SDCERS BOARD MEETINGS
February 19-20, 2009

PATTI'S NOTES

(I attended the Business & Governance Committee on February 19th, and the Board meeting on February 20th. 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. Motions and votes are in SDCERS monthly summaries of Board meetings.
WEB- Board meetings are archived and are available for viewing on line at any time (after the meeting) via the SDCERS web site which allows much more flexibility as to when retirees may watch the proceedings.
TELEVISION- If you live in the City limits, Board meetings are on Channel 24 around 5 or 6pm, usually the third Friday of the month, and usually repeat on Sundays at 1pm. February's tape was damaged and shown during the Academy Awards.)

SDCERS' June 20, 2008 revised valuation goes to the City Council on February 23, Monday after 2:00pm., on City Channel 24 or City Web site. SDCERS actuary, Gene Kalwarski of Cheiron, will present the annual evaluation.
City's July 2010 Annual Required Contribution was revised upward by $200,000.
Printed copies will be available most likely in March. Also available on SDCERS web site.

REVISED FUNDED RATIO FROM JUNE 30, 2008 VALUATION is
78.1% for the City and 92% for the Port. SDCERS Audit Committee has reviewed the revision. President Tom Hebrank applauded transparency and handling of the audit correction. He was more than pleased with staff.

(Current funded ratio for the last few months has been estimated at 68%.)

REPLACEMENT BOARD MEMBER: MAYOR'S DESIGNEE to the SDCERS Board and currently also Director of the Risk Management Department, Gregory J. Bych, has worked for the City for 19 years.
Trustee John Thomson was pleased to hear the legal opinion on conflict of interest status for various votes of the Mayor's designee will be available the last week of February.

CHANGES TO BOARD MEMBER ELECTIONS
The seat for Fire Representative (John Thomson's), and two General Representative seats are up for election. Seven people are running for Steve Meyer's and Franklin Lamberth's General positions.
As a result of Proposition H, which did not stagger the terms of the two General Representatives, General members will have two votes each to elect the two representatives.
Board voted to recognize PLURALITY top votes and eliminate run-off elections that would be needed for majority votes. THIS WILL APPLY TO ALL OTHER ELECTIONS, INCLUDING FUTURE RETIREE REPRESENTATIVE ELECTIONS.
Staff recommended plurality, over majority votes, to avoid additional election expenses.

PENSION PAYROLL checks and accounts payable checks will be coming from Wells Fargo in late March, Mark Hovey, Chief Financial Officer reported. This is a change from the City processing checks.

TOP SECURITY ON SDCERS WEB SITE ACHIEVED. David Bond, Chief Information Officer, reported improvements were made and the minus was removed from the A rating. "Our top scoring grade means SDCERS' members can rest assured their data is well protected and safe from would-be hackers."

MEMBERSHIP SERVICES
Fire Representative Trustee John Thomson asked for a report on quality control. Cynthia Queen responded that counselors do not give advice to members. Quality control is achieved by continual training of counselor as to Board Rule changes, and use of a checklist as information to members can be overwhelming.
If members have concerns about counseling, or more depth is required, Cynthia will meet together with the member and the counselor to get back on track. If a mis-match occurs then she will find another counselor.
Wescoe said members need to contact him if information is not clear.

Police Representative Trustee Mark Sullivan noted that he was not rushed in his counseling, he had one week to ask further questions before his decisions were final, and he had to initial each paragraph.
(Retirement counseling is expected to be heavy up to July 1, 2009.)

LAWSUITS AND LEGAL REPORT- Elaine Reagan
Of the eleven lawsuits listed, one of the most recent is MEA Vs SDCERS. Reagan notes SDCERS' April 2, 2009 Demurrer to causes of action for infliction of emotional distress and breach of fiduciary regarding IRS changes to Judith Italiano's pension "to enforce right to pension on now-discontinued 'Presidential Leave' retirement contribution program."
Roxanne Story Parks, Chief Compliance Officer has had questions from other pension systems on their Union Presidential Benefits in light of what is happening in San Diego as a result of SDCERS going through the IRS' Voluntary Compliance Program.
See:
San Diego Municipal Employees Association: Judith Italiano v. City of San Diego; SDCERS SD Superior Court Case No.: 37-2008-00096145-CU-BC-CTL Judge: Vargas SDCERS' Counsel: SCMV

Lawsuits of interest to SDCERS
Still awaiting news on People v. Lexin ( 1090 conflict of interest) and
USA v. Saathoff (Conspiracy, mail and wire fraud, aiding and abetting).

