Retirement Board Update - November 18, 2005 - By Joe Flynn

 To the Retirees:
    The Nov. 18 2005 Retirement Board meeting got underway with nine of our current 11 members and a full schedule. Robert Wilson, the new SDCERS Assistant Administrator, was on hand to provide a number of reports and answer questions on others. Robert had spent many years in the City Auditors office so is familiar with the territory and is getting up to speed quickly on SDCERS. Last week I met with him and Patrick Lane, Chief Financial Officer for SDCERS to go over questions I had regarding SDCERS Budget. In previous Budget sessions at the Board, I expressed a deep and burning desire for more information. I was more accustomed to the level of detail included in the City budget format and did not have enough background to be comfortable with the policy budget provided to the Board. Robert and Patrick were most helpful and answered a lot of questions. They have the information and the answers, and I hope to see more of it in future budget reviews. To be honest, not all Board members are interested in the level of detail that I am, but we all have to find our own comfort level, and staff has been helpful in filling in the blanks.
    The morning session of the Board was devoted to finance and investment with numerous financial statements, reports and audits. In response to a recommendation in an earlier audit by Brown and Armstrong, SDCERS has brought over three staff members from the City Auditor's Office. These individuals have been working on SDCERS projects and were being paid by SDCERS, but located in the Auditor's office. Many of you have worked in departments where you were paying for staff in other departments, working (hopefully) on your projects. Same thing. So in this case, I would expect to see an increase in productivity from the relocated staff.
    Fred Reish, fiduciary consultant to the Board, presented an update on the illegal acts investigation of SDCERS now underway by Navigant Consulting. The report is estimated to be 50% complete with document review and individual interviews. That was the good news. The bad news was that they were also asking for a cost overrun. Sunshine faded and storm clouds gathered. The Board was not happy. At this meeting, we only had the messenger, Mr. Reish, so the topic will be discussed again, perhaps at a special meeting to get the details direct from Navigant and come to an understanding. To me, it's a tough call. I liked the idea of an independent investigator preparing a report to clear the air and respond to all of the various charges that have been leveled. And we have a responsibility to make sure there are no residual problems. At the same time, however, we do not want to be taken down the primrose path tread so often of late by the City Council. We can learn from others. Stay tuned.
    EnnisKnupp, a consultant hired to do a review of the Investment side of SDCERS and Board operation provided a written report. The review evaluates each activity in relation to "best practices," a set of commonly agreed upon performance standards or expectations used by the investment/finance industry to judge an organization and its operation. The Investment operation of SDCERS and the Board received high marks throughout. The consultant did point out that a couple of our other consultants in presentations to the Board, should have discussed their conflict of interest safeguards in addition to presenting those safeguards in their written reports.    The pension fund is really diversified, financially and geographically. You may be interested to know that Hurricane Wilma damaged an apartment property in Miami, FL owned by SDCERS. Doug McCalla provided an update in one of his reports telling us that the property was without power for five days. The roof, windows, and landscaping sustained some damage. Insurance claims are being filed.

The afternoon session got underway with a report on DROP distribution activity by David Arce, operations manager. He said that 900 DROP participants attended the 14 meetings scheduled by SDCERS and that extended office hours (from 5 to 7 PM) for DROP participants will continue to the end of November. Letters of confirmation will be sent in December to those who have made their selection on distribution payments.    Representatives of Cherion, the new actuary, gave a get acquainted presentation on their process and gave a demonstration of their computer programs which show the impact of different assumptions or interest rates on retirement funding. The team appeared to be knowledgeable, experienced and accustomed to dealing in a politically charged environment. Just what we need; sharp pencils and thick skins.
    We did review an audit of the Corbett payment program in the morning, but I saved that till now because we discussed the Corbett payment program in detail in the afternoon. The audit found a number of errors in the Corbett payment program, mainly due to the fact that it is an add-on to the main system used to pay pension checks. Many of the accrual and accounting operations have to be done manually, which increases labor costs and can contribute to errors. I pointed out that the contingency factor on the Corbett payment results in unnecessary confusion and delay of a Court ordered payment. Not only are retirees denied timely payment but the doubling, or tripling of the Corbett payment can have negative tax consequences for retirees. For example, the payment is two or three years late, no interest is included, and the late payment can move an individual into the next tax bracket. Staff and the Board also pointed that if a late payment arrives after the death of a retiree and the estate has been settled, the complications can be horrendous. Another in a long line of reasons to pay the Corbett settlement monthly.
    Staff recommended, and the Board adopted, three recommendations: 1. that the Corbett payment be paid monthly, 2. that the 13th check benefit be included in the Pension system liabilities, and 3. that the Supplemental COLA also be included in the system liabilities. I believe these are steps in the right direction; if implemented they could take the guesswork out of these three benefits. I must also advise that not all Board members support the payment of supplemental benefits when the Fund has a large unfunded liability. That objection is based on principle; additional information on the history and intricacies of these benefits as well as their impacts will be required. I also recognize that Council involvement and action will be necessary to accomplish this so we have some rough roads ahead. But it's a start in the right direction.
    Following that discussion, the Board took action to authorize payment of the 13th Check and Corbett. This topic was also the subject of discussion with some new appointed members looking to eliminate the 13th Check and Corbett payment. It was pointed out by Lori Chapin, Board attorney, and myself, that the action today was ministerial and governed by the Municipal Code. In addition, the Corbett payment is the result of a Court case brought by retirees. I also agreed to share with the new members, the Background paper on the 13th Check prepared by Bob West and others and reviewed by L.Chapin. I had sent it out some months ago, but we keep getting new members so I will have to keep sending it. It may not change minds, but at least they will know it is not a "Christmas bonus." I shared with the Board the example of a retiree, one of the city's top secretaries when she retired over 20 years ago who gets a pension of $250 a month or $3000 a year. She would receive a 13th check of $1,500, "not enough to put her in the 'Cadillac Pension' class but certainly enough to improve her quality of life."    A Disability Committee is being considered, consisting of five Board members to meet to hear Disability approvals and appeals. The current process limits appellants time in presentation and takes considerable Board time. The process will be discussed further. A corollary item on confirmation of continued eligibility for disability retirement benefits was also discussed. Steve McMillian, Vice Pres. of POA gave testimony that this issue is a Meet and Confer item under a POA Memorandum of Understanding. This item and another on "investigation of potentially fraudulent applications or awards" was referred to the Disability Committee.
    The final item was a matter of providing SDCERS employees with indemnification for acts or omissions related to their employment with SDCERS. This policy clarifies SDCERS policy and implements State law that requires indemnification of employees. In the event that either or both, the SDCERS General Counsel and/or the Administrator were charged, this policy would allow the President and Vice President of the Board to provide attorney's and provide payment for their defense. I recognize and agree with the concept of indemnification. I disagreed, however, with the decision being made by only the Pres. and V. Pres. If such an event were ever to occur, I said it would be a real "hot button" issue and that the Board should make the determination and bear the responsibility. It appears that I was the only one holding this view, as the vote to approve was 8 to 1.
    All in all, there was a lot of good discussion by all Board members. I have learned a lot from the other Board members and I hope I have been holding up my end in "sharing" information with them.

Take care, and have a Happy Thanksgiving  

Joe Flynn, Retiree Rep. to the Retirement Board