September 19 & 20, 2002

2401 Colonial Drive, 3rd Floor
Helena, Montana

Thursday, September 19, 2002

AGENDA

I. CALL TO ORDER 1:00 p.m.
A. Roll Call
B. Approval of the August 1, 2002 Regular Meeting Minutes

II. EXECUTIVE DIRECTOR REPORTS - Carroll South 1:10 p.m.
A. Budget Status Report
B. Gainey Foundation Bonds
C. In-State Investment Report
D. Out-of-State Travel Requests

III. BOND PROGRAM - Geri Burton 1:45 p.m.
A. Bond Program Officer Position
B. INTERCAP
1. Activity Report
2. Staff Approved Loans Report
3. Loan Requests

IV. CHIEF INVESTMENT OFFICER REPORTS - Jim Penner, CFA 2:00 p.m.
A. Economic Overview - Newsletter
B. Asset Allocation
C. Index Program Expansion Proposal

V. MONTANA LOAN PROGRAM - Delrene Rasmussen 2:30 p.m.
A. Consider Commercial/Multi-Family Loans
1. DEH, LLC.
2. Lumber Yard Supply Company
3. Fredsmom, LLC.
B. Coal Tax Loan Activity Report - July
C. Mortgage Program Activity Report - July
D. Residential Loan Delinquency Report - June 2002
E. Commercial Loan Delinquency Report - June 2002
F. Updated Residential Service Agreement

VI. INVESTMENT ACTIVITY - Internal Management 3:00 p.m.
A. Domestic Equities (Montcomp) - Rande Muffick, CFA
1. Transactions - July and August
2. Holdings Report
3. Strategy
4. Portfolio Additions
a. Honeywell

B. International Equities - David Ewer
1. Internal Pool
a. Internal Transactions - July and August
b. Internal International Holdings Report
c. Strategy

C. Fixed Income - Bob Bugni, CFA
1. Transactions - July and August
2. Strategy
3. Investment Policy Statements
a. Resource Indemnity Trust Fund
b. Trust & Legacy Fund
c. Zortman/Landusky Long Term Water

D. STIP and Treasurer's Funds - Bob Bugni, CFA
1. STIP Transactions - July
2. STIP Holdings Report
3. Treasurer's Fund Transactions - July
4. Treasurer's Fund Holdings Report
5. Strategy

6. Investment Policy Statements
a. Short Term Investment Pool
b. Treasurer's Fund Investment Pool

VII. PRESENTATION - Schroders Asset Management 4:00 p.m.
Donald H. M. Farquharson, Director, Pacific Basin Portfolio Manager
Richard Sennit, Pacific Basin Portfolio Manager
Teresa Myers, Senior Vice President, Client Servicing and Marketing

REGULAR MEETING OF THE
MONTANA BOARD OF INVESTMENTS
DEPARTMENT OF COMMERCE

Friday, September 20, 2002

AGENDA

VIII. INVESTMENT ACTIVITY - External Management - Ed Kelly 8:30 a.m.
a. Security Lending
1. Income Report - July
b. Domestic Equity Passive
c. International Equity Active
1. Schroders Asset Management Annual Review
d. Private Equity
1. MPEP Transactions - July
2. MPEP Holdings Report - July
Presentation - Oaktree Capital Management, LLC, Howard S. Marks, CFA, Chairman
1. Private Equity Proposal

IX. ADJOURNMENT 10:00 a.m.

The Board of Investments makes reasonable accommodations for any known disability that may interfere with a person's ability to participate in public meetings. Persons needing an accommodations must notify the Board (call 444-0001) or write to P.O. Box 200126, Helena, Montana 59620 no later than three days prior to the meeting to allow adequate time to make needed arrangements.

