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SDCERS Board Meeting October 21, 2005 Preovolos asked the media to introduce themselves: Channel 8, Jennifer Vigil of the SDUT, and Scott Lewis of www.voiceofsandiego.org New Board Trustee: George Murray, retired in 2001 as a senior director of Prudential Securities. He also worked for Merrill Lynch, Shearson Lehman Brothers and Dominick and Dominick, Inc. This is his 75th birthday. Preovolos welcomed his expertise and spirit working with the Board. Board Member, John Torres, has resigned. The process, for a nomination of names for a vote in 60 days, is beginning. DROP AND SALES PITCHES: Watch for sales pitches from wolves, who see DROP funds coming their way. The Board is concerned that financial planners are sending out statements on safety. Advertisements from private investment firms, that are not part of the City's DROP program, are headlined perhaps with "Will the City vote away your excess benefits?", etc. See the Operations afternoon section below for more information on DROP. FINANCE AND INVESTMENT MEETING 8:30AM RETIREE CHECKS- In event of the City going bankrupt, Preovolos expressed concerned about the $13 million a month, that SDCERS transfers to the City for retiree checks. He wants to ensure that checks to retirees are timely. (At a previous meeting, the SDCERS Board had briefly discussed setting up a bank account, to independently send out checks, in event of City pressure not to pay "illegal pensions".) BANKING- It is time to bid out banking services. It
is a tremendous amount of work to change providers. State Street has been
SDCERS custodial bank since Northern Trust in 1998. They hold all the
assets of SDCERS. SDCERS has only the signature authority. They process
and actively manage all interest, etc. They charge SDCERS, but SDCERS
makes dollars in the arrangement. FINANCIAL REPORTS----McCalla presented the Comprehensive
Annual Financial Report (CAFR) for Fiscal year ended June 30, 2003. Page
42 begins facts, details, and assumptions to the financial statements,
page 66 shows a ten year history of funding, pages 69-70 compares the
City's contributions to the actuarially required contribution, page 82
begins the investment report, page 134 is revenue by source, page 135
is expense by type, page 138 is average benefit payments. You may ask
for a copy. CALLAN ASSOCIATES-INVESTMENT CONSULTANT: NAVIGANT'S ILLEGAL ACTS INVESTIGATION OF SDCERS: DONNA FRYE'S LETTER re: NAVIGANT, ETC. SDCERS' response to Frye- At the conclusion of the morning session, Preovolos requested to please continue to give Navigant and KPMG the respect that they deserve, considering the current world we live in. OPERATIONS MEETING 1:30pm NON-AGENDA COMMENT, ETC. DROP INTEREST, etc.- Giving perspective to his judgement,
McCalla gave his City work history, starting with part-time sweeping for
the City at $1.55 an hour, through his Industrial Personnel degree (about
organizational structures and decision structures), being on the SDCERS
Board, and his work with the Parks and Recreation Department. BUDGET - Joe Flynn said he knows more about the County pension budget than our own, because of the County's detail and presentation in their budget. Today, the SDCERS Board's interest appeared limited to the comparison of actual expenses vs. planned expenses, rather than what the expenses were. CHOOSING A NEW ACTUARY - The recommendations were down to Cherion, Milliman, and Buck. Criteria included: speak normal English (beyond numbers), deal with the City Council and Aguirre (if personal attacks), and techniques. A three year contract with Cherion (pronounced "kiron") was recommended, as they had experience with crisis and pensions, according to Meyer. Preovolos liked their great software program. Sheffler added that costs were close and so cost was not a factor. 415 TAX COMPLIANCE ISSUES: Chapin said that she wished
SDCERS had not started down the compliance road, as staff is uncovering
things. The Board approved legal services ($76,000 for middle stage) to
prepare for the IRS' tax review of those who are outside the 415 limit,
and paid beyond the maximum benefits with an unqualified plan. Comments
included, the need for "more traction on scope" of the situation.
James Waring was the only negative vote against approving a contract for
services to clean up for the VCP (Voluntary Compliance Program that SDCERS
has requested from the IRS). There is a short timeline before the deadline
for this. Necessary steps need to be identified, as well as, the identifying
the gap, solution and system to implement the solution.
