SDCERS Budget Presentation at City Council June 27, 2005 - Submitted by Patricia Karnes

Draft of my notes from TV broadcast-

SDCERS Budget presentation at City Council - June 27, 2005
Subtitled: What do you mean by "extensive" discussion of the budget?

   Presented by President-Elect Peter Preovolos. He has been in the benefit field for 40 years and a consultant, this is his first time with government. He introduced the subject using words such as prudent, safeguarding, ensuring safety, the highest degree of integrity, and growth.
   Preovolos pointed out that $8 out of every $10 to be paid out must come from investments. SDCERS is 77 years old and the California Constitution gives it "plenary" (complete) authority and the City Charter gives exclusive control to SDCERS. In reference to the City Council following the Charter, and "including" the SDCERS budget in the City budget, he defined "inclusion" as meaning to embrace without exception. Salaries, he said, need to be approved by the Council.
   Regarding the issue of general funds, he said that the SDCERS budget is entirely financed by undistributed earnings. Later Lori Chapin would add that once the City makes the City's share of the contribution, from the general fund, to SDCERS, it is SDCERS money and no longer general fund money.
   Probably, in response to last week's Council comments that SDCERS should cut 5% from staff, Preovolos said that this year SDCERS cut 4% of the employee base. (I remember that the SDCERS staff no longer needed the extra hours to process the purchase of service requests, as they were caught up.) Investment expenses were 58% of the budget. Non-staff expenses were 26% and payroll was 16%. The ten year chart for income into SDCERS was $720, 000,000 from the City as employer, $375,000,000 from City employees, and $1.9 billion from investment earnings. SDCERS has one of the most outstanding investment returns in the nation at 11½%. He said the better the return the higher the investment fee charged SDCERS.
   Next, Virginia Silverman read Nancy Acevedo's letter on waiving of attorney-client privilege and indemnification of the new Board.
   Then the Mayor called on Aguirre, who began establishing the degree of review of SDCERS' budget by the new SDCERS Board and their level of expertise in approving the SDCERS budget in April, at their first Board meeting. What sources were used to put together the 10 year income chart, Aguirre asked Preovolos, what did you look at? Preovolos responded by saying, what do you want… I looked at information available to you and everyone else. Preovolos referred to public knowledge documents and figures from SDCERS financial department. Did you look at employer contributions over the last 10 years? asked Aguirre. Aguirre continued, asking Preovolos, what source did you look up to determine employer numbers? Preovolos said, I looked at documents and want to refer these questions to SDCERS' CFO, Doug McCalla.
   McCalla said he has been with SDCERS since 1991 and was the chief financial officer. Aguirre asked him if he had interacted with auditors for the retirement system? Were you there at the time when the audit for 2003 CERS was made? (Then Preovolos protested, telling "Mike" he was changing the direction of the questions. The Mayor told Aguirre that he had 10 minutes. There was no time for a three hour deposition.) Aguirre inquired, who performed that audit? McCalla identified the auditor. Aguirre asked, did they perform an illegal acts investigation? (Preovolos, again, tried to talk, saying to Aguirre, "You interrupt me!") McCalla had no direct communication or information on the City's illegal acts investigation. Aguirre asked him, do you know of any action taken at CERS about an illegal act investigation at CERS. McCalla was not aware of any investigation.
   Lori Chapin was next, she said she had been with SDCERS since 1997. Chapin was their lawyer during the 2003 audit, by the auditor that the City had fired due to $500 million in errors on the City's financial statement. She knew that the firm had been fired but did not know why they were fired. Aguirre asked her, do you know of any requests to conduct an illegal acts investigation of SDCERS financial statement for 2003? And, are you aware that there is an investigation underway by the SEC? And in connection with that, there is an illegal acts investigation? Chapin only responded with general information that she had heard about Aguirre and read the newspaper. Chapin told Aguirre he was making a quantum leap to assume that when the lawyer for Kroll came to the June SDCERS Board meeting and asked the Board to waive the attorney-client privilege that was because there was an illegal acts investigation in the City.
   Switching direction, Aguirre inquired into Chapin's familiarity with the Westly case. Chapin said the Appellate Court felt Calpers must adhere to civil service rules.
   Turning again to the budget, Aguirre asked if the Board had removed John Torres, who is charged with a felony, from the committee that did the budget? (The Board has not removed Torres.)
   Aguirre made inquiries as to the team that put the budget together? Names were given and then Steve Meyer volunteered to respond and said it was submitted to the department heads, sent to the administrator and then to the Board. Chapin said it was begun in February or March and completed in April for inclusion in City's budget in May or June by the City Council. The old Board did not finish a budget before they left, leaving approval to the new Board. Aguirre continued, what review of the budget by the new Board?    Aguirre asked if there was questioning, etc. What was the procedure? Was it scrutized? Chapin said the budget was discussed for approximately ½ hour and the Board asked for rolling quarterly reports. Aguirre noted it was with less detail and time than the Council gave to the City budget.
   In summary, Aguirre did not find sufficient review of the SDCERS budget by the Board, nor oversight by Council at this point. He asked, why is CERS not doing an illegal acts investigation given the sufficient information presented in the past minutes. Aguirre stated a 10 year income chart is not relevant, a five year chart would have been better. He asked, why did the new Board vote at their very first meeting after approximately ½ discussion? He was extremely concerned by anyone, who was independent, coming into the Board and voting like this. He noted that there were very few moments here and that attention needed to be given to remedial action. Aguirre wondered, why the pension board is using the auditor the City fired? And, why there was no illegal acts investigation when it is even more central to SDCERS than it is to the City? In conclusion, he said, SDCERS has put the City into this situation.
   The Council concluded that they could not use SDCERS money for the general fund, and included SDCERS budget into the City budget, only Frye voted against "inclusion", with Zucchet and Inzunza absent.

Brief notes from Ratification of Memoranda of Understanding with Labor Unions at June 27, 2005 City Council Meeting.
   Aguirre: Unions negotiated knowing that the benefits were not being paid for. Employees must comply with City's charter which says liabilities can't be paid from a revenue source from a different year. Only problem is each year, the problem is growing and the City is still losing ground even though the City cuts services…until the City is forced into bankruptcy. In 1993 the UAAL was 12.9% of payroll, in 2005 the UAAL is 253% of payroll. Pay is up 68% and benefits are up 265%. What good is a benefit if there is no money to pay for it? People telling you what you want to hear are not doing you a favor. Deal with the truth.
   Mr. Peters: Roll-backs lead to risky legal battles. Didn't know it was illegal at that time. The legal fairness issue means roll-backs must be replaced with equal benefits. Orange County has double the problem that they thought it had last week. What is the most responsible solution? It is not realistic to present a bill. The City has started to pay down the debt and stopped doing the underfunding. Employees took a pay cut and their cut-backs will be used to pay down the UAAL. Possible money from leases. What level of government services do you want to pay for? No easy solution.
   Donna Frye: Not allowed to discuss other options during salary negotiations. There is a problem and money contributed to SDCERS is not covering benefits. Benefits awarded could not be funded. Sacrifices won't cover it.
   Mayor: To roll-back would be high risk and not solve problems. The MOU will help in the long-run.
   Pass- 6-2 (Frye and Maienschein opposed.)