2401 Colonial Drive, 3rd Floor
Helena, Montana
September 19 & 20, 2002

MINUTES

BOARD MEMBERS PRESENT:

Dick Anderson, Chairman
Douglas Bardwell
Dennis Beams
Jay Klawon
Joel Long
Calvin Wilson


BOARD MEMBERS ABSENT:

Karen Fagg
Maureen Fleming
Tim Ryan

STAFF PRESENT:

Robert T. Bugni, CFA, Senior Investment Officer
Geri Burton, Deputy Director
Richard Cooley, CFA, Assistant Investment Officer
Kimberly Dallas, Program Assistant
David Ewer, Senior Portfolio Manager
Edward Kelly, Assistant Investment Officer
Herbert Kulow, Senior Portfolio Manager
Rande Muffick, CFA, Assistant Investment Officer
James R. Penner, CFA, Chief Investment Officer
Delrene Rasmussen, Assistant Investment Officer
Carroll V. South, Executive Director
Louise Welsh, Bond Program Officer


GUESTS:

Mae Nan Ellingston, Bond Counsel, Dorsey & Whitney (via conference call)
John Mehan, Robert W. Baird & Company (via conference call)
Donald H. Farquharson, Director, Schroders Asset Management
Richard Sennit, Portfolio Manager, Schroders Asset Management
Teresa Myers, Senior Vice President, Schroders Asset Management
Howard S. Marks, CFA, Chairman, Oaktree Capital Management LLC.

CALL TO ORDER

Chairman Anderson called the regular meeting of the Board of Investments (Board) to order at 1:00 p.m. in the conference room at 2401 Colonial Drive, 3rd Floor, Helena, Montana. As noted above, the meeting convened with six members of the Board present. Members Fleming, Ryan and Fagg were not present.

Member Bardwell motioned for approval of the August 1, 2002 minutes; Member Beams seconded the motion and the motion was passed 6-0.

EXECUTIVE DIRECTOR REPORTS

Budget Status Report

Executive Director Carroll South presented this report for fiscal year end 2002.

In-State Loan Program

Mr. Carroll South, Executive Director, presented to the Board, a report on the recently discussed 25% provision in the In-State Investment law and what impact that language may have on the In-State Loan Program when the 25% mark is reached.

Staff recommends:
1. That a floor of $200.0 million be established for the Permanent Fund's TFBP investment to provide liquidity to cover legislative appropriations and/or legislatively-mandated loans. Given the state's serious budget problems there may be attempts during the 2003 Legislature to appropriate significant amounts of the Permanent Fund. If those attempts are unsuccessful, it may be possible to reduce this amount to $150.0 million going forward.
2. That $100.0 million of the Permanent Fund be reserved for the Infrastructure and Value-Added Loan Programs until such time that we can accurately gauge the potential growth of these programs. The unused portion of the reservation would remain invested in the TFBP. If the growth of these programs does not materialize a portion of the reserve could be used for Commercial loans.
3. That $15.0 million of the Permanent Fund be reserved for the Facility Finance Authority. The unused portion of the reservation would remain invested in the TFBP.
4. That 25.0 percent of the Treasure State Endowment Fund be allocated to the Commercial Loan Program to reduce demands on the Permanent Fund. As of June 30, 2002, 18.0 percent of the Endowment Fund was invested in Commercial Loans.
5. No change in Commercial Loan Program parameters at this time. If the continued rapid growth of the Program jeopardizes the above reservations, staff would recommend procedures to slow the growth using the "Investment Preference" section of the In-State Investment Law.

The above positions are currently maintained by staff or are open for discussion at a time that staff requires, therefore, there was no action taken by the Board on staff's recommendation.

Member Fagg arrived at this time.

Gainey Foundation Youth Camp

Ms. Geri Burton, Deputy Director, presented to the Board Resolution No. 198 "Relating to variable rate demand limited obligation revenue bonds (Gainey Foundation Project), Series 2002; making findings with respect to the project and bonds; authorizing and approving the project and sale and issuance of bonds secured by payments to be received pursuant to a loan agreement and a pledge and assignment of the Board's interest in the loan agreement and payments thereunder to a trustee; and authorizing the execution of documents".

At the August 2002 meeting, the Board approved a resolution giving preliminary approval to the issuance of tax-exempt bonds under the Economic Development Act of 1983 in an amount of up to $6 million. The proceeds of the bonds would be loaned to the Gainey Foundation to finance a portion of the costs of acquiring land in Madison and Beaverhead Counties and constructing thereon a camp for economically disadvantaged youth.

Staff conducted public hearings on the Gainey Foundation's proposed use of tax-exempt bonds to finance eligible project costs on August 28, 2002 in Dillon and Twin Bridges. Total attendance at these hearings was 19; 16 proponents, 3 neutral. Seven of the individuals attended both hearings.