DISASTER PREPAREDNESS- Board approved purchase/test of "Pension Gold" software to back up SDCERS' business continuity plan. Sullivan asked what SDCERS was paying for? Patrick answered "strategic plan costs". *Note: See Joe Flynn's notes for more complete information on the status of other Board financial actions and selection of consultants, etc. BOARD DISCUSSION OF INDEMNIFICATION DEFENSE OF SDCERS EMPLOYEES- The SDCERS' administrator and three members of SDCERS legal staff have been requested to be interviewed as "witnesses". (The comment was made that the City Council can't get enough votes to follow the law.) Mr. Reish pointed out that if there were no assets, it made no sense to pursue those who are judged guilty in the future, for reimbursement. He added that the Board members are City employees. He went on to say that things are moving swiftly at the US Attorney's office and it was not a conflict yesterday for Seltzer Caplan to assist additional employees. Meyer pointed out that some additional challenges, by judges, require separate attorneys for employees. George Murray said the initial motion was too general. James Waring revised the motion to have the Board review legal expense coverage of any additional subjects called. He wished deal with broader issues in the future, and deal with specifics today. Preovolos suggested Waring help Reish's firm re-write the motion. In the meantime, the Board voted to retain counsel for the four staff members who have been called to witness. Of note: Deborah Berger of the City Attorney's Office retired. LEGAL SECTION OF BOARD'S MONTHLY PACKET: CalPERS- ILLEGAL? PROPOSITION G, passed November 2004, specified that SDCERS use a particular amorization schedule. An argument can be made, via the Attorney General's opinion that Prop. G may be unenforceable, because pension boards have exclusive fiduciary responsibilities vested in them, and the Board retains the sole and exclusive power to provide for actuarial services in order to assure the competency of the assets. More information in the future from SDCERS' legal staff. LAWSUITS PENDING: |
Preovolos asked the media to introduce themselves: Channel 8, Jennifer Vigil of the SDUT, and Scott Lewis of www.voiceofsandiego.org
New Board Trustee: George Murray, retired in 2001 as a senior director of Prudential Securities. He also worked for Merrill Lynch, Shearson Lehman Brothers and Dominick and Dominick, Inc. This is his 75th birthday. Preovolos welcomed his expertise and spirit working with the Board.
Board Member, John Torres, has resigned. The process, for a nomination of names for a vote in 60 days, is beginning.
DROP AND SALES PITCHES: Watch for sales pitches from wolves, who see DROP funds coming their way. The Board is concerned that financial planners are sending out statements on safety. Advertisements from private investment firms, that are not part of the City's DROP program, are headlined perhaps with "Will the City vote away your excess benefits?", etc. See the Operations afternoon section below for more information on DROP.
FINANCE AND INVESTMENT MEETING 8:30AM
RETIREE CHECKS- In event of the City going bankrupt, Preovolos expressed concerned about the $13 million a month, that SDCERS transfers to the City for retiree checks. He wants to ensure that checks to retirees are timely. (At a previous meeting, the SDCERS Board had briefly discussed setting up a bank account, to independently send out checks, in event of City pressure not to pay "illegal pensions".)
BANKING- It is time to bid out banking services. It is a tremendous amount
of work to change providers. State Street has been SDCERS custodial bank since
Northern Trust in 1998. They hold all the assets of SDCERS. SDCERS has only
the signature authority. They process and actively manage all interest, etc.
They charge SDCERS, but SDCERS makes dollars in the arrangement.
CORBETT and 13th CHECK----Doug McCalla is waiting for the certified "realized
gains" to announce the possibility of this year's 13th check(which needs
City Council approval), and Corbett. There are over $59 million in realized
gains at this point, and just under $3.9 billion in the fund.
FINANCIAL REPORTS----McCalla presented the Comprehensive Annual Financial
Report (CAFR) for Fiscal year ended June 30, 2003. Page 42 begins facts, details,
and assumptions to the financial statements, page 66 shows a ten year history
of funding, pages 69-70 compares the City's contributions to the actuarially
required contribution, page 82 begins the investment report, page 134 is revenue
by source, page 135 is expense by type, page 138 is average benefit payments.
You may ask for a copy.
