SDCERS BOARD MEETING AND AUDIT, INVESTMENT, RULES COMMITTEE MEETINGS DECEMBER 18 AND 19, 2004

The following report covers SDCERS December 2004 meetings and was submitted by Advocacy Committee member Patricia Karnes.

  On Dec. 19th, as six plus media cameras recorded him, President Pierce announced, in the presence of the FBI, Aquirre's office, POA representative, etc., that there would be no Closed Session that day. (Six items had been listed, including Grissom's performance review, Gleason & Wood, as well as, Hanson, Bridgett, Marcus, Vlahos & Rudy, the firm that allowed the SDCERS Board to approve of MPII). Donna Frye had come to the Audit Committee, on Thursday, December 18th, with a letter demanding proof that Pierce followed the Brown Act in the noticing the agenda for November's Closed Session in which the Board took actions against Shipione. It was difficult to hear Pierce, and the non-agenda comments by four retirees, because the speaker system was not turned on immediately.
   Observers reported that the Board initially tried to exclude the media. Aquirre's office videotaped and did keyboard notes. (Pierce has been using only CDs of the meetings as official minutes. Recently, there have been written monthly "summaries", which seemed to been produced after Shipione said it was difficult for lawyers to identify who voted for what on the CDs.)

ACTUARIAL VALUE: Pierce asked for research to find out if the Board is bound by election results regarding how actuarial value is figured. (Actuarial value seems to determine what the City owes the pension fund, as well as, SDCERS' funding level percentage, which was 67% in June 2003, and now down to 55%, if I understand this correctly.)
   Shipione asked for Rick Roeder to come to the January Board meeting for further explanations and expectations.

TRUSTEE ELECTIONS: Board Rules 6.01 and 6.03 pre-date, and are inconsistent with, effective dates required by Proposition H. Board Rule dates are now incorrect, and cannot be compiled with, according to Prop H. After the election is over the staff will review election rules thoroughly and propose amendments consistent with provisions of Charter as recently changed by Proposition H.
   Board Rule 6.01 governs the elections for General and Safety Member Representatives and requires a majority plus one of the votes cast. The two General Members who receive the most votes, win, to take effect in April 2005. Terms will not stagger as both positions must be put up to election. No run-offs.
   Board Rule 6.03 governs the election for Retired Member Representative. As only one position in Fire, another in Police and a third in Retirement the rule remains majority plus one of the votes cast and run-offs are possible, so time must be allowed if a run-off is needed.

CONFLICT OF INTEREST BY VENDORS:
   (Sidebar: see San Diego Union article on 1-2-2005 page A1 "Possible conflicts of interest seen in city pension advisor" by Bruce Bigelow. Article on 1-3-2005 page B1, "Davis exits public life with stamp on port, city", this article continues on page B8, go to end of 2nd to last column - Davis wants to remove Port assets from SDCERS, as well as, see pension money in bonds rather than the more volatile stock market.)
   (Callan is a SDCERS consultant, they recommend Mercer and other money managers.) At the December 16th Investment Committee, Callan said that contrary to other consultants, who are no longer doing pricey educational conferences after SEC comments on the practice, that Callan finds pricey educational conferences very profitable and important to their business. They do not find it a conflict of interest, and plan to continue doing them. (Shipione has repeatedly tried to guide the Board away from the Callan-Mercer conflict of interest and expressed concern there is a further conflict due to Callan-Mercer also doing business with the City.)
   (Sidebar: Shipione is quoted in the December 12, 2004, NY Times, "How Consultants Can Retire on Your Pension" by Gretchen Morgenson. Basically kickbacks from money managers back to consultants via pricey workshops put on by consultants for money managers.)
   Brief review of a new vendor's conflict of interest policy, for vendors to sign, is in process. It keeps expanding in many dimensions... including the suggestion to add that a vendor will have fiduciary responsibility to SDCERS pension fund, and there will be no actual or perceived appearance of conflict of interest. "No chocolates," said Vortmann.

DISTRIBUTION OF DROP:
   IRS is changing how DROP is handled, effective Jan 1, 2006. Defined contribution rules will be replaced by defined benefit rules, with minimum distribution rules per Internal Revenue Code section 401(a) (9), as the IRS has issued Final Regulations. It will be more consistent with IRAs, requiring rollover or equal payments decided before retirement and unchangeable. If retiree is doing lump sum, they must take it at the start of retirement as payments will become "non-increasing" and periodic payments will no longer be acceptable. SDCERS will be notifying those affected and is planning for the changes and bringing the current rules into compliance. Wilkinson asked if the retiree would be locked into that interest rate forever?

AUDITS:
   Brown Armstrong did some of the SDCERS audit for fiscal year July 03-June 04. Brown said due to the accounting mess in the City, problems were a greater magnitude than anticipated. Brown added that information came in various pieces from the City and had many inaccuracies and difficulties. Increased fees, to Brown Armstrong, were approved by the Board. Brown said the extra charges were due primarily to KPMG fraud auditing and not from Shipione's questionings. Shipione explained: When I can't verify numbers, then I get into intent issues when looking for a pattern,….I can't influence my husband, but I'm being credited with the power to influence three crediting agencies and downgrade San Diego.
   The Board expects the SDCERS official audit for the year July 03-June 04 to be out around Feb. 05, …after KPMG finishes the City's June 2003 audit and another new auditor, who the City has hired for their 2004 audit, is done. Brown said they did their own checking and do not expect the numbers to change with the City's audits.  

  Savings due to Mercer's Best Practice's audit will cover the expense of the audit in two years, said Vortmann.

  Discussion of management bonuses being included in figuring the final retirement pension, when doing "close out audits" of selected employees, but not including exceptional performance pay in determining the retirement pensions that the general employee receives. Discussion on using the last year of DROP to figure retirement, instead of the first year of DROP. Discussion of close out auditing when those employees enter DROP and not waiting until they leave City employment.

OTHER LEGAL NOTES:
   It was not clear from the SDCERS' November Board Summary, if the City, or SDCERS, is paying for the lawyers for Cathy Lexin, HR Director, who was representing the City Manager on the SDCERS Board, as she meets with the SEC, etc. over Disclosure issues. Why was a waiver of "conflict of interest", for her to use a particular law firm, made by the SDCERS Board?
   It also is not clear how much, to whom, for what reason, SDCERS law bills are increasing this year and if that is valid use of SDCERS funds. City Attorney Mike Aquirre is looking into SDCERS legal services, according to the media.