The Resolution declares that the Board finds that the project is in the public interest. It authorizes the project to move forward and for staff to execute pertinent documents when in final form. The Resolution allows the Official Statement to be circulated; however, the Resolution explicitly states that the Board bears no responsibility for the accuracy or completeness of the Official Statements other than statements relating to the Board.

Staff recommends:
1. Requiring the Foundation to apply for and maintain accreditation by the American Camping Association (ACA). The ACA accreditation deals with several standards that must be met regarding individuals dealing with youth.
2. That the Resolution be adopted and that staff be authorized to proceed to complete the tax-exempt bond financing for the Gainey Foundation youth camp project.

Member Beams moved for approval of Resolution No. 198; Member Fagg seconded the motion and the motion was passed 7-0.

Out-of-State Travel

Executive Director Carroll South, presented travel recommendations for
" Dick Bridegroom to attend the Residential Underwriting Conference in Washington DC, November 2 - 8, 2002;
" Roberta Ecklund to attend the Bear Stearns 15th Annual Healthcare Conference in New York City, September 16 - 22, 2002;
" Herb Kulow to travel to Washington DC to take oral exam with MBA for the CMB Designation, September 12 - 15, 2002;
" Herb Kulow to attend the MBA Convention to receive his CMB Designation October 18 - 24, 2002.

Member Bardwell moved for approval of this recommendation; Member Wilson seconded the motion and the motion was passed 7-0.

BOND PROGRAM

Bond Program Officer Position

Ms. Geri Burton, Deputy Director, announced that Ms. Louise Welsh has been appointed Bond Program Officer. Ms. Welsh started her career with the Board of Investments in February 2000 as an Administrative Assistant. She was promoted to Bond Program Assistant in July 2001. Ms. Welsh has done an outstanding job at the Board of Investments and we are very fortunate to have Louise overseeing the Bond Program Office.

Activity Report

The Board reviewed this report for the period ending September 6, 2002.

Staff Approved Loans Report

Ms. Geri Burton reported that:

Borrower: Beaverhead County
Purpose: To finance the purchase of a building for additional space for County offices.
Staff Approval Date July 23, 2002
Board Loan Amount: $200,000
Term: 10 Years

Borrower: Park County Rural Fire District #1 (Livingston)
Purpose: To finance the purchase of a metal building to house the Mill Creek Fire Substation.
Staff Approval Date July 24, 2002
Board Loan Amount: $90,000
Term: 10 Years

Borrower: Paradise Valley Fire Service Area (Emigrant)
Purpose: To finance the purchase of a 2002 International wild land truck and a 2001 International water tender truck.
Staff Approval Date July 26, 2002
Board Loan Amount: $75,000
Term: 10 Years

Borrower: Dixon Elementary School
Purpose: To finance a portion of the costs associated with remodeling the existing shop building.
Staff Approval Date July 30, 2002
Board Loan Amount: $40,000
Term: 10 Years

Borrower: Ramsay County Water & Sewer District
Purpose: To finance a portion of the costs associated with a preliminary engineering report.
Staff Approval Date August 9, 2002
Board Loan Amount: $15,000
Term: 3 years interest only; up to 3 additional years, principal and interest.

Borrower: Sanders County Loan Increase Request
Purpose: To finance project costs at the County fairgrounds.
Staff Approval Date August 9, 2002
Board Loan Amount: $20,000
Term: 10 Years

Borrower: City of Cut Bank
Purpose: To finance the purchase of a new police vehicle.
Staff Approval Date August 20, 2002
Board Loan Amount: $19,814
Term: 3 years

Borrower: Town of Sunburst
Purpose: To finance replacement and installation of a transmission gas line between Sunburst and Sweetgrass.
Staff Approval Date August 22, 2002
Board Loan Amount: $50,000
Term: 10 year

Borrower: Montana City Volunteer Fire Department
Purpose: To finance two fire trucks.
Staff Approval Date August 26, 2002
Board Loan Amount: $164,000
Term: 10 Years

Borrower: Pryor Public Schools
Purpose: For cash flow purposes.
Staff Approval Date September 5, 2002
Board Loan Amount: $200,000
Term: Short term loan in anticipation of Impact Aid funds.

has been approved by staff.

INTERCAP

Ms. Geri Burton presented staff's recommendation that the Board authorize staff to proceed with processing and closing the following loans using the Board's standard Bond Program Office procedures:

Borrower: Huntley Project School District #24
Board Loan Amount: $300,000
Term: 10 Years
Purpose: To finance construction costs for a multi-purpose building.

