          4         MR. AIKENS:  My questions are kind of the

          5     state of the art.  We're going to spend 2 1/2 to

          6     3 million bucks, are we going to be at the state

          7     of the art when we spend the money?

          8         MR. STEEL:  It's a question of whether you

          9     want to be absolutely state of the art or whether

         10     you want to have absolutely the right pragmatic

         11     solution for PRIM, and I would say it's more the

         12     latter than the former.

         13         MR. AIKENS:  So we're going to be pragmatic

         14     rather than shoot for state of the art.  Were

         15     there any things in the PRIM working committee

         16     that was recommended or that you recommended that

         17     didn't survive the Administrative Committee?

         18         MR. STEEL:  No.

         19         MR. SCHWARZENBACH:  I just have a question

         20     just as far as vendors and how that all works and

         21     to what extent did the vendors still -- or is it

         22     independent of the solution?

         23         MR. BOONE:  Yes, it is independent of the

         24     solution.  Based on what we know at PRIM and our

         25     experience elsewhere, we have specified a


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          1     specific solution set that we think will work.

          2     What we haven't had in the eight weeks is enough

          3     opportunity to share all that with the PRIM Staff

          4     and get that buy in.  Because this will be

          5     effectively a change program, people are going to

          6     change the way they work, we need to make sure

          7     everybody's on board with that.  So the

          8     recommendation is that the next phase is about

          9     validating the solution and sharing that and

         10     getting people to touch and feel it.

         11         MR. SCHWARZENBACH:  I guess what I was

         12     trying to say is so you come up with a solution.

         13     The solution is you need a centralized database

         14     that solves these five problems.  That's

         15     independent necessarily of who you recommended

         16     maybe already or who you have in mind or maybe

         17     you haven't even thought of who the vendor is

         18     that would supply that for us, are we talking

         19     about single server, are we talking about open

         20     source, are we talking about somebody else?

         21     That's what I'm just curious.  I mean, this is

         22     presumably a functional solution at this stage

         23     still.

         24         MR. STEEL:  It is a functional solution at

         25     this stage that we have made a recommendation


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          1     around the Microsoft suite of products, which is

          2     the suite that we would expect to validate with

          3     the PRIM Staff over the next phase.  The

          4     solution, the time line that we proposed is

          5     independent of that.  We can flex it should a

          6     slightly different outcome result.

          7         MR. SCHWARZENBACH:  And the vendors involved

          8     in implementing that, are they -- again, I'm

          9     innocent of this, are they you guys, or is this

         10     something that is sort of out there that we're

         11     going to have an RFP for a software solution?

         12         MS. GERSHMAN:  That's what we want to talk

         13     about as we move into the next step.  We are

         14     recommending to move on with PA, but that's what

         15     we need to talk about.

         16         MR. SCHWARZENBACH:  I assume they're a

         17     Microsoft reseller.

         18         MR. BOONE:  We're not, actually.

         19         MR. SCHWARZENBACH:  You already have the

         20     product.

         21         MS. GERSHMAN:  We have a lot of the

         22     products.

         23         TREASURER CAHILL:  Any other questions?

         24     We'll let these gentlemen go and then we'll

         25     discuss.


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          1         MS. GERSHMAN:  So when we put this RFP out,

          2     this question came up at the Committee as well on

          3     who do we work with to go through the next step?

          4     And when we put this RFP out, we put it out in

          5     two phases.  We purposely did this so that we

          6     hired them on the first phase so that we could

          7     see that we were comfortable with the firm that

          8     we were working with, if they met their

          9     milestones, do we feel comfortable that we're not

         10     going to go over budget.

         11           They have met and I think exceeded any of

         12     our expectations.  When we went through the RFP,

         13     we also evaluated whether they have programming

         14     abilities, you know, whether they would have the

         15     resources if we were going to go into a

         16     development type solution, which we feel we are.

         17     And Greg and I and the Committee feel comfortable

         18     moving forward with them, feel that we'd be

         19     wasting a lot of time by stepping back, putting

         20     this back out on the street, looking to see if

         21     they end up being the right vendor.  They've done

         22     a great job.  And we feel we want to move

         23     forward.

         24           How we want to control that is, as they

         25     mentioned, we're going to have milestones.


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          1     Contractually, we've only contracted for Phase A.

          2     We are now going to move into a new contract with

          3     them.  And again, that was intentional.  And in

          4     that contract we will have these three kind of

          5     milestones along the way so that we don't have

          6     this one big project that's going to potentially

          7     cost some amount of money, and we will make sure

          8     that we can control the costs along the way.  And

          9     at any point in time, we own everything they've

         10     done to date, and we can terminate them if we

         11     wanted to.