Larry Grissom said staff, who are needed to prepare financial records, were
transferred from the City to SDCERS, to carry out the recommendations by auditors,
Brown and Armstrong, and this delayed production of records.
The final version of the June 30, 2005 monthly statement (draft approved by
Board in September), is in preparation for SDCERS' independent auditor review.
The July 31, 2005 and August 31, 2005 statements were delayed due to Kroll's
requests for information and education.
CALLAN ASSOCIATES-INVESTMENT CONSULTANT:
Callan noted: On future investment planning, when your funded ratio is 65%,
there are two thoughts- "take on more risk" to make up the underfunding,
or "better not take more risk". McCalla noted no correlation of lower
ratio funds, and funds that are taking on more risk.
George Murray, new Board member, asked that if Callan saw an atmosphere change,
would Callan tell the Board. Callan responded that he presents ramifications
of actions. Doug McCalla said SDCERS reviewed yearly, instead of the usual 5
years of most Boards. So SDCERS is most alert. A discussion of allocations and
re-balancing followed.
Below is a quote from Callan's letter of Sept. 15, 2005 to SDCERS in the packet
for the meeting:
Regarding their confidence in their "firewalls" to handle the highest
standards of transparency and policy of disclosure and compliance. "The
SEC's examination of the entire investment consulting industry culminated in
a report issued in May making recommendations for broader disclosures of potential
conflicts." "We have already informed you of the lawsuit filed against
us by the San Diego City Attorney…. We are fighting it vigorously."
NAVIGANT'S ILLEGAL ACTS INVESTIGATION OF SDCERS:
SDCERS' illegal acts investigator, Navigant Consulting, is progressing and plans
to finish in January 2006. Navigant was engaged by SDCERS, through attorney,
Fred Reish, of Reish, Lutman, Reicher and Cohen, to insulate Navigant from 3rd
parties, the SDCERS Board and staff, plus provide SDCERS with the protection
of attorney-client privilege. Also retained, through Reish, was independent
counsel to assist Navigant.
When asked how much this would cost, Mr. Reish said that he did not have the
cost to SDCERS with him at this time. Lopez thought, that Navigant would build
on Kroll's work, and that would save money. Reish responded that Lopez's point
was good, and that Navigant will be happy to look at Kroll's information. Reish
added, that independence should not be compromised to save money, and Navigant
will maintain fierce independence from Kroll.
While the concerns of KPMG and Kroll will be covered, Reish thought that Kroll
and KPMG might be dependent on Navigant.
Joe Flynn was particularly concerned about reports of Navigant's double billings
of past clients. Reish responded that this was a separate group of people and
SDCERS may wish to audit their records in the future.
Presentation of the final process used to do the investigation, along with the
facts and finding, will be released to the public and the Board, on the same
day. Reish's guess was January. The Board will not filter it, in advance. Preovolos
wants to meet any problems head-on, and deal with them. There will be no preliminary
drafts or reports, and status reports will not include detail that would lead
to feedback and pollution of the "independent investigation".
Preovolos has asked that Navigant present their report first, before presentations
by Kroll, KPMG and Brown, Armstrong(SDCERS' auditor). Preovolos is concerned
about the City's ever extending costs of KPMP, Kroll, and Brown, Armstrong as
each investigator "races to be last" in presenting final reports.
Preovolos and Reish feel that Kroll, KPMG and Brown Armstrong want to see and
criticize the other investigator's reports and build on their information, as
no one is willing to finish first. SDCERS' auditor Brown Armstrong won't issue
their report, until Navigant issues the report on SDCERS, said Reish. Preovolos
added that SDCERS has been held responsible for everything from the beginning
of time in the City.
Navigant's goals are to identify every defect that occurred and use the recommended
corrections to make SDCERS a "model" in the future for other systems.
The investigation, covering 1995 to 2002, will be expanded if necessary. Ninety
to 100 interviews are planned to be concluded in November, including interviews
with the Kroll team, KPMG, Brown and Armstrong, City Attorney Office, SDCERS
staff (Grissom, Chapin, McCalla, Dawne Clark- the Assistant Investment Officer?).
Also being interviewed are the Mayorial candidates, Council Members, etc. Seventeen
interviews have been completed to date. Two former Board members , charged by
the District Attorney, declined by to be interviewed. Electronic searches are
being done at the rate of 4000 documents per day with 120 search terms, with
completion scheduled for November 4th.
