Retirement Board Meeting - January 2008

PATTI'S NOTES (As I understood the meetings and what happened.)

SDCERS BOARD AND COMMITTEES - JANUARY 16 to JANUARY 18, 2008

SDCERS ASSETS
Chief Investment Officer, Doug McCalla reported that recent stock market activity resulted in a drop to just under $4.8 billion, down from $4.952 billion on January 4th.

SDCERS' Comprehensive Annual Financial Reports for 2006 and 2007
Outside auditors' Macias Gini O'Connell(MGO) expect an unqualified opinion for SDCERS' 2006 CAFR . They said the City Attorney's conclusions, in his report on SDCERS, were his own, but MGO was looking at his data. MGO wants to be sure the City's CAFR for 2005 and SDCERS CAFR are consistent and the history is understood. SDCERS' 2006 CAFR will include the IRS Settlement and has the management letter to complete. SDCERS 2007 CAFR is in process.

SDCERS June 30, 2008 ACTUARIAL REPORT- Cherion, Actuary
Boards' vote on the report will be on February 15, 2008.

City payment to SDCERS for FY 2009, is $161.7 million, 29% of payroll.
Funding ratio is down slightly from 79.9% to 78.9%.
Unfunded Liability is up $182.7 million, mostly due to change in funding method.

David Wescoe and Bob Wilson recommend going to SDCERS web site and downloading the FAQ, just added to the site, entitled "SUMMARY AND ANSWERS TO FREQUENTLY ASKED QUESTIONS ABOUT THE JUNE 30, 2007 ACTUARIAL VALUATION FOR THE CITY OF SAN DIEGO."

Cheiron found that a significant increase of vested employees terminating, with higher salaries than expected, contributed to a slight drop in funding ratio. Need $7.3 Billion to meet future obligations to members. Part of increase in unfunded actuarial costs (UAL) is because years of PUC funding method back loaded funding. This is the first year of EAN funding which is more widely accepted. Also last year received a boost with a change to Market Value of SDCERS' assets. Last year's investment gains were "smoothed", setting gains/loses to be averaged over a number of years, which will help balance out any losses in 2008-9 and keep the City's annual payment from spiking.

IRS' Voluntary Compliance Program- Roxanne Story Parks
After the City Council approves the IRS VCP Settlement, it won't be official until 60 days. The IRS started the 150 day countdown for City approval on January 10th. According to Roxanne, the last date the Council has to approve the agreement is in March. Changes the IRS is requiring will be retrospective to the date that the Council should have updated the pension plan in the past. Many of the 14 failures were failures to update Ordinances.
SDCERS is waiting for a Tax Determination letter.

Mayor and Council hired Samuel Hoffman, a tax and benefit attorney, who may be suggesting small changes to the IRS Settlement agreement.
SDCERS is taking out union service money and credits for union time. They have stopped making 415/POB payments and the new process for 415/POB payments from the City is working. There are new procedures for dormant accounts.
The City never paid SDCERS the firefighters' money from annual leave for purchase of service credits, and the IRS has disallowed those purchases. This is a MOU issue between the City and 43 members (one retiree, 42 employees).

UNION PRESIDENT BENEFIT STATUS
Wescoe said Unions need to go outside of SDCERS, to the City, to meet those MOU agreements which the IRS will not allow within the structure of SDCERS. If SDCERS were to act, it would be repeating a past error. An example, of City action, is the 415/Preservation of Benefit Plan or POB, (over the limit pension payments). POB is now being paid by the City, directly out of the General Fund.

Chris Waddell, SDCERS General Counsel, is continuing to work with tax counsel and IRS to resolve the Union President Benefit. A complication is that once members are retired, members are not allowed, under this plan, to purchase service. One union president is retired and several others are in DROP.

Wescoe added that Jay Goldstone as the City, not SDCERS, signed off with the IRS. The IRS held the issues of "over the limit payments" and union president benefits to the very end. This was not a negotiation, however SDCERS did argue hardship for union presidents. SDCERS offered "corrections" to the IRS in order to continue paying other current benefits and not ask members to put in more money. There was a one day window to notify union presidents.

In the end it was untenable for SDCERS to lose tax free status. MEA had asked for this IRS' VCP review, rather than risk an IRS' audit of SDCERS. Finally, note that penalties were not required.

