SDCERS Loans to the
City of
Presented to SDCERS
Board
November 16, 2007
Patricia Karnes
I am speaking as and official representative from the City's retiree
association Board today. My letter to the SDCERS Board
represents their official view. My additional comments today are not
known to our retiree association Board, and are my individual comment.
Policy on Loans to the City, Port and Airport
Referring to draft page 31 from the Investment Policy.
It does change the meaning to delete the sentence "FOR EXAMPLE, PROHIBITED
INVESTMENTS INCLUDE, BUT ARE NOT LIMITED TO, SECURITIES
ISSUED BY ANY EMPLOYER (OR ANY AGENCY THEREOF) PARTICIPATING IN SDCERS."
Retirees are not likely to find protection in the
remaining sentence: "ASSET MANAGERS SHALL EXERCISE PRUDENT EXPERT
STANDARDS IN DEFINING PROHIBITED INVESTMENTS."
While investments in City loans don't qualify currently, they wouldn't
necessarily be a good investment when they would qualify.
Doug had great passion in arguing for a hard prohibition. Doug did not look to
me like a person confident that his pension check would arrive without this
prohibition.
Asking investment managers to reject the City's requests for loans appears
defensive to me. In the future, the business community will continue to
pressure who ever is on the City Council or the Mayor
for use of SDCERS' funds. The Council and Mayor will continue to tempt new
appointees to the SDCERS Board who have no historical knowledge of problems.
Could SDCERS investment managers have purchased City of
If there was a regional catastrophe, SDCERS would face a double loss of future
payments from the plan sponsors.
October 20, 2007
To: Michelle London, SDCERS Board Secretary for distribution to the SDCERS
Board-
Thomas C. Hebrank, President; Mark C. Sullivan,
Vice-President; Susan S. Gonick, V. Wayne Kennedy,
Franklin R. Lamberth, Carmen C. Lutes; Steven W.
Meyer, George A. Murray, Peter E. Prevolos, JoAnne SawyerKnoll, William J. Sheffler and John G. Thompson.
Also please forward copies to: David Wescoe, CAO. Doug McCalla, CIO; Rebecca Wilson,
Membership Services.
Copies provided to City of
________________________________________________________
RE: Please re-consider adding Doug McCalla's
recommendation to put a hard prohibition in the Investment Policy that would
prevent buying debt paper from participating plan sponsors.
How often do you go against the advice of Doug McCalla
in financial matters? Has the City learned nothing about asking to do
"deals" with CERS? It has not yet recovered from MPI and MPII. While
the City is unlikely to want to pay 16%, 12% or even 8% to borrow funds, why
does the City keeping asking? Please make this a hard line in the sand.
In 1996, CERS declined to loan the City funds for the new
SDCERS members have learned not to trust the City. It promised them a
retirement plan, unfortunately it is currently of
interest to tax-payers, the national press, the IRS and Mr. Keller (SEC
oversight) seeking answers to Cheiron's numbers
during his last report to the City Council.
Because the City has more experience asking for loans, than any of the Mayor's,
future or current, five SDCERS Board appointees would have institutional memory
of SDCERS, please support Doug's requested hard prohibition to limit plan
sponsors' debt paper and protect SDCERS members from further strife.
Newly appointed Board members may be tempted to relieve stress on the Mayor,
causing CERS' staff to explain the negatives of such a loan and extricate the
Board from politics gracefully.
II. FINANCIAL REASONS FOR A HARD PROHIBITION
I first heard of a possible loan to build City Hall at the SDCERS Investment
Committee, Thursday, May 17, 2007 - 1:30p.m. Check under:
II. Investment
A. Old Business
ACTION REQUESTED
1. Review and approve recommended revisions to SDCERS' Investment Policy
Statement. Doug McCalla (TAB 31)
Reference to page 28, "Prohibited Investments" of McCalla's May draft revision of the Investment Policy.
Doug recommended prohibiting taking "debt paper" or loaning money to
any of Plan Sponsors.
He explained that the worse situation in the past, was
SDCERS building a parking building and the City calling it even, by paying
SDCERS $1 dollar. Doug had other examples on deals with the City that had not
gone well.
He also listed other reasons (continued in the dialogue below).
Thinking about investment returns, he asked if the City would pay 16% interest
that SDCERS can get in the market?
Dawne said that if the City had difficult financial
times, then it would repay the outside Bonds off well before SDCERS. I was most
struck by their image of SDCERS looking a fool in the eyes of the national
investment community that they would loan to someone that is having difficulty
paying already ( 20 year amortization instead of
recommended 15 years that the Pension Reform Committee recommended, for
example).
My notes as I understood the discussion, are not exact, nor complete, and are
often generalized. For the complete and accurate discussion, the Board can
refer to their official record on CD of the Investment Committee and Board
meetings for May 2007.
Hebrank: …heard most recently new
City Hall as investment…."
Chris Waddell: We could participate if same terms as other commercial
investors. Chris thought up to 25% limitation of total project.
Doug: …It doesn't make sense to do tax-exempt when don't pay taxes that would
drive down returns to CERS and increase the City's ARC.
Hebrank: Clarify and expand what and why prohibited.
Sheffler: Could change this policy to engage.
Doug: Already creditor to City. Puts us in bad place to take
on debtor's paper.
Callan (Recommends money managers): (Summary: SDCERS
cannot directly invest, so why would an investment manager pick a debt to the
City of
Dawne Clark: City would sooner pay off generally
insured bonds than pay their ARC.
Doug: Charter says CERS needs (to invest via) separate asset manager that CERS
can't do that (invest directly into a City bond).
Callan: Refer to Charter, note in IPS.
Chris: Even if permissible, do you want asset managers to buy SD bonds on the
market? (Chris said he will do more work on this area.)
Doug: If 12% return, then (Doug would rather) go into passive, less expensive
management and decrease risk. Active management takes on risk of downsize
performance.
III. FIDUCARY REASONS FOR A HARD PROHIBITION
Guard the financial health of CERS' hen house from the foxes that cannot
calculate future unfunded liabilities that would result from immediate raids of
hatching investments at CERS.
Reconsider a hard prohibition against loans to Plan Sponsors and enjoy staff's
and members' appreciation for your fiduciary duties.
Respectfully, Patricia Karnes