SDCERS BOARD MEETINGS - November 20-21, 2008 (I attended the Business & Governance Committee, Investment Committee and the full Board meeting for these notes. There was no Audit Committee meeting. Notes are 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. 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.) Live streaming will be available when Mimosa is installed at SDCERS according to Information Technology Director, David Bond. It also will retain all email indefinitely for on-going litigation. 13th CHECK AND CORBETT SETTLEMENT SDCERS Board approved 13th check and Corbett benefit to eligible retirees. Background: The City Council updated requirements to pay the 13th check and Corbett settlement in October 2008, removing "Surplus Earnings" from the Muni Code, but leaving the calculation unchanged. Staff report: "SDCERS supported the elimination of the use of investment earnings to pay these benefits, and since FY 2006 valuation Cheiron has reflected the associated contingent liabilities in the City's valuation liabilities. As a result, beginning in FY 2008 the actuarial cost of the benefits has been paid as part of the City's annual required contribution." Staff report: "The 13th check is paid in those years where the total amount of investment earnings less interest credited to member and employer accounts and less SDCERS' budgeted expenses and operating costs exceeds $100,000." "In years where the 13th check is not paid, the Corbett benefit is not paid but is carried forward and will be paid the next year the 13th check is paid." Dave Hall pointed out the numbers are from the previous year's earnings and appear in the SDCERS' June 30, 2008 Valuation. Staff report continues: "Investment earnings received totaled $299,104,947. Interest credits to employer and member accounts and SDCERS' budgeted and operating costs totaled $148,219,605. This leaves a balance under the Municipal Code formula of $150,885,342 which is sufficient to trigger the payment of the 13th check and Corbett benefit payments of approximately $4,813,000 and $5,446,000, respectively, as well as the crediting of interest to the Supplemental COLA reserve in the amount of $1,052,782." DOUG McCALLA RETIRING Wescoe is planning an open house at SDCERS, in honor of Doug, for retirees to attend. Send Doug a retirement card.. _________ After 40 years of being with the City, starting at $1.55 hour in Parks and Recreation Department, Doug McCalla's last day on active DROP will be Dec. 31st. His time with SDCERS covered seven Mayors and close to 100 Trustees. He read his good-bye letter on November 19th at the end of the Investment Committee meeting and at the full Board on November 20th. Doug joined SDCERS as the sole investment professional. He leaves behind four team members, who he has trained, with Liza Crisafi succeeding him. (Wescoe said Liza had a magnificent career before she came to SDCERS.) Doug said they all have better qualifications than Doug had when he came to SDCERS 17 years ago. Doug said he was motivated for years to take care of "…this bucket of money, as my money," and now his team will be doing that for him. He leaves with tremendous satisfaction, thanking those who mentored him, honored to have had the opportunity, and cherishing his experiences. He will remain available to SDCERS. David Wescoe joked that MPI and MPII may have never happened without Doug's expertise at attaining surplus earnings after 1987. Steve Meyer said Doug had given outstanding fiduciary service to SDCERS. Callan Associates' Janet Becker-World told me Doug was well known in financial circles. Steve Meyer added that Doug's investment ability saved taxpayers as 75% of every dollar, paid out in pensions, came from Doug's investment returns. (I gave Doug our City retiree association's recruiting application.) EXECUTIVE SUMMARY OF STAFF REPORTS Status Reports: * $13.6 million was needed for October monthly benefit payments and operating expenses. * Net invested assets as reported by the custodial bank were $3.782 billion (unaudited) as of October 31st. Asset Allocation * October 9, declines in domestic and international equity markets triggered a portfolio re-balancing of core bond, market neutral and international bond allocations exceeding or reaching the upper bounds of their risk control bands, comprising 4.7% of assets. Cash of $177.0 million was raised from that sale of fixed income allocations. $163.2 million of the $177 million was added to equity allocations. $7.059 million of the $177 million went to real estate capital calls. *SDCERS re-balanced again the week of November 17-21st and will use the cash to pay the 13th check, Corbett and the next three months of benefit payments. First Quarter Returns- FY 2008-2009 (July -August-September) Total realized gains (sold) were +0.19%, or $9 million Unrealized losses (not sold yet) were -$ 220.6 million At the full Board meeting, Doug reported that at quarter end, September 30, the fund's returns were down -10.1%, including real estate. Callan Associates reported SDCERS was at the 66th percentile of public funds for the last year and 86 percentile for the first quarter. Over ten years, the fund has a 7.7% return, placing SDCERS at the 6th percentile of public funds. Doug noted that long term results have been consistently above average. (Watch the recording of the full Board, Doug gives breakdowns of how specific types of investments did.) INVESTMENTS and FINANCIAL REPORTS Next CAFR, Comprehensive Annual Financial Plan, prepared by MGO, is scheduled for release by December 31. It will be the first CAFR in years that is on time, said Mark Hovey, CFO. The new June 30, 2008 Valuation will be presented by Gene from Cheiron, SDCERS' actuary, at the next Board meeting on December 19, 2008 at 8:30am. It will include SDCERS' funded ratio as of June 30, 2008. Non-Agenda comment at the Nov. 2oth Investment Committee: Aguirre took a position more conservative than SDCERS' traditional expectations on the market. He acknowledged that while it was not always possible to work together, he was asking for the City, SDCERS and the City Attorney's Office to meet informally and off the record on what to do about the financial crisis. He asked where does SDCERS' investment policy go from here? "WHERE IS SDCERS INVESTMENT POLICY GOING?" Two Views presented, (followed by Doug's plans below) All though these Investment Committee presentations, the theme repeated: "my charts and numbers are two weeks old and they are out of date." Investment Chair Steve Meyer reported to the full Board that the fundamentals are gone in the market. 1) State of the Credit Market: McCalla did introductions, noting Bond managers are more pessimistic than Equity managers are. Wescoe said there were airsickness bags under our seats. Bond manager, Olaf Rogge of Rogge Global Partners (Global Fixed Income Management) stopped in San Diego, on his way back from Japan to London, where he has asked his family to learn to cut back. He agreed with Aguirre's view of the economy. Noting that there is unprecedented volatility in the financial markets, he pointed out that we are at a crossroad and can no longer rely on "reversal of the mean." (This is no ordinary economic hill and valley.) We are the Old World economy, he added later. Rogge said we are now entering an economic crisis that we have never seen. He said it looks worse than 1929. Rogge would sell equities and accumulate cash. Don't buy equity now (panic market), they are too expensive, unless dividends are 4-6%. Avoid corporate bonds, unless they are winners. If you don't have to sell commercial real estate, keep it. If there is growth in the next five years, it will be emerging markets. Not now, but in the future, using non-dollars, Rogge recommends the emerging markets because their high 55% savings rate (due to no pension plan and no insurance) is greater than the US saving rate of 0%. He is expects the interest rate to go lower and is concerned that 20 to 30 year bonds will be impacted by inflation. He sees the housing crisis as superceded by the economic crisis. Household debt, as a proportion of disposable income, is 155% in the United Kingdom, 145% in the United States, 126% in Spain, 104% in Germany, 87% in Euroland, and 69% in France. Households cannot reduce debt without ceasing to spend. Board Trustee Bill Sheffler pointed out that will put pressure on industry. In response to another Sheffler question, Rogge said we must de-leverage and deflate. We have lived far too much in debt. The downsizing will take a long, long time. Rogge illustrated that there is no new major development, the IPOD is too small to help anyone financially, other than Apple. The less a government is in debt the more it can help the economy. The US government is 85% in debt, Japan over 160%, and Italy is almost 120%. Rogge's question: How can Japan live under these same conditions when this has been their environment? 2) Callan's Investment Performance Report for quarter ended 9/30/08 Janet Becker-Wold, from Callan Associates (recommends money managers for SDCERS), expected the GDP to continue to go downward. Consumption is down as people pay off their homes and debt. There is fear and lack of confidence in capital markets. Everything is down about 40%. The market has gone through a tremendous rotation and there is a problem evaluating money managers in this environment. Banks are reluctant to even lend to each other and it is only better in short duration securities. Corporate high yield would have been a disaster, at minus -8.89% return. Janet recommended the best diversification that SDCERS can do, and the total fund had low volatility. New Trustee, Mark E. Oemcke was not sure that market neutral was doing what it was supposed to do. Doug said Market Neutral had reversed the role it played and SDCERS was assigning it to its own category. Doug: "Where is SDCERS' Investment Policy Going?" After the presentations, President Hebrank asked McCalla what he thought of Rogge's recommendations to sell all equities? McCalla recommended not taking one individual perspective, rather look to many inputs before changing direction of this supertanker. He suggested asking portfolio managers to a forum and finding out their ideas and not to go to extremes. Janet/Callan distinguished short-term quick changes from long-term investments, and said the only free lunch is the equity market. Did I hear right? Doug said the Investment division will be doing the annual allocation study earlier and also will be looking into hiring an emerging market manager. He added that panic is not the time to act. SDCERS' Investment team is also working with Callan for a market neutral manager. Doug will report back to the Board in December. The theme is diversify and Callan will do the search for new specialized money managers (Callan's business). New Trustee, Ray G. Ellis asked Janet what was the feedback from money managers? Janet responded that some bond managers have under-performed by 15%. They have beefed up risk management. Others are looking for what they missed. Doug noted that the money managers are not going into cash and not timing of the market, per SDCERS' instructions. Trustee Mark Oemcke advised to stay vigilant, Real Estate cash flow restrictions may impact the ability of real estate businesses to remain in business. ACTIVE MEMBERS' DROP INTEREST (This does not apply to those already retired with DROP annuities in SDCERS.) Active DROP accounts run a maximum of five years. Wescoe noted that DROP is a City program and not a SDCERS program. SDCERS only sets the interest crediting rate. Dave Hall noted for the public that not all retirees receive DROP. 1) The Board approved reducing the active member rate from the old assumed rate of 8% to SDCERS' new assumed rate of return of 7.75% effective Jan. 1, 2009 and remain in effect until further review during the first quarter of 2009. Wescoe will deal with any surges in retirements. The Board will continue to study the issue in January. City and stakeholders will be participating in discussions. The Board may vote on an even lower rate in February. Trustee Wayne Kennedy wants more information on DROP rates in other pension systems. Reasoning: Trustees Susan Gonick and Bill Sheffler agreed that national interest rates have gone down with the economy. As Trustees, they see the artificially high rate as a fiduciary dis-service to the fund balance as it cost SDCERS millions of dollars in one year. 2) SDCERS' actuary, Cheiron will be here in January to report to the full Board the rationale for various interest crediting rates in regard to SDCERS' balance, including the affect of those already retired with 8% DROP annuities. 3) Comments by Trustees and stakeholders: Trustee Franklin Lamberth was concerned the rate would go so low that the average member will laugh. Wescoe noted the lowered interest might trigger some to leave DROP. Bill Farrar protested that the Board vote was reduced by 23%, by requiring some Trustees whom were active DROP members to recuse on this issue. He asked the Board to wait until the court resolves the 1090 conflict of interest issue. (Trustees Mark Sullivan, Steve Meyer and Thomson left the room, Thomson saying He didn't believe in this interpretation but he didn't want to be indicted.) Ron Saathoff argued that it was important to be consistent when he served on SDCERS Board for 20 years: The current 8% rate had never been changed and all changes should happen at the fiscal year beginning in July. KROLL RECOMMENDATION ON ACTUARY- UPDATE Mark Hovey reported SDCERS is reviewing Kroll's last uncompleted recommendation for a SDCERS policy to hire a new actuary every 10 years and do RFPs for actuaries every 5 years. SDCERS GROWS MORE INDEPENDENT Mark Hovey, CFO, said SDCERS is preparing to issue our pension checks directly and independently, after March 1st. He reported the City would continue to issue SDCERS checks until March 1st. SDCERS is targeted to go live on Jan 1st with the first part of a new ledger and financial system. MODIFICATIONS TO THE WATCH LIST If the problem is small and corrected, managers will not stay on the list for a year to save everyone's time. Liza Crisafi said monitoring criteria was also clarified. MANAGERS AND CONSULTANTS PROVIDE ANNUAL CERTIFICATION OF COMPLIANCE WITH SDCER'S CONFLICT OF INTEREST POLICY- Approved as part of the Investment Policy. POLICY ON FRAUD, CRIMINAL CONDUCT AND INTERNAL INVESIGATIONS- Roxanne Story Parks, Chief Operating Officer This policy will "…ensure that SDCERS has sufficient internal controls in place to detect and prevent misappropriation of trust assets." Franklin thanked Roxanne for the draft policy on fraud and the Internal Audit Plan. A work group of SDCERS' General Counsel, Chief Compliance Officer and Internal Auditor are meeting weekly to prepare the draft for the Board review and comment at their December meeting. Bob Wilson, Internal Auditor, is identifying vulnerable areas. LEGAL REPORT - Elaine Reagan, General Counsel Look for updates from SDCERS on their web site. Elaine said a lawsuit regarding MEA's Judith Italiano's dis-qualified retirement benefits will be discussed in Closed Session in December. Apparently the City received a lawsuit from Italiano. HEARING ON INTEREST DUE ON UNDERPAYMENT Under a new policy, Business and Governance held a hearing on waiving interest on an underpayment due to SDCERS' error. The committee discussed waiving charging interest to the member and instead billing the City because it was an error by SDCERS. Wescoe will contact the City Controller and explain the situation. Elaine noted that once the Board waives, the Board couldn't go back to the member to collect, if the City fails to pay. The IRS does not allow not making the fund whole. APPEAL OF STAFF DECISIONS REGARDING BENEFITS POLICY This gives members, disagreeing with staff decisions, an appeal procedure "…regarding the amount or effective date of the of the member's benefit, or any other administrative decision affecting benefit payments…." Does not apply to disability retirement applications. There are time limits to appeal. CLAIMS OR LAWSUIT POLICY Six systems do not provide settlement authority to Administrators/CEOs or the Board President/Chair. Elaine said it was valuable for clarity that the Board has the only authority to settle. This policy also gives procedures for handling of claims and lawsuits against the Board. MILITARY MEMBERS KILLED IN ACTION Roxanne Story Parks, Chief Compliance Officer, reported that the new federal Heart Act gives benefits to dependents of SDCERS' members killed in action. Contact SDCERS. Plan sponsors have several years to put this into the Muni Code. SDCERS must only do what is required in the Act in the meantime. Steve Meyer asked a draft be prepared for the City Counsel's approval. PRESERVATION OF BENEFITS IRS approval, of the Preservation of Benefits plan, means those pension benefits, over IRS limits and funded directly by the City, are only taxed when the member receives them. There is separate counseling for this group. Hovey counts 47 members in 2008 and 60 members in 2009. SURVIVING SPOUSE This puts the Board's previous vote into a rule- Former spouses of members who retired, or entered DROP after September 18, 2008 are no longer eligible for continuances. This does not affect former spouses of members who retired or entered DROP previous to this date. |