Statewide Legislation
SB 1123 "This bill went into effect on January 1, 2009. It requires that the future annual costs of any proposed pension and OPED benefit change be made public at a local government meeting and clarifies the meaning of annual cost to mean both the extra cash necessary to pay for the benefit as well as new liabilities….prohibits the placement of any new benefit on the consent calendar….CEO must acknowledge in writing that he or she understands the actuary's estimate of the cost." Page 3 of Reagan's report.

Pension Initiative "Paul McCauley, a CPA in Santa Monica, has filed an initiative with the Attorney General's Office to amend the State Constitution to allow state and local government to renegotiate vested pension benefits. The California Constitution mirrors the Federal Constitution by ensuring that no law may be enacted impairing obligations under existing contracts. This initiative would create an exception to this contract rule by exempting public pension contracts, including the ability to reduce or take away vested benefits for existing and prospective retirees. ...the initiative is unclear whether it would apply to just the pension benefit component or the entire MOU.  If passed, this initiative would likely result in litigation on the grounds that it cannot preempt federal law…and…cannot amend the Constitution to take away a fundamental right." Page 3 of Reagan's report.

Union Tribune will meet with SDCERS the week of February 23-27 to discuss software costs of producing their request for information.

AD HOC COMMITTEE TO NOMINATE BOARD PRESIDENT for election in March was approved by the Board. President will appoint those not interested in running for the office.

REALIZED RATE OF RETURN (sold) for Fiscal Year 2009, from Liza Crisafi's FY 2009 report.
Quarter ended 09/30/08 was +0.19%
Quarter ended 12/31/08 was minus -3.87%
FY 2009 YTD, compounded, was minus -3.69%

REALIZED EARNINGS (sold) for Fiscal Year 2009 from Crisafi's FY 2009 report.
Minus -$168.6 million for interest and dividend income, net gains/losses on sale of investments, unaudited.

UNREALIZED LOSSES ( not sold) totaled minus -$596.4 million, unaudited, from Crisafi's Status Report.

TOTAL PORTFOLIO VALUE $3,505,898,400 as of Jan. 30, 2009 for the City, Port and Airport, unaudited, from Actual Asset Allocation Exposures report dated January 30. 2009.

COMPARISONS of TOTALS, audited by Sara Jimenez, Principal Accountant.
Total Net assets December 31, 2008 were $3,284,947,755, audited.
Total Net assets December 31, 2007 were $4,689,844,999, audited.

City of San Diego's Net assets December 31, 2008 were $3,077,456,215.
compared to $4,123,031,339 on Ju1y 1, 2008.

ALLOCATIONS as of January 30, 2009, from Actual Asset Allocation Exposures, January 30. 2009
35.24% is US Equities ………$1,235,507,486
15.36% is International Equities $538,549,868
31.87% is US Fixed Income …$1,117,313,185
04.56% is International Bonds …$159,755,540
00.04% is Cash, Enhanced Cash.…$1,274,307
12.68% is Real Estate…………..$444,554,635
00.26% is Cash Overlay & Margin/Futures $8,943,378


Allocations are coming up for their annual review by the Board, said Chair of the Investment Committee, Steve Meyer.

MONTHLY BENEFIT PAYMENTS & OPERATING EXPENSES
were $15.2 million, from Crisafi's Status report. Monthly benefits continue their trend to rise in cost as members retire, noted Mark Hovey, CFO.

INVESTING

CALLAN'S DECEMBER 31, 2008 QUARTERLY REVIEW TO SDCERS
"Total Fund Peformance
SDCERS' fourth quarter return of -13.0% (private real estate valuations are lagged one quarter) was ahead of the Total Fund benchmark's -13.5% return. For the one year ended December, the System was down -26.4%, lagging the Total Fund benchmark return of -23.6% and ranking in the 62nd percentile of (Callan's group of) the public fund universe.  Longer-term results for the System are very strong relative to the benchmark and the public fund universe.  For the trailing ten years ended December, the Fund returned 5.0% on an annualized basis, which ranks in the 4th percentile of the public fund universe and exceeds the total fund benchmark by approximately 1% on an annualized basis." Page 4

"Recent results have lagged as a result of active management primarily in domestic equity and fixed income." Page 7

* CALLAN ASSOCIATES IS MERGING INTO
MERCER INVESTMENT CONSULTING:
CALLAN ASSOCIATES, who helps SDCERS select money managers, is merging with Mercer and will be re-named MERCER INVESTMENT CONSULTING.

CHIEF INVESTMENT OFFICER- Liza Crisafi and her team followed SDCERS investment guidelines and visited Salus Capital Management in Los Angeles. Salus has been a money manager for $109 million of SDCERS' market neutral portfolio. After identifying SDCERS account was over 60% of Salus assets, termination procedures were started. Board approved the termination, and supported Crisafi's visits and requiring monthly reports from firms investing SDCERS funds.
Callan regularly prepares quarterly reports of money managers.

PRIVATE EQUITY is still in progress. Corey Buuhoan, Investment Officer, reported that legal is reviewing documents with two firms being hired to advise on private equity: Credit Suisse Securities (USA), LLC and the Stepstone Group, LLC.
They will help prepare a future presentation on private equity program policies and procedures, overall strategic plan, tactical plan for 2009, investment pacing proposal, and strategy/sector allocation recommendations. RFPs are out for possible specialist firms.

ACTIVE  DROP INTEREST AND CONVERSION DROP INTEREST
Effective July 1, 2009, the Board reduced interest to 3.54% for active DROP and to 5% for DROP conversion to an annuity upon retirement. Rates will be re-evaluated annually in November.

The Board determined these rates by actuary recommendation and a composite of actuarially accepted indices and the Municipal Code default. The new fixed rates will be entered into the Board Rules per IRS requirements and will be posted on SDCERS Web site. A composite was selected to balance different risks, different investment emotions, and different perspectives in this time of turmoil.

Comments:
-  Letter from Mayor Jerry Sanders noted the volatile market. "And also do not believe that it would be appropriate to tie the interest rate to the actual returns because I do not believe someone's drop should be exposed to possible losses." He recommended a 5-year average of an index for DROP actives, reflecting the security of the investment.
- Dennis noted the Baseball bonds pay 8%, questioned conflict of interest for Trustees who would be subject to City taxes increases, and asked if it would require a public vote to raise rates in the future.
- Bill Farrar, Retired Fire & Police President, pointed out SDCERS did not raise rates in years that SDCERS earned over their assumed rate, pouring $43 million extra to the fund. He noted that in 2001, 2002, 2003 and 2008, SDCERS interest rate dipped below their assumed rate.
- Sharon Wilkinson, former General Representative Trustee on the SDCERS Board from December 1994 to December 2004, is in her 5th year of DROP at the Water Department. She felt the DROP benefit was negated if the interest rate was set too low. She debated if the City meant DROP to be cost neutral to SDCERS. She suggested the DROP interest be included in the ARC. She questioned if SDCERS assumed rate of return is set too high if the Board needs to cut DROP interest rates?
- Joe Flynn, a recent Retiree Representative Trustee, thought the City didn't initially understand the implications of DROP interest. DROP was a short-term solution for politicians trying to keep seasoned employees after granting them early retirements, in lieu of pay raises. Joe pointed out that the City's savings from DROP, do not come to SDCERS. The Board must base their decision on legal and actuarial advice, and resolve conflicts in favor of the fund. He said DROP participants relied in good faith on the City's early warrant and understanding. Joe asked for the smallest possible impact on DROP participants faced with the unexpected hit on their retirement plans. (DROP participants cannot withdraw from DROP.)
- I noted that those who were not DROP, were upset to see SDCERS funding ratio being further undermined by current DROP interest rates that went to only one group of members.

Board discussion:
(Recused until courts reverse their ruling on 1090 conflicts: John Thomson, Mark Sullivan and Steve Meyer due to severe penalties.)
Peter Preovolos called DROP a flawed program, a myth that SDCERS has had to deal with again and again. At best, he said, the Board could limit the
volatility. 
Dave Hall asked if there are standard rates used by pension funds? The answer was "no standard". He also asked why the Board was changing the rate now, when it had not done so during other dips in returns?
David Wescoe, Chief Administrative Officer said the differences were:
· Guidance from IRS had not arrived previously. SDCERS has gone through the IRS Voluntary Compliance Program now.
· New composition of the Board since Prop H.
· Focus on all members, not just a sub-set.
· Actuarial Soundness.
Gene Kalwarski, SDCERS actuary, added actuarial reasons:
· Cost Neutrality and underfunding issues at SDCERS.
· Earlier retirements than expected with DROP.
· Removing of instabilities from the system.
· Last year's experience study indicated a problem if DROP interest continues at 8% or 7,75%.
Mark Oemcke noted the 20-30 year mis-match of market rates, and the rates being paid by SDCERS. He recommended using a composite of rates as it was not possible to know which was more correct in this economy.

Franklin presented the opposing argument. DROP participants risk the final outcome for their retirement because they lose up to five years of service
credit when they go into DROP. He asked for balance, because cutting the rates was a slash to benefits. He requested Board actions in baby steps. He noted an annuity was a long stretch in time and the return for active DROP should remain SDCERS' long term expected return. He would make the error of optimism in the market, acknowledging real trouble if that failed. He moved to keep the status quo but there was no second.

Conclusion
In the end the obligation, to be cost neutral and recognize the impact on members, who are not in DROP, resulted in approval of rates within the actuary's recommended range and acceptable to the IRS.

ANOTHER VERSION OF THE KROLL RECOMMENDATION was again offered to the Board for consideration. This time Stan Keller, the City's SEC Independent Consultant made the suggestion to rotate lead partners in an actuary business for more independent judgement.

Preovolos said this was a misguided concept by Kroll. Oemcke noted it was not as if the lead partner was crunching all the numbers himself. Susan Gonick pointed out that actuary work is not an art form, it is more straightforward. Steve Meyer added that there is no standard for changing actuaries and the Board retained the right to decide on actuarial services. President Tom Hebrank concluded that after consultations this change was not really necessary with currant controls and that the Board would not be giving Wescoe any new directions regarding actuaries.

INDUSTRIAL DISABILITY APPLICATIONS-  be wise.
Sandra Claussen, discussed how staff reviews disability applications. The applicant, not SDCERS has the burden of proof that the industrial disability is from a work related cause. Substantial medical evidence means the treating physicians have included comments on:
· Risks/causes of the injury in the applicant's record.
· Physicians' conclusion of the cause/risks.
· Physicians' basis of conclusion, facts.
· Physicians' reasons/argument of why the physicians thought their conclusion was valid.
If there is no such record, SDCERS staff will assume the injury was from family history, etc., and not a work related injury and staff will deny the industrial disability claim.
Without such notation in the applicant's record, the exam by SDCERS' physician and an adjudicator most often results in a negative judgement as well.
SDCERS does not follow Workers Compensation rules.

Fire Representative Trustee John Thomson countered the staff's opinion to deny a fireman's application. He noted the California State's Heart Lung & Hernia act documenting fire fighters' work related injuries that accumulate after working for 30 years. He wondered why fire fighters would want to work for San Diego if the pension fund denied fires as a cause of work injuries. He said it was a slap in the face to a lifetime of service.
John Thomson's grounded, practical and common sense logic will be missed when he leaves the Board.