SDCERS BOARD MEETINGS - January 22-23, 2009
Submitted by Patricia Karnes

PATTI'S NOTES

(I attended the Business & Governance Committee, the morning of the full Board meeting, and watched the conclusion on Channel 24 for these notes. 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.)

NOTABLE RETIREMENTS: Toni Atkins and Scott Peters.

NEW TRUSTEE IN FEBRUARY: The Mayor's new ex-officio representative Trustee will be coming from Risk Management, replacing JoAnne SawyerKnolls. Also in February, SDCERS expects an outside legal opinion on whether an ex-officio must recuse on votes having to do with SDCERS' litigation/settlements with the City.

TRUSTEE ELECTION: Fire representative  Trustee John Thomson announced at the Business and Governance Committee that he will not run for re-election next month. (Thomson introduced Alan Arrollado, as the next-to-be-elected Fire representative.)
Wescoe noted that the staff has the highest respect for Thomson, and he has asked excellent questions and has high integrity. Trustee Bill Sheffler expressed his appreciation that Thomson had requested an opinion regarding the conflict of interest of ex-officio's voting on litigation/settlements with the City.

MORE SECURITY FOR SDCERS COMPUTER NETWORK: David Bond, Chief Information Officer, reported to the Business and Governance Committee that network port security access has been improved even further. Outside computers cannot plug into the system. "Each workstation is now 'locked' into a specific data jack in the wall." SDCERS will have a firewall inside the City's firewall and password security, protecting "…both organizations from the vulnerabilities of the other." There will be three core infrastructure layers of network security between SDCERS, the City and the Internet…."

EXPENSIVE REQUEST: San Diego Union Tribune requested every electronic pension record. Names were redacted. "All non-public, private and/or confidential member information was withheld or redacted pursuant to applicable laws." (Page 2 of General Counsel Elaine Reagan's monthly legal report.) So far the U-T has refused to cover the significant programming charges. SDCERS has found it necessary to hire Eugene Hill, an attorney.

SDCERS Updating the City Each Month: CFO, Mark Hovey  wrote in his monthly report to the Board: "Updated market values of assets are being provided to the City each month to ensure the City's disclosures are up-to-date with the latest stock market fluctuations and how SDCERS' changing asset value would influence future City Annual Required Contributions to SDCERS."

CORRECTION of SDCERS' NUMBERS from July 2007 through November 2008, June 30, 2008 CAFR, and  June 30,2008 Actuarial Valuation: CFO, Mark Hovey, reported a slip occurred switching Cheiron's numbers to State Street Bank (to split SDCERS into a Group Trust for the City, Port and Airport). The Business and Governance Committee was pleased the Port's actuary was alert. Repercussions will be small.

SDCERS Board's approval of the June 30, 2008 Comprehensive Annual Financial Report (CAFR) will be delayed to allow SDCERS outside auditors, Macias Gini & O'Connell (MGO) to review changes.
Cheiron, SDCERS's actuary, will be re-working the valuation and ARC.

New numbers will show that the City's share of SDCERS is approximately $12 million less than the November 30, 2008 financial statements below, which is relatively insignificant in regard to the total assets. Add about $9.5 million to the Port's assets, and $2.5 million to the Airport's assets.

EXECUTIVE SUMMARY OF STAFF REPORTS January 22, 2009
SDCERS Unaudited Net invested assets as of Dec. 31, 2008 was $3.70 billion.

SDCERS Y-T-D Status of FY 2009 (July to June '09) Gains/Losses - Lisa Crisafi, CIO
Realized gains/losses (sold) were minus -$139.0 million.

Unrealized (not sold) gains/losses  for this Fiscal Year-July to June 2009:
July unrealized gains were plus $203.9 million
Aug unrealized gains receded to plus $17.2 million
Sept unrealized gains fell to minus -$220.6 million.
Oct unrealized gains dropped further to minus -$661.7 million.
Nov unrealized gains continued down to minus -$771.14 million.

***Investment returns are too low to show the threshold for retirees' 13th check and Corbett in November 2009.

Later in the January meeting, Wescoe was asked what percent that SDCERS has lost. Wescoe responded 20% to 25%.

Note:  Returns from security lending are north of zero every month.

AUDITED FINANCIAL STATEMENTS- Sara Jimenez's Report of Jan. 9, 2009, audited for Nov. 30, 2008. (SEE NOTE ON UPDATING OF THESE NUMBERS ABOVE.) (Compares 2007 and 2008)

Total Plan assets Nov 2007 were $6,190,801,780 (City, Port and Airport)
Total Plan assets Nov 2008 were $4,425,723,655 (City, Port and Airport)

NET Plan assets Nov 2007 were $4,733,501,414
NET Plan assets Nov 2008 were $3,151,415,258

Total City assets Nov 2008 were $2,953,262.128 (subtract approx. $12 million from this number.)