         12           So that's the Committee's recommendation is

         13     that we approve moving forward with PA to

         14     complete Phase B and work with them on this

         15     recommended solution of using the Microsoft

         16     products although we --

         17         MR. SCHWARZENBACH:  So you already are

         18     licensed?

         19         MS. GERSHMAN:  We are.

         20         MR. TRAVAGLINI:  That's a significant

         21     factor.

         22         MS. GERSHMAN:  That's a huge factor.  The

         23     other thing I want to add is that Boston Systems

         24     and Solutions, who is our network provider, has

         25     been part of this search team and part of this


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          1     team.  So they also have been validating whether

          2     these solutions make sense with the technology

          3     that we have, which is pretty state of the art.

          4     And built into these numbers, at my request, are

          5     business continuity issues, and because now that

          6     we're going to be relying on the system so much

          7     more, we need to make sure that we can support

          8     that.  So it's a really all-in, full

          9     comprehensive package that we'll plan on moving

         10     forward with PA and BSS.

         11         TREASURER CAHILL:  You just made a great

         12     motion.  Approval of that motion.

         13         MR. BROUSSEAU:  Motion subject to the

         14     outcome of contract and fee negotiations that we

         15     hire PA for Phase B.

         16         MR. AIKENS:  Second.

         17         MS. McGOLDRICK:  Second.

         18         TREASURER CAHILL:  Are there any other

         19     questions?  All those in favor say aye.

         20         THE BOARD:  Aye.  (Unanimous.)

         21         TREASURER CAHILL:  Opposed?  The ayes have

         22     it.

         23            (VOTED:  That the PRIM Board, subject

         24            to the satisfactory outcome of contract

         25            and fee negotiations, hire PA


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          1            consulting for IT consulting services

          2            for Phase B of the entity-wide IT

          3            project; and, further, that the Board

          4            authorize the Executive Director to

          5            take all actions necessary to

          6            effectuate this motion.)

          7         TREASURER CAHILL:  Anything else before the

          8     Board?

          9         MS. GERSHMAN:  No.  I just wanted to remind

         10     you that we're going to be sending out the Board

         11     Self-Evaluation Questionnaire that we'll be

         12     asking to you send back to Bob.  There will be a

         13     self-addressed envelope.  And I particularly ask

         14     that you put down any comments you have towards

         15     any board education that we will be having

         16     probably in the first quarter of 2007.

         17         MR. BROUSSEAU:  It's on page 8, because it

         18     will assist Karen and Staff to design our board

         19     education project or program later in the first

         20     quarter of 2007.  So it will really help us, and

         21     I'd like to get these back by November 1st.  Are

         22     you going to cover the meeting dates?

         23         MS. GERSHMAN:  The meeting dates are in

         24     there.

         25         MR. BROUSSEAU:  We don't vote on them until


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          1     December.

          2         MS. GERSHMAN:  Right.

          3         MR. TRAVAGLINI:  We're voting on them in

          4     December, and the one issue where we know is

          5     August meeting of next year is scheduled for

          6     Thursday, August 9th, I believe.  We're going to

          7     need to change that board meeting date.  It

          8     likely, as it looks now, will be Wednesday, the

          9     day before, August 8.  So just when we come back

         10     in December, because that's when we vote and sort

         11     of make them hard and fast, try to check your own

         12     sort of schedule.  Because that's the one thing

         13     we know now we will be revisiting that particular

         14     meeting date.

         15         TREASURER CAHILL:  Motion to adjourn.

         16         MR. BROUSSEAU:  So moved.

         17         TREASURER CAHILL:  Motion is made and

         18     seconded.  All those in favor say aye.

         19         THE BOARD:  Aye.  (Unanimous.)

         20         TREASURER CAHILL:  Opposed?  The ayes have

         21     it.

         22            (VOTED:  That the October 5 meeting be

         23            adjourned.)

         24         (Whereupon meeting adjourned at 12:00p.m.)

         25


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          1

          2
              Treasurer Cahill, Chair
          3

          4

          5   Alex Aikens

          6

          7
              Robert L. Brousseau
          8

          9

         10   Paul Cesan

         11

         12
              Theresa McGoldrick
         13

         14

         15   George McSherry

         16

         17
              Peter Schwarzenbach
         18

         19

         20   Ralph White

         21

         22
              Michael Travaglini,
         23   Executive Director

         24

         25


                      PRIM Board Meeting Minutes of October 5, 2006,

                      For Approval at the December 5, 2006, Meeting
