Patti's Notes SDCERS BOARD MEETING - February 15, 2008 (Notes do not necessarily follow the order of the committees or the full Board meeting, they may be by subject. They are my understanding of what happened.) TAX DETERMINATION LETTER (mostly from Roxanne Story Parks' report) Roxanne said the City Council must take action by April 25, 2008 on the settlement as Ordinances take two readings. . The favorable Determination Letter that was received by SDCERS is contingent upon: 1) City Council's adoption of th4e Technical Ordinance attached to the Compliance Statement (Voluntary Compliance Program settlement), and 2) SDCERS Board adoption ( on March's Business and Governance Committee's agenda) by Board rule of: a) amount of interest credited annually to members accounts since FY 1989, b) the member contribution rates for each plan sponsor for each FY since 1989, c) the mortality table used by the Board since 1989, and d) the amount of interest credited t DROP accounts each FY since 1998. Roxanne added that the Tax Determination Letter is on a five year rotating "Cycle C", so the next renewal filing is before Jan. 31, 2009, followed by another re-filing in Jan. 2014. President Hebrank noted that the City was having a conference call with their attorney on Sunday, Feb. 17th regarding the IRS Ordinance. Roxanne said the Tax Determination Letter has shortened the time that the City has to approve the IRS Ordinance via Counsel vote, due to 1st and 2nd reading, etc. If Not Approved If the City fails to approve the settlement, the IRS could impose penalties and excise taxes on the City, the plan, and/or participants. Sheffler asked that penalties fall on the City, and not participants, if the City Council doesn't approve the settlement with the IRS. GROUP TRUST If the "Group Trust" is approved by the Council, the next step is to split into three Determination Letters, one for the City's plan, one for the Port's plan and one for the Airport's plan. The Determination Letter will make SDCERS self-correcting, allowing them to do the split without more IRS approval. VOLUNTARY COMPLIANCE PROGRAM (VCP) Incumbent Presidential Leave: Board to determine if Purchase of Service will be allowed due to administrative error, in March. 50 Fire Fighters use of Annual Leave to buy Purchase of Service Benefit is gone due to IRS' removing parts of the plan, Board Rules and plan language. As the City never paid SDCERS the dollar value of the Annual Leave for their Purchase of Service (POS), there is no money to return to the fire fighters. It is now a City issue to compensate the fire fighters for their Annual Leave. When Board member Thomson asked how fire fighters were credited with POS previously, Roxanne said employees, City and SDCERS arranged it. She didn't know how it was done book-wise. However those fire fighters may now purchase that lost time at today's rate of pay and today's price. Agenda comment Aguirre arrived very late for comment, but President Hebrank permitted him to speak to VCP. He referred to his Interim Report #26 on IRS Code Violations and asked the Board to do an internal investigation on IRS Prohibited Transactions involving former SDCERS' former Administrator Larry Grissom, and former City Auditor Ed  Ryan, for allowing the Union Presidential benefit when they knew it was not allowable. He thought the Board needed to do an Internal Investigation to find out how this happened and said the Board knows the members receiving this benefit. Because of the Board's fiduciary responsibility to care for members' financial security, he thought this issue should be resolved in light of the stock market's negative impact on SDCERS' fund. Aguirre also described SDCERS Board's failure to correctly price Purchase of Service credits and DROP as another Prohibited Transaction. He regarded not charging current Board members the full price of POS and DROP as another Prohibited Transaction. The current Board was not in place in October 2004. Aguirre believed the current Board had approved some of the Prohibited Transactions. COMPREHENSIVE ANNUAL FINANCIAL REPORTS (CAFR) FY 2006 CAFR is finished and at the printer. Macias, Gini and O'Connell (MGO), outside auditors, issued an opinion letter Jan. 28, 2008. Opinion Letter highlights: 1) Three particularly sensitive estimates affecting the financial statements were: - Actuarial valuation of pension benefit obligations. - Fair value of real estate and related income. - Allowance for doubtful accounts relating to service credit purchase contracts. They are sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected, but are reasonable in relation to the financial statements taken as a whole. Page 2, III. 2) MGO recommended an annual "…comprehensive risk assessment analysis and document its risk assessment policies and procedures for each fiscal year beginning July 1, 2007." Page 4. (Bob Wilson, presented the results of the 1st internal risk assessment for SDCERS operation to the SDCERS Audit Committee in February 2008. They are reviewing his Internal Audit Report.) 