WEB SITE/INFORMATION TECHNOLOGY- David Bond, Information Technology Director
David has an incredible team. In answer to Joe Flynn's request, SDCERS is taking the first steps in live streaming. Re-play Wescoe on KUSI. Meetings are not available yet.

DROP INTEREST RATE
Board approved DROP interest at 8%, subject to mid-year adjustment on July 1, 2008, if required to comply with the Pension Protection Act. Trustee Kennedy will re-convene the AD Hoc DROP Committee to delve into more detail. Federal legislation may be passed clarifying this.
Waddell added that some funds reflect changing market rate and others offer a lower guaranteed rate. Steve Meyer noted that market rate is not an actual return. SDCERS is a blended stock and bond fund.

INVESTMENT COMMITTEE-Steve Meyer
New policy is to have staff select from three money managers, visit on-site and bring back the final selection to the Board for approval.

INVESTMENT DIVISION STAFFING
Ms. Elizabeth (Liza) Crisafi has been hired as Deputy Chief Investment Officer.
Ms. Jamie Hamrick was promoted to Assistant Investment Officer.

PROHIBITED INVESTMENTS
Sullivan asked if SDCERS has prohibited investments? Doug McCalla responded that there were no specific limitations at this time, only guidance to money managers.

LEGAL SERVICES- Chris Waddell, General Counsel
RFP is out for fiduciary services, replacing Harvey Leiderman.

Waddell is setting up basic courses in being a fiduciary and Brown Act compliance for the full Board in upcoming months.

LAWSUITS- UPDATE
City of San Diego vs. SDCERS, Superior Court Case No. 37-2007-00081912-CU-WM-CTL, JUDGE Nevitt.
On Nov. 20th the City Attorney sought to set aside the Board's November 16, 2007 vote regarding treatment of costs associated with purchases of service. Status Conference January 18, 2008. Hearing for SDCERS demurrer, based on lack of City Council approval of lawsuit, is February 8, 2008.

City of San Diego vs. SDCERS, Superior Court Case No. 37-2007-00077604-CU-MC-CTL, Judge Barton.
Ordinance effective July 1, 2005 or January 17, 2007? Hearing for SDCERS' demurrer is February 29, 2008. Parties engaged in written discovery.

DISABILITY
Discussion on disqualifying disability retirees who are no longer judged disabled.

RULE 15 DISABILITY PROCEDURES- Elaine Reagan, Associate General Counsel
Elaine will revise the language so applicants without attorneys can understand disability procedures. While changes are not a meet and confer item, stake holder's input is still welcome and a matter of fairness, said Sullivan. Elaine said that even if SDCERS is in an adversary's role, that SDCERS does counsel applicants. Franklin pointed out that Work Comp doesn't pre-qualify applicants for Disability. Elaine will present the new draft in February.

ACTUARIAL SOUNDNESS POLICY? (My non-agenda question/ their answer.)

Question: During non-agenda comment at the January 16th SDCERS' Audit Committee, I asked if the Audit Committee was going to review SDCERS' "Actuarial Soundness Policy?"
My interest was SDCERS Board's policy and actuarial plan to have money to pay contracted benefit levels in future years.

Background: SDCERS Board Trustee, Mr. Shuffler brought the Actuarial Soundness Policy up in November 2007, at a CSDREA meeting, as something that needs to be done in public. SDCERS' NAVIGANT REPORT found that SDCERS did not have an actuarial soundness policy at the time of the investigation of SDCERS that concluded in January 20, 2006. See page 98 of 115, section D and page 113 of 115, section B-1, for samples and explanations. Also see SDCERS' Milestone Report on Action Items as of 05/07/07 Item # 06-008.

Response: Outside of this meeting, David Wescoe and Bob Wilson said the current SDCERS Board voted for the most conservative, most widely and commonly used, and most sound actuarially methods, and they are now in place. Also, a new "experience study" (on assumptions about employees and retirees) will be included in next year's June 30, 2008 actuarial evaluation. Wilson noted that the City has now paid three full years of money to SDCERS.
Conclusion: The actuarial work is in place and the next step is developing the "policy".

-Patricia Karnes 1/21/2008