SDCERS BOARD MEETINGS - September 17-19, 2008
Reported by Patricia Karnes

Patti's Notes
(I attended the Audit Committee, Business & Governance Committee and the full Board meeting for these notes. Notes from the Investment Committee are from materials prepared for the meeting, or the full Board meeting, as I did not attend that meeting. We need a volunteer to attend the Investment meeting.
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.
Official 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 usually repeat on Sundays at 1pm.)

STOCK MARKET ACTIVITY- CIO, Doug McCalla's messages

Note: Doug McCalla will be the speaker at the City of San Diego Retired Employees Association's program on November 18th at Balboa Parks' War Memorial Building, northwest corner of the zoo's parking lot, at 11:00am. Free and open to all City retirees. Web address is www.csdrea.com


Doug McCalla said when the stock market falls 4%, SDCERS experiences only a half of that drop, or 2%.  By comparison, he pointed out that SDCERS would have lost 3% if SDCERS were only invested in more conservative investments.
SDCERS' discipline, patience, and diversification has reduced the total fund volatility. McCalla stressed that diversification is the greatest defense. The goal is to reduce, not avoid risk.

These are notes of McCalla's training for the 3 outside independent Audit Committee members-
It is 5 times harder for SDCERS Investment people to buy when an area of asset allocation has dropped, than to sell when an area of asset allocation has gained value. It requires discipline to use the formula for re-balancing that includes volatility. Buying low and selling high in the 2000-2002 market plunge, kept losses at SDCERS from being as serious as it was for other pension funds. (See press release below for numbers.) "Re-balancing" last happened in January, and again in July, when plan sponsors put cash into SDCERS. Sometimes the wait is three years between sell high and buy low opportunities. While the Board evaluates the risk-award asset allocation ratio for SDCERS each year, McCalla and team monitor spreadsheets each day from State Street Bank, while they contact and watch 30 money managers making decisions. Cash, from sales, stays with money managers for the next investment. SDCERS is not market-timing. If cash is needed, SDCERS goes to Bond Managers. The only signers are SDCERS staff. SDCERS weathers the market by staying with the process.

McCalla's remarks at the Business & Governance Committee-
The performance return report is quarterly and the balance report is monthly.

McCalla's further comments at full Board-
McCalla will be updating the Board monthly on the top stock exposures. The greatest single holding was Qualcomm. No stock was over 0.4% of the fund, or approximately $20 million. All mortgages are top tier, conforming loans (no subprime), and required 20% down.

REPORTS FROM BOARD MEETING MATERIALS
Executive Summary of Staff Reports of Sept. 18, 2008
Sept. 4th Balance- $4.622 billion
Monthly benefit payments and operating expenses were $10 million.

McCalla's FY 2008 Realized Rate of Return, Sept 4, 2008 report- (determines 13th Check and Corbett for Dec. 2008).
Quarter ended 9-30-07 was +2.71%
Quarter ended 12-3-07 was +2.84%
Quarter ended 3-31-08 was +0.24%
Quarter ended 6-30-08 was +0.83%
Total for fiscal year was +6.76%

From Financial Statement Account Variance Analysis for the month ended July 31, 2008 and July 31, 2007-
Fund balance up $232,758,733 or 5.55% since previous year.
Balance July 31, 2008 was $4,427,097.046.
Balance July 31, 2007 was $4,194,338,313.

SDCERS Board's Press Release -
Steve Meyer read the whole release into the record. Below are highlights from Sept. 17th "SDCERS Maintains Its Long-Term Focus Despite Wall Street Woes". Contact is David Wescoe, SDCERS' Administrator/CEO.
"SDCERS has weathered turbulent economic times in the past and will weather these as well. Because any public pension plan such as SDCERS is investing for the long-term, periods of short-term underperformance are offset by years when marketing performance is better, such as fiscal year 2007 when the Fund was up +16.25%. Sound, well-diversified investment strategies have enabled SDCERS to ride out difficult times and to consistently deliver on its obligation to pay benefits. The worse investment strategy is to overreact to short-term issues, which always translates into selling low and buying high. This is a bad policy that SDCERS does not follow."
"SDCERS' investment return for the quarter ended June 30, 2008 was +0.19%. For the fiscal year ended June 30, 2008, the portfolio's preliminary return was -4.64% (non-public real estate lag one quarter for pricing and appraisal data). For the three and five fiscal years ended June 30, 2008, SDCERS annualized return were +7.77% and +10.76%, respectively.  For all of these periods, SDCERS' investment performance has ranked in the top half when compared to other public pension plans. For the ten-year period ended June 30, 2008, which includes the 2000-2002 bear market (the worst such period since the Great Depression), SDCERS' annualized investment return was +7.94%, which ranks in the top 3% of public pension plans. Over this ten-year period, Trust Fund assets have more than doubled from $2.13 billion to $4.69 billion."
"SDCERS' investment report for the quarter ended September 30, 2008 and final fiscal year 2008 performance results will be available in October."

VISIT SDCERS WEB SITE at www.sdcers.org for updated information.

ASSUMED RATE OF RETURN REDUCED:
5 YEAR REVIEW OF ACTUARIAL ASSUMPTIONS IN EXPERIENCE STUDY-
The Board adopted the complete package of assumption changes that Cheiron, SDCERS' actuary, recommended. (There were more adjustments than investment return and inflation than are included here.) The expected investment return (sometimes called the discount rate or assumed rate of return) was reduced to 7.75% from 8%. And the inflation rate was reduced to 4% from 4.25%. Cheiron thought this "balancing" would result in annual costs close to last year and was more conservative for the plan sponsors. Board President Hebrank added that the City is aware of Cheiron's proposed change.
Steve Meyer said he doesn't think that he has ever seen an experience study that didn't recommend 7.75%. Cheiron added that SDCERS' investment consultant has estimated a 7.8% total return.
Mark Hovey, SDCERS' CFO, noted that assumption changes are amortized over 30 years. A Board Member added that amortization of the UAAL is still 20 years. Trustee Bill Sheffler reminded Trustees that employee contribution rates could be affected, along with employer annual contributions.

ASSUMED RATE NO LONGER LINKED TO DROP INTEREST
Active DROP- Due to the IRS requiring specific interest rates, the City Council voted, in 2008, to put the specific interest rate for DROP into SDCERS' Board Rules. ( MOUs are not in the Municipal Plan, and are not considered a SDCERS plan document by the IRS.) Trustees may update interest rates via the Board Rules. Currently Board Rules state the interest on active DROP is 8%. DROP interest rates are reviewed annually by Trustees in November.

Retired DROP- Interest rates are permanently set when active DROP goes to retired DROP, per the IRS.

WHEN RECUSING IS NECESSARY
Elaine Reagan, General Counsel, said that if Trustees fail to recuse and instead vote on a contract in which they have a conflict of interest (such as DROP interest, when the Trustee is active DROP), they are subject to civil and criminal penalties and void the vote of the Board, as well as risk losing their own contract (DROP).

AUDIT COMMITTEE
The Audit Committee's Chair, Armon Kamesar, began the meeting with a quote from Dickens- "It was the best of times and the worse of times".

Audit Investment training by Doug McCalla- See McCalla's comments at the beginning of my notes.

2007-2008 CAFR:
Outside Auditor, MGO will start the 2007-2008 audit for the CAFR on Sept. 22nd.  Internal Auditor, Bob Wilson reported to the Board that MGO is expecting to send an opinion letter the week of Nov. 17th.  The CAFR is on schedule for the first time in five years. The Audit Committee may meet in November, after all, to review the draft CAFR, rather than wait until their regularly scheduled 10:00am Wednesday, December 17th meeting. Watch for a new date/time.

The audit will cover actuarial information, fair value for investment portfolio, retirement benefits, and test mid-November credit quality. (Due to the market conditions, MGO feels it will be challenging to evaluate the market value of SDCERS' assets. SDCERS' change to market value will reduce MGO's work. Formerly SDCERS used book value.) It will also evaluate SDCERS' approach to significant risk of material misstatement due to error or fraud, SDCERS' approach to internal controls, consideration of materiality, and governing body.

Driven by national problems of the late 1990's and early 2000's, and new this year, MGO will be documenting SDCERS' Internal Controls of significant transaction streams: investment, benefit payments and financial reporting. While still short of SEC regulation standards, MGO will look at SDCERS' evaluation of the organization's risks, and the corresponding controls that SDCERS' has put into place. They plan to use a matrix check off. MGO may, or may not test the controls. MGO will report on negative exceptions to any of the required steps. MGO said that SDCERS is already 5 or 6 steps of the curve because it has already established an independent audit committee. MGO will also offer good guidelines to this committee.

MGO will use individual interviews to determine what level of information that SDCERS' management has provided to the Audit Committee. Community questions will also be considered. MGO' testing methods are driven by the most efficient test and/or availability of independent outside 3rd party verifications. Testing is not by a random selection, but aims at achieving a low measure of risk. MGO changes the elements in each audit and uses supplementary tests.

New Audit Chair: Michael Collin was elected Chair for the next two years, replacing Armon Kamesar. Armon Kamesar's name will be on the October SDCERS Board agenda for re-appointment. (Board President Tom Hebrank and Steve Meyer are representatives from the Board.)
Terms determined:
Armon Kamesar- 2 yr term ending Sept. 30, 2008
Michael Collins- 3 yr term ending Sept. 30, 2009
Marilyn Brown- 4 yr term ending Sept. 30, 2010

Kamesar had prepared a list of Audit Committee accomplishments since October 2007, covering governance, financial reporting and committee education. THIS IS A GOOD COMMITTEE IF YOU ARE ATTENDING SDCERS' MEETINGS FOR THE FIRST TIME, as discussions are more open, complete and without obscure professionalism.

CITY, PORT, AIRPORT FINANCIAL STATEMENTS SEPARATED
In his August 2008, Finance and Administration Division Report, Mark Hovey, CFO, explained the new statements, "which identifies asset, income, and expenses by plan sponsor." The new reports use "market values, rather than cost values, to be consistent with our CAFR financial statement format."

DISABILITY- CLOSED SESSIONS FOR SENSITIVE MEDICAL HEARINGS?
SDCERS' Counsel will be drawing up criteria for determining when a disability applicant may request a closed session at the Disability Committee. Trustees do not want "closed" to appear to be "hiding".

"ORDERING BACK TO WORK" IF NO LONGER QUALIFIED FOR DISABILITY
Currently a statue requires SDCERS to first order a member back to work before pensions can be cut due to the member's disability disqualification. The SDCERS Board has no other option to stop payments.
This month, the Board was clearly uncomfortable with the appropriateness of ordering a member with a disqualifying pre-existing condition back to work. The Board requested Elaine Reagan, SDCERS Counsel to craft a resolution to inform the City of the poorly written directions. Proactively, Elaine has already been in contact with the City's Labor Relations person.

BUSINESS & GOVERNANCE COMMITTEE- Mark Sullivan, Chair

Trustee Elections
Mark Sullivan, Chair of the Business and Governance Committee, reported that the Harbor Police vote for the Police Safety representative.
The Board approved changing the notification for General and Retiree representatives to 30 days from 20 days. Comments made by Joe Flynn, and Patricia Karnes for CSDREA President Nancy Acevedo, requesting a longer nomination period.

Former Spouses Excluded From Surviving Spouse Continuances
Board approved by 12-0 to approve staff recommendation. Applies to future retirees. Contact SDCERS for more information.

Some Board Rule and Charter Changes Were Delayed By Board
* Changes that were adopted: Added language for Administrator to set the agenda. Travel Policy now varies from the City. Marketing was already included under Conflict of Interest Policy. Board Communication Policy minor changes. Public Records requests' directions already in law, and will be overseen by SDCERS legal staff to assure compliance with the Code.

* Returned to staff for more research and comparing to other systems:
1) How do other pension systems handle the hiring of outside Counsel/consultants for opinions?
Staff suggested substantive changes included increasing the Administrator/CEO authorization from$10,000 to $50,000, and the "Board President's authorization was deleted, with any requests over $50,000 requiring Board approval".
Board discussion: Do committee chairs, Board Presidents and/or Administrator/CEOs have authority? Sullivan asked what if a Committee wants a legal or fiduciary opinion? Elaine Reagan, General Counsel, recommended always going through staff to avoid unnecessary expense. Does the Administrator have final approval? Jo Anne SawyerKnoll, and President Tom Hebrank argued for emergency authority for situations that are unexpected and asked who is successor to the Administrator/CEO for decision making. Elaine Reagan answered that it depended on which department of SDCERS had that expertise. (If you missed Wescoe's comments in these notes, it was because he was out of town for the meeting and weekend.)
Looking at it from another side, the Board asked, for example: if a Board President, who does not have day to day knowledge, should have authority up to $50,000? They asked if a future Administrator/CEO would have a personal reason to withhold hiring of outside counsel, was on vacation or medically unavailable, and it was difficult to gather the full Board? Reagan argued that if the CEO refused, that there would be bigger problems than just hiring an outside legal opinion, and that Fiduciary counsel was on retainer already.
Hebrank wanted to be sure there were not too many restrictions and asked if the Board President only had authority to run meetings? The suggestion was perhaps to have both the President and Administrator/CEO to sign off. Joe Flynn is interested in following this item when it comes back from staff.
2) Who has authority to settle claims or lawsuits? How much rests with the Board and how much with the Administrator? "No substantive changes other than increasing the Administrator/CEO's settlement authority from$5,000 to $20,000" and re-incorporating guidelines from adoption in October 1998. What do other systems do?
3) How members may appeal staff benefit decisions, at first though the Member Services Director and then to the Administrator/CEO, up to the Business & Governance Committee. "Members will be advised of their appeal rights at every step throughout the appeal process." Board referred this back to staff for more information.

LEGAL- Legal trials can now be followed on SDCERS' web site.

Chief Compliance Officer, Roxanne Story Parks' report-
1) Group Trust: IRS' Determination Letter, is expected soon.

2) Preservation of Benefits: IRS' Private Letter Ruling on is also expected soon for the three plan sponsors' preservation of benefits (for those receiving higher pensions than the IRS allows). The Council will have 60 days to act and may need support of retirees.

3) Roxanne's Draft Policy on SDCERS' Compliance Program will be on the Business and Governance's agenda for October.

INVESTMENT COMMITTEE- Steve Meyer Chair
Cash Overlay: Clifton Group approved for "cash overlay", using the residual cash, which is available between investment transactions, to buy futures to securitize that cash.  In the short run, futures may go down, but expect good results in the long run. Benefits also include keeping more eyes on money managers.

SDCERS' Small Cap Tilt: SDCERS invests in a higher percent of small cap than most pension systems, which has resulted in 3.25% over the normally expected bench market. While small cap may not perform for 5-7 years, the longer return is more than makes up for the wait.

Private Equity (non- publicly traded companies): Cory Buuhoan, SDCERS' Investment Officer, reported that the next step is to hire a Private Equity Generalist. This is a fortuitous time to enter private equity, as turbulent times make for opportunities with the better firms.
McCalla added that SDCERS will start to invest now, and will diversify, by spreading additional private equity buying over many years into the future.

ERROR ELIMINATION WITH TECHNOLOGY
New technology is expected to catch incorrect over/under payments.
(In the meantime, remember to check your data online at SDCERS.)

RECIPROCITY
Non -agenda comment on reciprocity with other agencies: Member was not informed that there was a time limit for requesting reciprocity, and he missed the deadline by 22 days. Fourteen of those days were lost due to the system processing. Cynthia Queen, Membership Services Director, told the Board that she is meeting with the member and researching with legal, etc. in hopes of finding a solution.

SDCERS 1st ANNUAL MEETING
Attendance was approximately 150 at Balboa Park Club on September 9th.
Cynthia Queen, Member Service Director posted the event on SDCERS' web site six weeks in advance. (CSDREA estimates 1/3 of its members have computers.)
(Patti's Notes from the event are posted separately from this.)

MEMBERSHIP SERVCES
Cynthia Queen is busy filling five Public Information Clerk positions to answer your more detailed questions, as well as, help you with the Member Portal on the web. She mentioned two other vacancies in her report as well. No wonder she looks so busy.

PRE-RETIREMENT SEMINARS- Cynthia Queen, Member Services Director
The first, in a series of two hour, in-house pre-retirement seminars, are being planned:
Airport Authority on Sept. 30 and October 15.
City of San Diego on Nov. 12 and Nov. 18
Watch for additional dates.

Final note: If you believe my notes are not correct, verify your information with SDCERS. If you wish to contact me, please do so through the vice president of programs on our CSDREA web site at www.sdrea.com