Mark Sullivan asked if Navigant has a plan for dealing with the political climate
and Aguirre. Reish told Navigant that their best defense is the quality of their
report and suggested Navigant ask Aguirre for insights. Sullivan said it was
important to be credible.
James Waring asked why a retrospective investigation.
Reish stated that the fundamental question was- "what is the enforceable
pensions that SDCERS' Board must pay?"
Meyer said that Navigant was chasing down all the herrings to determine their
color: red, blue, etc. Meyer was not worried about the deadline of the report,
but he was concerned about the quality of the report.
DONNA FRYE'S LETTER re: NAVIGANT, ETC.
Grissom distributed copies of Frye's letter and SDCERS staffs' answers. Chapin
said a copy of Frye's letter, and SDCERS' staff's response to Frye, would be
sent to Reish. In concluding Board discussion, Scheffler saw that Kroll had
significant conflict in investigating the City and expected SDCERS to be attacked
by Kroll, as they have separate agendas.
Frye's letter, of August 31, 2005, was sent to Aguirre, Ewell, and the SDCERS
Board of Trustees, (with copies to Honorable Deputy Mayor and City Council members).
It regarded the City Pension Investigation. Her goal was to better understand
the relationships between the myriad consultants and companies that have been
hired by both the city and SDCERS. Frye asked for a timely response.
"1. Does March McLennan own Mercer?
2. Does March McLennan own Kroll?
3. Has the City of San Diego purchased any insurance products from McLennan
in the past 10 years?
4. Did SDCERS hire Mercer in 2004 to do an audit of the retirement system?
5. Did SDCERS hire Mercer to provide strategic workshops, and did SDCERS hire
Mercer (and Bob Blum as an employee of Mercer) to provide tax advice, among
other things, from approximately 1992 to 2001?
6. Did SDCERS recently sue Bob Blum for malpractice? If so when, and what is
the status of that litigation?
7. Did Kroll sell Kroll Lindquist Avery to Navigant Consulting on August 10,
2005?
8. What is the relationship, if any, between Marsh McLennan and Navigant?
9. Did SDCERS recently hire Navigant Consulting in August 2005 to perform an
investigation of the pension?
10. What is the name of the outside law firm that the City Manager is considering
hiring to work with the SEC?"
SDCERS' response to Frye-
On September 20, 2005, SDCERS' Roxanne Story Parks, Assistant General Counsel
responded to questions related to SDCERS:
4. "Yes, SDCERS hired Mercer Investment Consulting, Inc. and Mercer Human
Resource Consulting, Inc. in 2004 to perform Actuarial, Investment, Operations,
and Best Practices audits."
5. "SDCERS hired Mercer to provide tax consulting services and advice relating
to federal and state tax regulations, as well as to assist in strategic planning."
6. "SDCERS filed a complaint for malpractice in San Diego Superior court
(Case number GIC831983) on June 25, 2004. The litigation has since been settled."
9. "At the August 19, 2005 meeting, the Board approved retention of Navigant
Consulting, Inc. Navigant will be retained through outside fiduciary counsel
Reish, Lutman, Reicher & Cohen."
* * * * * *
(NOTE: Regarding #6 response above-
The legal malparactice and breach of fiduciary duty lawsuit, against Blum, was
settled for insurance policy limits. SDCERS will use the settlement, minus lawyer
fees, for real estate investments.)
At the conclusion of the morning session, Preovolos requested to please continue to give Navigant and KPMG the respect that they deserve, considering the current world we live in.
OPERATIONS MEETING 1:30pm
NON-AGENDA COMMENT, ETC.
On funding level-
John Casey suggested that SDCERS accept bonds from the City, as the City can't
sell bonds to fund SDCERS, and also to assume a 10% return, to put the funding
problems out ten years, for a new SDCERS Board.
DROP IRS CHANGES-
DROP retirees were concerned about the Dec. 1, 2005 deadline to respond to the
DROP changes. They had received letters announcing the changes only three days
ago. Questions arose regarding the funding level of DROP accounts, if there
should be legal action involving the fund, or City. Are those accounts truly
separate from the 65% funded ratio in event of bankruptcy? There were two "general
responses": 1) DROP money was "safe" and accounted for separately
on paper, and 2) that dollars from SDCERS are not subject to City bankruptcy.
(No direct answers regarding DROP in the event of possible receivership of SDCERS.)
Roxanne Parks said there was a clerical error, missing paragraph, in the DROP
mail-out. It was corrected.
Mark Sullivan asked if it was realistic to notice, counsel and process 1000
DROP members in six weeks.
Joe Flynn seemed to get all the negative calls. Lopez announced that some employees
retired under the old program and will sue if the plan is not as it was presented
to them.
DROP INTEREST, etc.- Giving perspective to his judgement, McCalla gave his
City work history, starting with part-time sweeping for the City at $1.55 an
hour, through his Industrial Personnel degree (about organizational structures
and decision structures), being on the SDCERS Board, and his work with the Parks
and Recreation Department.
McCalla recommended that the Board refer setting the interest, on DROP, back
to the City Council for legislative clarification, as this issue never dies.
In the meantime, he said, continue to credit interest at the "default"
rate, which is historically, the assumed rate of return.
Continue to monitor the actuarial gains/losses each year, he added. There is
the possibility that using the assumed rate would increase the unfunded liability
in some years. Up until fiscal year 2000, SDCERS retained more dollars than
it paid out. Growth has led earnings. He recommended SDCERS bill the City for
shortfalls on a 5 year amortization, as the City, because it is the sponsor,
bears the brunt of plan design.
The City usually pays 36% of salary to retirement. When entering DROP, employees
pay 3.05% and the City pays 3.05%, because there must be a contribution or the
City must go back to Social Security.
A quarter of the trust dollars are DROP. Mark Sullivan commented that this is
where Diann Shipione said was deep water (as far as SDCERS being tax qualified
in the eyes of the IRS).
McCalla said that to lower the assumption rate to 7 ¾% would increase
the unfunded liability. Chapin said the DROP interest rate was only an "implied
contract". Sheffler said it was not economically reasonable. McCalla said
SDCERS is "managing the risk". Sheffler responded that it was not
proper for the Board to make plan decisions, as past Boards had done. Meyer
said to send the decision to the plan sponsor (City).
BUDGET - Joe Flynn said he knows more about the County pension budget than our own, because of the County's detail and presentation in their budget. Today, the SDCERS Board's interest appeared limited to the comparison of actual expenses vs. planned expenses, rather than what the expenses were.
CHOOSING A NEW ACTUARY - The recommendations were down to Cherion, Milliman, and Buck. Criteria included: speak normal English (beyond numbers), deal with the City Council and Aguirre (if personal attacks), and techniques. A three year contract with Cherion (pronounced "kiron") was recommended, as they had experience with crisis and pensions, according to Meyer. Preovolos liked their great software program. Sheffler added that costs were close and so cost was not a factor.
415 TAX COMPLIANCE ISSUES: Chapin said that she wished SDCERS had not started
down the compliance road, as staff is uncovering things. The Board approved
legal services ($76,000 for middle stage) to prepare for the IRS' tax review
of those who are outside the 415 limit, and paid beyond the maximum benefits
with an unqualified plan. Comments included, the need for "more traction
on scope" of the situation. James Waring was the only negative vote against
approving a contract for services to clean up for the VCP (Voluntary Compliance
Program that SDCERS has requested from the IRS). There is a short timeline before
the deadline for this. Necessary steps need to be identified, as well as, the
identifying the gap, solution and system to implement the solution.
SDCERS staff wants to identify those outside the 415 limit. It is cheaper to
go outside of SDCERS to perform the screening.
PROCEDURES FOR RESPONDING TO PUBLIC RECORD REQUESTS: Legal staff is preparing
a comprehensive new Board rule addressing SDCERS' procedures for responding
to public records requests. Requests will be routed through the legal staff.
All personal data is crossed off of copies before they are sent out.
****As public requests are time sensitive, and often mailed directly to Board
members, the suggestion was made to allow staff to open Board member mail. John
Thomson refused to allow his mail be opened.
Charges, related to actual costs, were discussed. James Waring said it was tactical
to ask requesters to provide staff to do the photocopying. Waring also suggested
limiting retention of documents to avoid copy requests. As repeat requests are
expected, the possibility, of putting documents on an electronic data base,
was discussed. The City Attorney has especially impacted SDCERS with large requests.
(Aguirre also asked for Preovolos' appointment book.)
DISASTER PREPAREDNESS- Board approved purchase/test of "Pension Gold" software to back up SDCERS' business continuity plan. Sullivan asked what SDCERS was paying for? Patrick answered "strategic plan costs".
*Note: See Joe Flynn's notes for more complete information on the status of other Board financial actions and selection of consultants, etc.
BOARD DISCUSSION OF INDEMNIFICATION DEFENSE OF SDCERS EMPLOYEES- The SDCERS' administrator and three members of SDCERS legal staff have been requested to be interviewed as "witnesses". (The comment was made that the City Council can't get enough votes to follow the law.) Mr. Reish pointed out that if there were no assets, it made no sense to pursue those who are judged guilty in the future, for reimbursement. He added that the Board members are City employees. He went on to say that things are moving swiftly at the US Attorney's office and it was not a conflict yesterday for Seltzer Caplan to assist additional employees. Meyer pointed out that some additional challenges, by judges, require separate attorneys for employees. George Murray said the initial motion was too general. James Waring revised the motion to have the Board review legal expense coverage of any additional subjects called. He wished deal with broader issues in the future, and deal with specifics today. Preovolos suggested Waring help Reish's firm re-write the motion. In the meantime, the Board voted to retain counsel for the four staff members who have been called to witness.
Of note: Deborah Berger of the City Attorney's Office retired.
LEGAL SECTION OF BOARD'S MONTHLY PACKET:
CalPERS-
There has been a request from CalPERS for copies of the complaints pending against
SDCERS and the funded ratios for all participating employers to assess any proposed
application to participate in CalPERS. The Port must provide one year notice
before canceling its agreement. (Preovolos has met with the Port Authority and
Airport Authority over concerns about a potential withdrawal.)
(Note: During the meeting, Lopez pointed out that CalPERS would likely increase
disability retirements and increase costs as they seamlessly give disability
retirements with workers compensation.)
ILLEGAL? PROPOSITION G, passed November 2004, specified that SDCERS use a particular amorization schedule. An argument can be made, via the Attorney General's opinion that Prop. G may be unenforceable, because pension boards have exclusive fiduciary responsibilities vested in them, and the Board retains the sole and exclusive power to provide for actuarial services in order to assure the competency of the assets. More information in the future from SDCERS' legal staff.
LAWSUITS PENDING:
SDCERS v. City and Aguirre, filed Jan. 27, 2005
Next hearing is 3pm Oct 27, 2005 Dept 69 Judge Barton
Third amended cross-complaint filed. Re: SDCERS entitled to retain legal counsel
and have returned privileged SDCERS' papers seized by Aguirre from City employee
offices. Aguirre's cross-complaint includes- fraud, misrepresentation, illegal
benefits, receivership.
SDCERS v. City of SD, filed July 26, 2005
11am Dec. 9, 2005 Dept. 70 Judge Bloom
Legality of payment of contested retirement benefits. Unions supporting SDCERS.
To hear the City's motion to "Strike the Complaints of the Invervenors."
POLICE Officers v. Aguirre, certain SDCERS Board members, etc.
Filed Aug. 9, 2005
9:30am Nov. 1, 2005, Court Room 13 FEDERAL COURT
Motion for preliminary injunction/and or motion to dismiss.
CITY v. CALLAN, GABRIEL ROEDER, SMITH and COMPANY
Filed Aug. 16, 2005 SDCERS is not involved. Judge Kevin Enright.
Complaint for damages for professional negligence, intentional fraud- affirmative
misrepresentation and intentional fraud concealment.
CITY v. FORMER MAYOR, ZUCCHET, INZUNZA
Filed Sept. 23, 2005 Judge Richard Montes
Need 10 years to vest. Government code 1090 and Political Reform Act.
PEOPLE OF STATE OF CA v. CATHY LEXIN, ET. AL.
Judge Frederick Link, Continued to Jan. 6, 2006
Conflict of interest-1090.