SDCERS BUDGET- Percent of annual budget used in first 6 months.
Holding the line by not filling positions.
Investment management is 46.52%, down due to lower investment returns.
General Operations is 42.05%.
Data Processing is 34.30% (compare to City's overrun for ERP).
Salaries and Personnel is 41.21%.

Money left at the end of the year remains in the trust and doesn't rollover.

INTEREST CREDITING FOR ACTIVE DROP---DISCUSSION
Retirees with annuities are not affected.
Retirees, under 70 ½, with DROP lump sums may be affected.

Why should every retiree be interested?

The Board must weigh SDCERS' ability to pay future pension checks against the impact, on members, of reducing interest on DROP accounts that are not annuities.  (Trustees Sullivan, Thomson and Meyer were required to leave the room because of possible conflict of interest.)

Wescoe emphasized that the HIGHER THE DROP INTEREST, THE GREATER THE RISK ASSUMED BY SDCERS, AND INCREASE IN COSTS TO SDCERS. Wescoe pointed out to the Board that a strong consideration is the soundness of the pension fund. Current returns at SDCERS may not average enough over 5 years to cover the current active DROP interest rate of 7.75% enacted in July 2008 under different economic conditions. 

As an example of current DROP costs to SDCERS:
Reducing the active DROP rate to 4% would save SDCERS $404 million, according to Gene, (see his chart handed out at the Board meeting). He expected a spike in retirements if the rate is reduced.

Cynthia Queen, Membership Services Director, reported that staff has already seen a 40% increase in DROP members retiring. She estimated it would take the  two highly-trained counselors four months to process retiring DROP if the rates were reduced. She added that there are currently 1,000 active DROP members with 330 reaching the 5 year deadline in 2009 and 2010.

SDCERS' actuary, Gene Kalwarski of Cheiron noted 8,700 members are eligible to elect DROP in the future. DROP ceased as a benefit for new employees in 2005, noted general representative Trustee Franklin Lamberth as he debated the issue in his own mind. Wescoe noted that about ½ of those retiring take a lump sum rather than an annuity. Looking at the dilemma from a moral view, Lamberth saw relief for the system, if retiring members took their lump sums and went elsewhere.

Control of DROP is by direction of the City of San Diego Municipal Code (SDMC), not SDCERS, the Board has been given the responsibility to set the rates and cannot limit DROP. An annuity is provided for in the SDMC. Elaine Reagan, SDCERS General Counsel, said DROP is a vested benefit and it cannot be eliminated, unless unions agree to do so.

Dave Hall, retiree representative Trustee, asked Gene what is in the overall best interest and long-term health of the plan? Gene responded that DROP is not cost neutral and reducing interest will make SDCERS more likely to pay all members. Mayor outside appointee Trustee Raymond Ellis thought the interest rate would almost have to go down to 2% to pencil out, after he commented on SDCERS needing to chase investments to pay for DROP interest.

Reducing the interest rate would not result in an immediate reduction in the annual required payment by the City to SDCERS. After several years, an experience study done by SDCERS' actuary may show that with fewer employees entering DROP, the City's ARC may be $24 million less. Cost neutral was regarded as an ambiguous concept, as some money is saved at the City's end with DROP. However, employees are likely to retire later without DROP and thereby save SDCERS money.

Many attended the presentation by outside fiduciary counsel, Ashley Dunning of Manatt, Phelps & Phillips, and SDCERS' actuary, Gene Kalwarski of Cheiron, including Ron Saathoff, parent of SDCERS' DROP.

Ashley advised the importance of using "rationale". She also noted MOU agreements expire in June. She said it was possible to set future post-retirement-annuity-interest-rates, separately from active DROP interest rates. Both rates could be less than 5%.

Other Considerations:
Jay Goldstone for Mayor Jerry Sanders- "I believe it is the Board's responsibility (if not legally at least morally) to ensure that the financial strength of the Plan is maintained in order to minimize the volatility and level of ARC payments."

Possible resolutions:

1) Several on the SDCERS Board asked questions about tying the future rate to a US Treasury, Long-Term Bond, 30 year Treasury Security,  PBGC Deferred Annunity Rate, etc.. Gene will prepare a presentation on the various historical rates for possible choices in February.

2) Gene recommended a reduction to 3% to 5%, which he felt was still a gain to an active DROP member. Some Board members mentioned lower rates.

3) Problems, of implementation of a new rate sooner than July 1, were presented. Ashley suggested noticing interest changes in advance as members cannot withdraw from DROP.

4) A vote by the Board is expected in February. Followed by a Board Rule change in March, after Reagan sees what the Board decides.