Borrower: Madison County
Board Loan Amount: $243,000
Term: 5 Years.
Purpose: To finance the purchase of two motor graders..

Borrower: Gallatin County
Board Loan Amount: $995,000
Term: 7 Years.
Purpose: To finance a cell liner expansion at the County's landfill.

Member Long moved for approval of this recommendation; Member Klawon seconded the motion and the motion was passed Klawon7-0.

CHIEF INVESTMENT OFFICER REPORTS

Chief Investment Officer, James Penner, recapped the preceding reports and presentations.

Asset Allocation Report

Mr. Jim Penner, Chief Investment Officer, presented the Asset Allocation report for September 30, October 15 and October 31 transactions. Additions to this report included an increase of up to $55 million in Private Equity purchases on September 30 and the possible suspension of the October 15 Domestic Equity S&P 500 index purchase of $10 million.

Index Program Expansion Proposal

Mr. Penner presented a recommendation to authorize staff to prepare and disseminate a Request for Proposal (RFP) to hire an enhanced domestic equity non-large capitalization investment manager. Selective prospective vendors recommended by staff would make a presentation to the Board in January before the Board considers staff's final recommendation.

Member Klawon moved for approval of this recommendation; Member Long seconded the motion and the motion was passed 7-0.

LOAN PROGRAMS

Consideration of Commercial Loan Participation - Permanent Coal Trust Fund

Ms. Delrene Rasmussen presented staff's recommendation to participate in the following loan request:

Borrower: DEH, LLC.
Lender: First Security Bank, Missoula
Purpose of Loan: To refinance existing debt of DEH and provide funds for the remodel of the "The Inn on Broadway".
Amount of Loan: $2,725,000
Board Loan Amount: $1,362,000
Board Participation: 50%
Term of Loan: 20 Years
Interest Rate: 7.55% + .75%LSF
Recommendation: Approval, subject to the terms and conditions in Schedule A.
Loan Committee Recommendation:
Approve with additional requirement that a Repair & Replacement Reserve Account be established and maintained by lender. Member Beams abstained from Loan Committee recommendation.

Member Bardwell moved for ratification of loan committee recommendation; Member Wilson seconded the motion and the motion was passed 6-0. Member Beams abstained from the vote.

Borrower: Lumber Yard Supply Company
Lender: First Interstate Bank, Great Falls
Purpose of Loan: To provide fixed rate financing for the purchase, remodel and inventory for the lumber yard in Billings.
Amount of Loan: $5,000,000
Board Loan Amount: $3,750,000
Board Participation: 75%
Term of Loan: 20 Years
Interest Rate: 7.55% + .30%LSF
Recommendation: Approval, subject to the terms and conditions in Schedule A.
Loan Committee Recommendation: Approve. Member Long abstained from Loan Committee Recommendation.

Member Bardwell moved for ratification of loan committee recommendation; Member Beams seconded the motion and the motion was passed 6-0. Member Long abstained from the vote.

Borrower: Fredsmom, LLC.
Lender: First Security Bank, Missoula
Purpose of Loan: To provide permanent financing for the purchase of two lots and the construction of a warehouse with office space.
Amount of Loan: $1,117,000
Board Loan Amount: $893,600
Board Participation: 80%
Term of Loan: 20 Years
Interest Rate: 7.45% + .45%LSF
Recommendation: Approval, subject to the terms and conditions in Schedule A.
Loan Committee Recommendation:
No action taken. Lender asked that this request be presented at a later date to allow for additional information to be made available.

Coal Tax Loan Program Activity Report

Ms. Delrene Rasmussen presented and the Board reviewed this report for July.

Pension Mortgage Program Activity Report

The Board reviewed this report for July.

