SDCERS BOARD MEETINGS - March 19- March 21, 2008
Reported by Patricia Karnes

(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.
CDs of SDCERS' committees and Board meetings are available through the Board Secretary, visual recordings are available through City Channel 24. Live streaming will be available soon. Full Board meetings are on Channel 24 around 5 or 6pm, usually the third Friday of the month, and repeat on Sundays at 1pm.)
Topics covered: Changes and shifts in power. IRS and Council, Info Tec strategic plan, Investment, Internal Audit, CAFRs, "Independence", Donations and Disability--a sad, sad story.

WHO IS VOTING FOR YOU?
Retiree Representative, Dave Hall was sworn in, replacing Carmen Lutes. He arrives with a strong management background. This is fortuitous as the Board is talking about changing their governance rules, moving away from micro-managing staff, and moving toward giving more responsibility to their CEO. Three of the five appointed Board members are numbers people: Bill Sheffler is an actuary, Tom Hebrank is a CPA, and Peter Preovolos knows private pension administration and figures. The other two appointees: George Murray and Wayne Kennedy have experiences from other Board systems. JoAnne SawyerKnolls is the City's ethics attorney and appointed to represent Mayor Sanders. Steve Meyers (carrying SDCERS Board's institutional memory) and Franklin Lambert (in his third year) are general employee representatives. Safety is represented by John Thomson from Fire, and Mark Sullivan from Police.

RETREAT FOR BOARD GOVERNANCE CHANGES?
Kennedy encouraged the Board to move beyond inherited problems and get things moving. He recommended a retreat to deal with needed changes. Meyer agreed.
At the Business & Governance Committee, Steve Meyer wanted structural changes and added fluidity in the existing Board structure. He made the suggestion to only elect Vice Presidents, who would become Presidents after one year. Steve added that events are coming up and the Board is bound currently by Board Rules, while they wait for the Mayor to appoint several new members. Wescoe recommended bringing Meyer's requests back to the Business & Governance Committee with a schedule and list of topics in coming months. A retreat would offer an opportunity for candid discussion of governance in an appropriate environment. Susan noted that SDCERS is using an outdated model…in terms of what needs to be done sooner, rather than later. Wescoe said his key priority, in his 60 hour week, is to make the process more transparent and he itemized items that need to be moved to get on with business.


WHO SETS SDCERS' AGENDA?
At the Business & Governance Committee, Meyer said that a yes vote from Committee members would only be opening access to the agenda. Wescoe noted that in the past the Executive Committee (4 people) could be appointed by one person. He recommended change so that no "click", or person, could control (the Board) and stop items from going on the agenda, become political, or determine performance evaluations. It is critical to make changes before the Mayor appoints new Board members without institutional history, and go through the learning curve to see the problems.  Meyer said there was a risk if changes were not made. He currently was opposed to procedures in the Board Rules and agreed that the Board needs to act now and go into deeper governance issues.
Currently, the CEO prepares the Board's monthly agenda for the Executive Committee's review.

Meyer said this was driven by staff's business considerations, and the Board would retain governance and strategic planning. He added that the Board should demand control and that the agenda be opened, the CEO should be trusted, and power was too concentrated. Susan Gonick asked who would resist voting for this change? She added that the Business and Governance Committee had balanced the power, between the staff and Board very well.
Wescoe, CEO, had requested the change for greater transparency, cooperation and efficiency in meeting Brown Act time limitations to put things on the agenda. He noted that without this change, the CEO was not able to put items on the agenda. He added that if the Board voted "no", he would not be here and this would be the biggest mistake the Board has ever made.
But memories of inherited problems haunted the vote. President Hebrank said he had only refused one agenda item. He said he had a problem transferring the Board's authority to staff. Bill Sheffler thought the President should have power to remove items put on by staff, and was uncomfortable ceding authority to staff. JoAnne SawyerKnolls was concerned that the President and CEO were not agreeing and wanted to work out differences.
Kenney pointed out that the Board can table an item, vote it down, etc. He concluded that the change was needed to get things moving that needed to be done. Dave Hall asked if this change was a good policy for future Board Presidents and CEOs?
The vote was 8-3-1. Approval of Board Rule 2.01, changed the Board's monthly agenda preparation. The Board's yes vote dropped the President's veto of items, and enabled the CEO, Executive Committee, President, or two Board members to add items without Executive Committee approval.
Hebrank, Sheffler and SawyerKnolls voted no, Hall abstained at this time, and the eight other members voted yes.
In a related vote on Rule 4.00, JoAnne SawyerKnolls and Bill Sheffler were alone in voting "no" to removing the ability to set agendas from the Presidents' role. But Hebrank voted yes with the other Board members.

WHO SELECTS SDCERS FIDUCIARY COUNSEL?
Originially, Sheila Jacobs issued RFPs to seven firms, and advertised in Los Angeles, San Francisco and San Diego areas. CEO David Wescoe, Roxanne Story Parks, Chris Waddell, etc. scored the applications. One firm stood out to staff. However, the Board preferred to interview more than one firm themselves before voting next month.

WHO SUPERVISES FIDUCIARY COUNSEL?
Joe Flynn commented that prior to 2005, there were problems with the Fiduciary Counsel that resulted in a multi-million dollar settlement to SDCERS. He pointed out that in the interest of "independent opinion", his Board voted to have the Fiduciary Counsel report directly to them. Hebrank agreed with Joe, but changed his position when he voted.

This Board Rule change had several aspects.
One part requires that "any and all communications between fiduciary counsel and any SDCERS employee, Board member or any other individual regarding SDCERS' business must be reported and/or copied by fiduciary counsel to the General Counsel or Chief Compliance Officer, as appropriate….regarding SDCERS' business, its employees or interests…must be immediate and intended to fully advise the recipient of the substantive content of the communications."  "Fiduciary Counsel may discuss any issue directly with the full Board."

When the Business & Governance Committee reviewed this, General Counsel, Chris Waddell, said it was unusual and not "Best Practices" to have a fiduciary counsel at every meeting. The Fiduciary Counsel who previously attended meetings regularly, will now be invited on an "as-needed" basis at General Counsel's, Chief Compliance Officer's or Board's request.
The new Fiduciary Counsel will report to General Counsel. The General Counsel currently reports to Wescoe. When the General Counsel in unable to supervise, then Compliance Officer, Roxanne Story Parks, will supervise.

Meyer said this was a sea-change on how the Board is documenting, and that the Board did not have the expertise to supervise Fiduciary Counsel. Sullivan did not see a Fiduciary Counsel as necessary for every meeting. Meyers and Sullivan agreed that this is only a broad vision. Preovolos confirmed that Board members can still contact the Fiduciary Counsel directly. Wescoe reassured that the Fiduciary Counsel would still be obligated by California's Rules of Professional Responsibility to report to the Board directly if there was a problem. Passed 12-0.

PERFORMANCE REVIEWS
Performance Reviews for Administrator (Wescoe), Chief Compliance Officer (Roxanne Story Parks), and Internal Auditor (Robert Wilson) are done annually in July's Closed Session.
In the Business and Governance meeting, Wescoe was emphatic that evaluations be changed to the full Board from the Executive Committee. (Chair: President Hebrank, Steve Meyer, Mark Sullivan and William Sheffler.)
To "…ensure the independence of the Administrator, Chief Compliance Officer and Internal Auditor, the Board", and not the Executive Committee, "…has the sole responsibility for establishment of performance goals and objectives and the annual performance review of these staff positions." The Board passed this Rule 1.44q.
The Board voted to remove performance evaluations from the Executive Committee for these positions in Rule 3.03.

BUSINESS & GOVERNANCE SCHEDULE
Possible change of Business & Governance's schedule, to the week before the Board meeting, to allow staff to revise documents before inserting them into the Board packets.

TECHNICAL TAX ORDINANCE- CITY COUNSEL ON APRIL 1
Roxanne Story Parks said the IRS' Technical Tax Ordinances is planned to go to the Council on April 1. The second reading would be on April 15, and, if necessary, backup is April 22.
(Note: The Council will also be reviewing the Mayor's request for an allocation by Ordinance to pay Mercer for work on the new employee pension plan. Unions and Council will be given a copy of the plan.)

All supporting documents were completed by March 19th .
SDCERS' Tax Attorneys, Ice Miller, thinks that the Council's adoption day doesn't need to include the 30 waiting period for Ordinances.

City Council will decide if a vote on the Technical Tax Ordinance, is required by both active (12,000) and retired Members(5,500-6000), as their benefits are affected.
City's legal advisor is leaning toward voting. Decision based on plurality of those who vote. SDCERS would conclude vote before deadline.
Elaine Reagan, Assistant Counsel at SDCERS, said SDCERS would strongly word the impact on Members' personal finances if the Ordinance does not pass.
Reagan said SDCERS would choose to follow IRS law, over State law, if must deal with conflict.

VOLUNTARY CORRECTION PROGRAM (VCP) COMPLIANCE STATEMENT:
SDCERS and City must complete all corrections before June 9, 2008:

1) Council adoption of Technical Tax Ordinance by April 27.

2) Board adoption of Board Rules (Board completed March 21).
Favorable Determination Letter-
The IRS required retroactive changes to put the plan into compliance. So the Board voted 12-0 to adopt "by Rule", instead of without rule, and the following to be made part of the Municipal Code:
Amount of interest credited annually to members accounts since FY 1989, Member contribution rates for each plan sponsor for each FY since 1989,
Mortality tables used by the Board since 1989,
Amount of interest credited to DROP accounts each FY since 1998.

3) Adoption of Plan Amendments by Port and Airport Authority.

4) Presidential Leave Program- "Proposals for Board action as to each of the affected former union presidents will be on the April agenda."- Parks' report.

5) Cashless Leave Conversion Program- "Member Services is contacting each member to counsel them on their options." - Parks' report.

CITY APPROVES GROUP TRUST
Jay Goldstone has signed the Group Trust for the City. As soon as the Voluntary Compliance Plan and SDCERS plan amendments are approved by the City Council, then SDCERS will file as a Group Trust (City, Port and Airport as separate under one agreement) with the IRS.

Mark Hovey's report: "Finance staff have been working to finalize the accounting procedures associated with a Statement of Plan Net Assets and a Statement of Changes in Plan Net Assets providing separate values for each plan sponsor."

INFORMATION TECHNOLOGY
Information Technology Director, David Bond presented "Information Technology Strategic Plan Overview" dated March 20, 2008.

Bond reported between 15-20 contracts for current projects. The web site will initially be a query screen, and the plan is to add features, as SDCERS goes along. If a disc drive is lost, the system converts to a virtual replicated environment, allowing virtualization and business as usual. SDCERS only needs a mid-level system, as it evolves beyond PensionGold software.
Board Member Kennedy asked to have security moved from #9 on the priority list to #1.

Rebecca Wilson's report noted that the new web site is in " final phase of development and testing…Members' access to account balances, retirement benefit payments, service credit, beneficiary and plan information….multiple security layers including firewalls, password protection, multiple data point verification and encrypted data transfers."

BOARD RULES GOING TO THE WEB:
The goal is to put Board Rules and their new Table of Contents on SDCERS' web site for Members, Board members, and staff to access.
A sample of the future Table of Contents for Board Rules was presented.
Meyer was most enthusiastic.
Systematic revision of the Board Rules is underway.

INVESTMENT
At the Audit Committee, Mark Hovey, Chief Financial Officer, said not to expect an 8% return this year. Chair Armon Kamesar was concerned about stretching for that "extra". He received no answers as finance was not on the agenda. Under the CAFR report, Audit Committee Member Marilyn Brown asked to have a disclosure indicating if SDCERS held any Bears Stern in SDCERS' 2007 Comprehensive Annual Financial Report (CAFR).

No re-balancing of the pension portfolio in February.

Board voted 12-0 to allow a maximum of 40% of total real estate assets to be non-United States real estate. Thomson inquired if other pensions were investing this much? Doug McCalla said SDCERS' percent might be higher and going into foreign real estate will "broaden the opportunity-set".
The Board also approved $20 million Euros for European real estate. McCalla added that this is "currency and asset diversification".

INTERNAL AUDITOR
At the Audit Committee, Internal Auditor Robert Wilson reported that currently SDCERS is integrated with the City's accounting reporting system. SDCERS is preparing an RFP by the end of the month for a proposal for independent software, including security, internal controls, etc.

An audit is planned of Sponsor's Contributions and records.

Wilson has started doing annual risk assessment studies, with quarterly reports, such as examining if the separation of staff duties results in a lack of  checks and balances to identify errors, etc. This is particularly important to avoid errors and fraud in determining and paying benefits. Wilson noted this risk study is a road map to be pro-active and not reactive to problems.
The next Audit Committee meeting is April 16th at 10:00am. (Come early as parking can be a problem by then. Bring a small car as many spaces are compact.)


COMPREHENSIVE ANNUAL FINANCIAL REPORTS
Mark Hovey will be starting the 2008 CAFR in July/August. It may be streamlined in the future to match other systems. In the past there were many disclosures.

2007 CAFR: "Staff has completed reviewing all investment related disclosures and schedules for the FY 2007 CAFR." McCalla's report.

Mark Hovey's report on the 2007 CAFR: "…resolving any final comments on the CAFR and updating legal confirmations and the management representation letter are all that remain to returning SDCERS to being current with its financial reporting."

2006 CAFR: "The FY 2006 CAFR was put on the SDCERS web site February 6, and printed copies of the CAFR have been mailed to the Board, Council members, and plan sponsors. This marks the third CAFR issued in the past 12 months." - Mark Hovey's Report.

FINANCIAL INDEPENDENCE FOR PENSION CHECKS
In FY 2009, SDCERS is planning to start cutting pensions checks for retirees instead of relying on the City.

SDCERS STATEMENT OF POLICY UNDER PROPOSITION 162 AND CITY CHARTER (INDEPENDENCE):
This is not a new document.
At the Business & Governance Committee, Chris Waddell recommended putting all these separate items together in one document as a buffer against elements in the City. This document does not change SDCERS' relationship to the City. Meyer noted that the Port and Airport were concerned about the lack of SDCERS independence from the City.

There was no Actuarial Soundness Policy included in this document.

Under the Human Resources section, Waddell wrote: " SDCERS will continue to work with the City to seek solutions that meet SDCERS' unique needs and, if necessary, will explore other alternatives to ensure that it can recruit and retain the necessary staff to enable it to exercise its fiduciary responsibility over SDCERS assets and to administer the system."

Wescoe's history note: Before MPI, the train got off the track when the City switched from EAN (Entry Age Normal Actuarial Cost Method) to PUC (Projected Unit Credit Funding Method) for the SDCERS actuary to figure the City's annual required contribution.
(Patti's note: SDCERS Board has now switched back to EAN.
See also SDCERS' commissioned INVESTIGATION FOR THE BOARD OF ADMINISTRATION OF THE SAN DIEGO CITY EMPLOYEES' RETIREMENT SYSTYEM by Navigant Consulting in 2006. If you check  page 31 of the first part, they say the City switched to PUC in 1991 and that was the first instance of the City improving benefits for employees and underfunding at the same time.

DONATIONS
Board passed 12-0 to allow general donations to be accepted. Such contributions are non-refundable and not specific to a member.

DISABILITY: WARN EMPLOYEES ABOUT "LIGHT DUTY" AND RULE 15
Do Disability applicants need to be warned that taking a Light Duty temporary position may disqualify them from Disability retirements? Departments, especially the Police and Fire, often give injured employees Light Duty positions to keep money coming in while they recover from surgeries and go through the disability retirement process. If employees are injured after entering DROP, they can forget about disability retirements from SDCERS under the current interpretation that the employee is retired and benefits are already determined .

SDCERS staff repeatedly states SDCERS is not the same as Workers Compensation.

Meanwhile on March 21st, SDCERS Board approved a revision of Rule 15 that refers appeals of the Board's denials to adjudicators.  It is estimated to cost an applicant $15,000-$20,000 in legal, medical presentations and fees, in order to appeal (note: most do not have income due to denial, as well as, no City job). The time period to file objections was extended from 10 days to 15 days , with the ability to do email filings.

Applicant, Police Officer Claudine Elig said she received no copy of Rule 15. SDCERS' Chris Waddell suggested all new applicants receive a copy of Rule 15 when they file.

SDCERS legal division bases denial of Officer Elig's application for Disability Retirement, on SDCERS' belief that a Light Duty assignment was permanent as the assignment had lasted over two years. The Police Department's policy said the job was temporary. SDCERS doesn't believe the Police Department. Elaine Reagan, SDCERS Assistant Counsel believed the Police Department's actual policy is different from their written policy and that the adjudicator will only take information under oath and not by anecdote. Sheila Jacobs, another SDCERS Assistant Counsel added that the Police have been "accommodating".  Board member Lambert said his department only allowed for one year of Light Duty.
Sullivan, also active in the Police Union, as well as, John Thomson from Fire, plead each time this comes up, for the Board to be more reasonable.

Police Officer Claudine Elig had three injuries and has been recovering from several surgeries, some occurring in her Light Duty job. She is now "Permanent and Stationary". Sullivan told the Board that 30 days after "Permanent and Stationary" the applicant will be given a notice to demote from Police Officer or the applicant has the choice to go back to the Doctor and beg for a medical release when the applicant cannot physically defend the public.

Mark Sullivan announced that this issue is now subject of meet and confer and that the Police Chief has made it clear that he doesn't want Police Officers who can't be Police Officers.
Bill Sheffler, Chair of the Disability Committee, noted it is a mystery to him why applicants, who are denied by the Board, don't sue the City for not providing alternative employment to those injured on their jobs. He said this issue must be dealt with by the City and not the Board.

Next Disability Committee, Chaired by Sheffler, is on April 4, 2008.

Next Board meeting is April 18, 2008 at 8:30am.