3) Board will be reviewing procedures for the Compliance Officer to check conflict of interest statements. Page 6. (Roxanne will be reviewing the annual "700" form.) 4) "New Financial Reporting Standards…GASB Statement No. 50 will require …plans to disclose the methods and assumptions used to determine the fair market value of investments such as real estate investments, for which quoted market prices are not available." Page 8 FY 2007 CAFR is expected at the end of February. SDCERS' actuary, Cheiron is working on the actuarial section. Ratification by outside auditors, MGO is expected by the end of February. ACTUARIAL VALUATION June 30, 2007 Actuarial Valuation was approved by the Board. It was presented at the January 2008 Board meeting. June 30, 2008 Actuarial Valuation will include Cheiron's "Experience Study". It is expected to be done by the end of the summer. Board member Kennedy asked to have a presentation on "experience studies" before Cheiron presents SDCERS experience study results. BUSINESS & GOVERNANCE COMMITTEE - Feb. 14, 2008 Independence Policy Chris Waddell, General Counsel, presented a draft of the new Independence Policy for SDCERS. It will be an action item in March. Public comment: I requested creation of a statement of Actuarial Soundness Policy to be included in the Independence Policy. Writing an Actuarial Soundness Policy would complete all the recommendations suggested by the Navigant Report. The opposite of an Actuarial Soundness Policy would be disregarding the chances that a given level, of the City's debt to SDCERS, would disable the ability of SDCERS to pay future obligations. New Rule allowing donations to SDCERS Old rules did not allow Donna Frye to pay $100,000 into SDCERS for her under payment of Purchase of Service. This would permit her to donate money without it being credited to her name. Waddell said this would increase SDCERS' assets, but not increase liabilities as no benefits would be linked to the payment. INVESTMENTS Committee -Feb. 14, 2008 Wescoe said no other system has as many talented people as SDCERS' investment team, even if they have larger teams. He announced that the investment team is now complete with Cory Buuhoan, the new Assistant Investment Officer. Cory will be focusing on the SDCERS' launch into private equity. A RFP for private equity will go out after the City Council approves the Group Trust. Callan Report Summary "After fees and expenses, 2007 will likely fall short of the 8% actuarial expected return, the first calendar year this has happened since 2002…. (however) three, five and ten-year periods remain well in excess of the long-term actuarial expected return target, the total fund benchmark, and the median public plan….The two most significant tools which have enabled SDCERS to control risk over these periods have been diversification and re-balancing." No one sector stays on the top for return of investment. Only U.S. Treasuries did well this last quarter. Non-US stocks up 11% because of the weakening dollar. Emerging markets are illiquid, but have done 35% in the last 11 years. Materials did well in internationals. Reits were down 11.7%. Re-balancing Steve Meyer, Chair of the Investment Committee, repeated lessons: change is going to happen, diversify, don't chase performance, and "buy low & sell high". McCalla reported that U.S. Treasuries were sold high. Bought low: $11 million of domestic equity and $5.37 million of real estate., The remainder went into pension payments and operational expenses. McCalla said SDCERS was ahead about 50 basis points for the entire year. Status SDCERS placed 57th place in the public fund universe. Fourth quarter of 2007 was minus 0.61%. Total return for year 2007 was plus 8.14%. January benefits and operating expenses totaled $15.5 million. December 31, 2007 fund value was $5.039 billion. January 31, 2008 fund value was $4.822 billion. Putnam Report Private Equity is no longer able to buy-out troubled businesses. The economy is interested in growth and certainty. INFORMATION TECHNOLOGY REPORT SDCERS and the City are separately implementing new "Financial Administrative and Accounting Systems" which will give SDCERS independence and control of SDCERS own records. RETIREE REPRESENTATIVE Deadline is Feb. 29th. If multi-candidates, then SDCERS will use an interactive telephone for retirees to cast votes from March 20-April 3. Dave Hall has submitted his application. FOLLOWING CLOSED SESSION Hebrank said SDCERS Board will not tell who, and why, they are suing, until individuals have been served. Peter Preovolos, former President ,noted that the Board has done the Navigant investigation of SDCERS, the City has done the Kroll report, and  the IRS has reviewed the pension system. Roxanne added that SDCERS' tax attorney, Ice Miller, has also done an investigation also.