Residential Mortgage Delinquency Report

The Board reviewed this report for the period ending June 20, 2002

Commercial Loan Delinquency Report

The Board reviewed this report for the period ending June 30, 2002

Residential Service Agreement

Ms. Delrene Rasmussen presented for board review and approval the updated residential service agreement. The following changes have been made to the agreement:
" The seller/servicer designation has been replaced by the word "Participant".
" The new warranties, which were approved by the Board in February 2002, have been added in Sections 3.27, 3.28, and 3.29.
" Section 8, which addresses remittances, reporting and handling of funds, has been revised by the accounting department. Effective July 1, 2004 any Participant with over 200 loans will be required to submit an "Exception Reporting Form" electronically.
" Insurance. Section 9.3 has been increased from $1,000 to $5,000. This means that the Participant will be authorized to settle and adjust insurance claims, including endorsing drafts for damages up to $5,000.
" Section 8, 8.1 states "The Participant may transmit the Reconciliation Statement to the Board by facsimile…" will be changed to read "… to the Board by facsimile or by electronic means acceptable to the Board…"

The updated residential service agreement will be sent out for signature by Participants upon approval.

Member Bardwell moved for approval of this recommendation; Member Klawon seconded the motion and the motion was passed 7-0.

INVESTMENT ACTIVITY

Montcomp

Mr. Rande Muffick presented July transactions, the holdings report as of July 31, 2002 and the current investment strategy. Member Bardwell moved for approval of the Montcomp strategy as presented; Member Beams seconded the motion and the motion was passed 7-0.

In addition, Mr. Muffick presented Honeywell International Inc. as a Portfolio Addition.

International Investment

Mr. David Ewer presented July internal transactions, the internal international holdings report as of July 31, 2002 and the current investment strategy. Member Klawon moved for approval of the International Investment strategy as presented; Member Wilson seconded the motion and the motion was passed 7-0.

Fixed Income

Mr. Robert Bugni presented July transactions, and the current investment strategy. Member Klawon moved for approval of the Fixed Income strategy as presented; Member Long seconded the motion and the motion was passed 7-0.

In addition, Mr. Bugni presented the Investment Policy Statements for Resource Indemnity Trust Fund, Trust and Legacy Fund and the Zortman/Landusky Long Term Water. Member Long moved for approval of the Investment Policy Statements as presented; Member Wilson seconded the motion and the motion was passed 7-0.

Treasurer's and STIP Funds

Mr. Cooley also presented July STIP transactions the STIP holdings report as of August 31, 2002, the July Treasure's Fund transactions, the Treasurer's Fund holdings report as of August 31, 2002 and the current investment strategy for both of these funds. Member Klawon moved for approval of the STIP Fund and Treasurer's Fund strategy as presented; Member Long seconded the motion and the motion was passed 7-0.

In addition, Mr. Cooley presented the Investment Policy Statements for Short-Term Investment Pool and State of Montana Treasurer's Fund. Member Bardwell moved for approval of the Investment Policy Statements as presented; Member Wilson seconded the motion and the motion was passed 7-0.

Security Lending

Mr. Ed Kelly presented this report for July.

Montana Private Equity Pool (MPEP)

Mr. Ed Kelly presented July transactions and the holdings report as of July 31, 2002.

Private Equity Proposal

Mr. Ed Kelly presented staff recommendation that the Board of Investments commit to investing $75 million in the Oaktree Capital Management Opportunities Fund IVb distressed debt investment fund.

Member Klawon moved for approval of this recommendation; Member Long seconded the motion and the motion was passed 7-0.

Presentation - Schroders Asset Management

Mr. Donald H. Farquharson, Mr. Richard Sennit, and Ms. Teresa Myers, Schroders Asset Management, gave their annual Pacific Basin Equity Fund Performance Review to the Board and staff.

ADJOURNED

The meeting adjourned for the day at 5:15 p.m.

CALL TO ORDER

The meeting was reconvened Friday, September 20, 2002 at 8:30 a.m. Four members of the Board were present

Presentation - Oaktree Capital Management, LLC

Mr. Howard S. Marks presented to the Board a report on "Capturing Inefficiencies in the Distressed Debt Marketplace". On Thursday, September 19, 2002, the Board approved staff recommendation to invest with Oaktree Capital Management.

Mr. Marks report included an overview of Oaktree's Investor Approach, Oaktree's Track Record with Distressed Debt and the elements demonstrated for Oaktree's success in the distressed debt marketplace.

NEXT MEETING

The next regularly scheduled meeting of the Board will be October 31 - November 1, 2002.

ADJOURNMENT

There being no further business, the meeting was adjourned at 10:00 a.m.

BOARD OF INVESTMENTS

APPROVE:
Dick Anderson, Chairman

ATTEST:
Carroll South, Executive Director

DATE: