CITY COUNCIL ON PENSION ISSUES - April 1, 2008 - No April Fool Reported by Patricia Karnes

Patti's Notes (Notes do not necessarily follow the order of the meeting, they may be by subject. They are my understanding of what happened.) SDCERS' IRS TAX ORDINANCE PASSED SDCERS' Roxanne Story Parks and Ms. Mumford from Ice Miller, tax counsel for SDCERS made a very complete, detailed, intense and compelling presentation. Pension members could have seared a steak with the heat that Mumford generated. The Council wasn't prepared for it anymore than those in the audience were prepared to hear it. Basically Mumford said that if the Ordinance was not passed, the IRS would be informed and SDCERS would be disqualified. Members would immediately be taxed on the total sum of their life-long pension benefits at a higher rate than they currently are taxed. The sample was a $430,000 amount that would be taxed in one year. Commentors: MEA's Ann Smith commented that while she could not evaluate the claim about the IRS disqualification, MEA was concerned about their members' pensions losing tax qualification. She recommended the Council approve the Tax Ordinance, even if it did not clarify the Presidential benefits. Saathoff was there and did not speak. Patti, representing CSDREA, thanked the Mayor and SDCERS for acting in a timely manner, and Peters for putting it on the Council agenda. She stressed it was a time sensitive and limited time offer from the IRS. And as an individual, she added comments from other retirees: Thanking Roxanne for her lengthy work over 3 years, and her ability to explain this issue clearly to retirees. She noted that the SDUT Editorial staff had not given up their Social Security in order to join the bandwagon at the City. Failure to adopt this Ordinance could place those favorable negotiations in jeopardy and expose the City to  increased costs for pensions, penalties, sanctions and/or taxes. She asked them to please embrace this IRS Settlement quickly, cooperatively and wholeheartedly. SDCERS' President, Tom Hebrank gave the proper speech. Discussion: There was no discussion of members voting to approve the Ordinance. Aguirre reminded everyone that the Presidential benefit was not part of collective bargaining and Ann Smith had advised Italiano to go ahead when it was declared illegal. SDCERS paid it when it was illegal. (SDCERS stopped paying it.) This was a time to wrap up the other unclear issues said Aguirre: Preservation of Benefits, DROP and Purchase of Service. Atkins added that it was important to tell the IRS everything. Ice Miller, Mr. Hoffman, the City's tax attorney, Peters and Frye said it was best to stick with the original language. In the end, Peters encouragingly voiced "Forward", like a magical phase to Madaffer, then Aguirre. And Aguirre compromised, saying that he would prepare a parallel Ordinance at the second reading of the Tax Ordinance, to deal with the Presidential benefit. Peters thanked SDCERS for going out and fixing the problems that extended back to the 1980s. As dinner time approached, the Council unanimously approved the original IRS Tax Ordinance, with added definitions, Mr. Hoffman, had prepared. Interestingly, Ice Miller said that individuals could ask for Private Letter rulings in their cases. Thank you letters from retirees to SDCERS's staff and Board, to Joe Flynn, the Council, and Aguirre would be greatly appreciated by them. They hear so little appreciation and this was a very big correction to carry to the finish. SDCERS' ACTUARY AT COUNCIL: Gene from CHEIRON- (no hand-outs for public) Scheduled at 11:00 time certain, Peters remembered about 11:20am, and that gave three council members five minutes each to ask questions. Gene left for the airport at noon. Frye asked if he could come back. Peters said yes.(Later an audience remark: It would have been interesting if it had lasted another half hour.) Amortization: When the SDCERS Board approved a 20 year amortization, with no negative amortization from the unfunded liability, this actually worked out to a 17.5 year amortization, said Cheiron. Aguirre noted the market value of the fund was $3 billion in 2000 and $4.6 billion in 2007. Cheiron confirmed. Aguirre pointed out that the current liability of SDCERS is $6.8 billion and assets are $4.6 billion. The unfunded liability is composed of  $1.1 billion from past and $1 billion for future benefits. Cheiron confirmed. Aguirre said contributions to SDCERS rose to $332 million in 2006 (including employee pick-up, city contributions and employee contributions). Cheiron confirmed. Cheiron told Frye that he had relied on SDCERS's unaudited information. TOBACCO BONDS TO SDCERS? Judy Italiano told Patti directly that the Mayor still has some time to do the tobacco/employee bonding deal to SDCERS per MEA's MOU, but is late for another Union. KROLL Kroll report deferred to April 29th. MERCER EXTENSION OF CONTRACT BY MAYOR IBA said $185,000 for Mercer contract extension would offer the Council options for the Mayor's new pension plan and provide for additional work by Mercer. IBA said impasse is coming up. Frye pointed out Mercer, who the Mayor hired, is questionable as it made recommendations in MPI. She noted Mercer's actions in Oregon is too familiar and Alaska is suing Mercer for performance. She added the Mayor is only here and discussing the new plan because he ran out of money, and the Mayor can do with he wants with Mercer. Staff said the City only had two responses to the RFP, and Mercer was the better one. The City was not aware at the time about Alaska. Madaffer said it was foolish to stop the Mercer contract now. Faulconer seconded Madaffer's motion. But Faulconer plans to follow up on Miss Frye's remarks and it would be tough to have the needed information in two weeks without Mercer. Hueso concerned that Mercer will give quality work and this process did not involve the Council from the start. Peters asked if this is a done deal? He wants assurance the Council will have input on 2-tier pension plan. Extended funding for Mercer will come back to Council on April 15th. MR. KELLER, SEC OVERSIGHT AND INDEPENDENT CONSULTANT - 1st ANIVERSARY ANNUAL REPORT He was appointed in January 2007. Keller felt both of his roles were independent and had the same objective. He estimates he is running $1 million less than was budgeted this first year. He has spent $75,000 for auditing and accounting help. He said there has been progress in structural changes: Charter changes are on the ballot, training has been expanded, Financial Reports for 2003, 2004 and 2005 are out, Financial Report for 2006 is going to the Audit Committee. City needs to demonstrate "Disclosures" and Keller will discuss this in his next report. Two areas where more effort and improvement are needed: 1) Internal audit function- It had disappeared to get to Financial Reports. Needs enhancement if it is to perform. 2) Internal control- It is not clear the City has the financial resources to get this done in a timely manner. At the moment there are not enough internal controls to do an evaluation of them. He said there is not much point now, wait at least until the Financial Report for 2008, when there will be internal controls to test. Frye concluded that without internal controls, she couldn't rely on the Financial Reports being issued. Aguirre asked "internal controls"? Keller said they were the checks and balances of accounting and reporting processes to give you confidence in accuracy and "tone at the top" was the key. Keller thought that the Charter change was acceptable because the Auditor was no longer under the same umbrella as before, the Council and City Manager/Mayor are separate, the Audit Committee is effective and the Auditor's tenure is different. City needs to address fiscal problems, both in the long and short terms. Waterfall: Keller said there was a difference between a trigger to pay Corbett/13th check and the source of payment for Corbett/13th check. He said they should be paid as part of the City's Annual Required Contribution to SDCERS. MAYOR'S REQUEST TO BORROW $108 million at up to 12% interest possible. Over a $1 billion is needed for backlogged maintenance, streets, buildings, etc. The Mayor did not want to wait for January to go to market, $108 million would be a private loan from Bank of America. The Mayor would use  leasing agreements, for collateral, as the State of California doesn't allow direct borrowing on City property. Aguirre has financial questions and wants to review that proposal. Staff said it has been done elsewhere. Frye was told that the interest payment could go up as high as, 12%, or $24 million a year. Suggested collateral included offering leases on Scripps Ranch library, Mission Valley Library, etc. up to $110 million. Peters and Frye were uncomfortable and wanted a list of other properties with the potential for leasing that were considered possible for the collateral. Bank of America would ultimately decide as acceptable to them. Frye wondered how many City properties were tied up already and asked for a list. Frye wanted a complete list of all loans and liabilities, including retiree healthcare. She was told that Mr. Luna, current City Auditor, did not feel it was his role to comment on the loan or how it would be paid. Given the City's "structural deficit", she asked how would the City pay back this loan to Bank of America in 2010? Madaffer said "Streets" and yes. Atkins asked where were the debt details? And she recommended that Madaffer look at the forest and not just the trees. Coming up out of the trees, Atkins said that she didn't see a plan. Hueso said 24th Street had cracks large enough for Florida Canyon and hiking trails could be built in them. Atkins wanted more discussion. Peters said it would take two readings, and advised her to vote yes now and talk later at the second reading. Only Frye voted no. Council adjourned about 8:40pm. Next week is legislative recess and you can ask Maienschein, Peters, and Aguirre questions at CSDREA's City Attorney Candidate Forum.  Andrew Donohue, Editor for on-line Voiceofsandiego.org is moderator from 9:30 to 11:30 at the War Memorial Building on April 8th. Staying for $10 lunch following their presentation? Call Sylvia at 858-272-0494 or Dora at 619-464-8595 for reservations.