Board of Trustees
C/O Donna Hawthorne, Board Secretary
San Diego City Employees Retirement System
401 "B" Street, Suite 400
San Diego, CA 92101

July 4, 2005

Dear Board,

Re: Failure to waiving the attorney-client privilege and
Tom Page's remarks on the LAW OF UNINTENDED CONSEQUENCES.

I. The Power to Administer:
   Is it more in the interest of the beneficiaries of SDCERS to waive, or would beneficiaries do better to bear the consequences of any possibility of receivership/city bankruptcy? In the possibility of receivership/bankruptcy, does the Board accept relinquishing the power to administer?
   The SDCERS Board has no ultimate power regarding the possible, or impossible, roll-back of Manager Proposal I and/or Manager Proposal II benefits. SDCERS Board has no ultimate legal power to determine legal or illegal acts.

II. The Power of Paying Pensions:
   The new SDCERS Board has the power to make fiduciary decisions that may not have been in the awareness of the previous SDCERS Board.
   If the current Board thinks it is not waiving, so as to preserve Manager Proposal I and Manager Proposal II pension benefits for retirees , perhaps it should think again.
   Eight years is one estimate of how long the plan could pay Manager Proposal I, Manager Proposal II, and all previous benefits to qualified retirees, because of the escalating payments to more recent retirees. The rate of obligation is growing faster than SDCERS' balance increases. Perhaps you might request a chart on rate of pay-out to find out for yourself what the increasing rate of outflow is, and how many years that SDCERS will be able to pay, for example, Bruce Herring his annual chunks of $100,000. Will Herring accept having those payments terminate while he is still living? Even a billion is not infinite. In the last nine years, the fund has sunk approximately 30%.
   The funding level percent is dropping again this year. National pension consultant with 50 years of experience, Dr. Steve Schanes, presented a report to the City's Government Efficiency and Openness Committee on June 13, 2005. He worked out figures for SDCERS that show that on June 30, 2005, SDCERS had one of the lowest funding levels in the country at 40% of funding.
   This new SDCERS Board, with greater than ever expertise, is facing a challenge to stop this sinking. Some of you, who have not had the time to believe that there is a problem meeting future payments to retirees, may want to consider that the SEC and the Mayor's Pension Reform Committee identified issues with the acceptability of the current funding level. Even if the individual Board members don't believe there is a problem, it is a major problem for many outside the system.
   How much cash would the City need to infuse to turn the situation around?
   When you end your Board term, what will the funding level, at that time, say about your fiduciary responsibility to see retirees receive pensions?

III. The Power to Invest:
   President-Elect Peter Preovolos spoke of $8, out of every $10 that is used to pay pensions, must come from investments at his June 27th SDCERS budget presentation for the City Council. Doug McCalla's excellent ability to achieve returns is very appreciated by all. This does require capital however.
   One unintended consequence, of not waiving, may be that SDCERS could be earning 11% from money generated from the Council if it was able to issue Pension Obligation Bonds instead of a lesser interest rate that the City pays on what it owes to SDCERS.

IV. News about a Possible Fishing Hole Is Old News:
   Someone wrote a note about the "fish" on an old City bond issue.
   It is already very late in the chain of financial pension events, whatever Mr. Grissom's concerns about the correct interpretation of the truth (that he spoke about at the June SDCERS Board meeting).
   Reasons, given in interviews for not waiving attorney-client privilege, have created an image of "stonewalling" and the Board dressed perhaps in the EMPEROR'S NEW CLOTHES (that only the emperor imagines he is wearing, and he assumes that others are seeing due to their innocence)? Embarrassing to the beneficiaries.

Thank you for considering possible consequences,

Patricia Karnes,

(While I am a member of the Advocacy Committee of the City of San Diego Retirement Employees Association, I am speaking as an individual. I come regularly to SDCERS' Board and Committee meetings. I attended most of the Pension Reform Committee meetings. I am a retired Librarian after 24 ½ years, with pre-1996 retirement benefits.)