Pricing of FUTURE PURCHASE OF SERVICE (PSC):
Gene recommended basing the price on the highest salary even if the employee is making less now, because the cost to SDCERS, and the value of the pension is based on the highest salary.

Mayor outside appointee Trustee William Sheffler noted that not increasing the price to cover the higher pension, would be like Lenin's comment on taking from each according to his ability and giving to each according to his need.
Ashley recommended that the Board implement the price increase  immediately as the SDMC says to make PSC cost neutral. The Board passed the increase 8-1 with Thomson voting no.

SDCERS TO GO TO CITY ATTORNEY & COUNCIL PRESIDENT WITH LIST OF BURIED ITEMS:
An Ordinance is needed to put the Pre-1981 Plan Time Re-purchased after Refund MOU into the SDCERS plan document.

This is significant because it will be the first Ordinance to go through the new City Attorney to the new City Council, and open the plan for discussion.

Wescoe is discussing this issue with the new City Attorney and Council President Hueso, covering three points: it was done about 12-15 years ago, it was done before the IRS' Voluntary Correction Program, it is only in a MOU.
Thomson asked why SDCERS was being more aggressive than other MOU issues that did not make it out of the last City Attorney's Office and/or the City Council? Wescoe noted that this correction went as far as the preamble to the Ordinance.
Mayor outside appointee Trustee Susan Gonick then asked Wescoe to prepare a complete list of buried requests and take that list to the City Attorney and Council President, as well.

Details of this particular item are under Tab 30 Agenda Item VII.A.9- It would correct an error in plan document and carries out the original legislative intent. Board voted to "…authorize the Board President to request that the City enact an ordinance amending the Municipal Code 24.1102 to delete the language prohibiting the purchase and add language allowing General Members…." to re-purchase time. Otherwise SDCERS must rescind all contracts since 1994.

INVESTMENT COMMITTEE-
Chair, Steve Meyer reported their meeting was a short 20 minutes. There were no action items.

Corey Buuhoan, SDCERS Investment Officer, reported that the percent of real estate to the entire fund is larger because the fund has shrunk.

As Townsend has been slow to invest, the returns have been hurt. Townsend has been working with staff to determine a more realistic target benchmark than SDCERS established 3 years ago. In response to Susan Gonick and Dave Hall, Wescoe explained that the high benchmark was originally due to an aggressive strategy and SDCERS is now changing to less risk.

Corey said SDCERS leverage is 32.6%, well below SDCERS  maximum guideline of 50% on real estate purchases.

Susan Gonick also asked about exposure to Madoff. Headgefund indexes handled by Credit Swiss had insignificant exposure. Credit Swiss is not listed in SDCERS top 25 Equity positions. Top company on the list is 0.617% of fund portfolio.

LEGAL REPORT- Elaine Reagan's Jan. 5th update.
Page 2 of section III. "SDCERS was served with the Italiano/MEA vs SDCERS lawsuit on December 22, 2008. Plaintiffs are represented by Ann Smith.  Ms. Smith has stipulated to an extension of time to February 5, 2009 to file a response to that complaint."
Closed Session agenda, item # A.11:
San Diego MEA vs SDCERS, Case No. 37-2008-00096145.

City of San Diego vs SDCERS, Superior Court Case No. 37-2007-00081912-CU-WM-CTL. RE: SDCERS Board's vote of 11-16-07 regarding treatment of PSC costs between 8-15 and 10-31-03 for those still employed by the City as of 11-20-07.  Awaiting entry of judgement, then 60 days to appeal.

MEMBER SERVICES- Cynthia Queen, Director's Report of January 8, 2009
Member Services staff worked full days on Christmas and New Year's Eve to ensure Members wanting to retire by the end of the year would be able to do so. In December, there were 195 office counseling sessions and 670 phone counseling sessions.

WHAT TO DO NOW
Final Note from Patti:
1) Know the legal agreements backing your pension and healthcare benefits, by visiting CSDREA's web site for CSDREA's background papers on issues.
2) Teach new retirees to remind current City management and unions of our benefit history and vesting, so vested benefits are not forgotten and carelessly negotiated into oblivion.
3) Network and recruit retirees to be informed, there is strength in numbers and institutional memory.
4) Lead others and run for a CSDREA office.
5) Look for updates on CSDREA's web site. Join if you are not already a member for the most complete information.
6) Check for David Wescoe's updates on the SDCERS web site.
7) Watch SDCERS and City Council meetings on City Channel 24.
8) You are a stakeholder: call, write letters, comment at meetings, bring solutions to Council.
9) Encourage SDCERS as it strives to be better funded and the best public pension system. Unions need not be the only lobbyists.
Be active and have fun with this! Parade and party