SDCERS BOARD MEETINGS
April 16-17, 2009
Submitted by Patricia Karnes

PATTI'S NOTES

(I attended the Business & Governance Committee on April 16th, and the Board meeting on April 17th. Notes are by subject. They are my understanding of what happened.
WEB- Board meetings are archived and are available for viewing on line at any time (after the meeting) via the SDCERS web site.
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 the following Sunday at 1pm
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.

SDCERS GOING FOR THEIR OWN CHECKING ACCOUNT
City Attorney Goldsmith is reviewing "how to formalize the City delegation of banking and check issuance procedures to SDCERS", said CIO Mark Hovey. SDCERS will then have an independent checking account to issue pension checks, etc.

$3,416,267,568 for City, Port and Airport is TOTAL PORTFOLIO VALUE as of MARCH 31, 2009 as reported at the bottom of the ACTUAL ASSET ALLOCATION EXPOSURES page in the April 16, 2009 EXECUTIVE SUMMARY OF STAFF REPORTS. 

(Patti's comment: When Mark Hovey helped me find the new location of SDCERS asset value, he said that approximately 94% of the total portfolio value is the City's share, the other 6% is the Airport and Port.

(ADDITIONAL NEW  INFORMATION: Retirees are researching the location of the Investor section on the City web site because that is where Jay Goldstone is posting the monthly updates of the value of the City pension assets and funded ratio.
Meanwhile, Goldstone noted in a letter dated April 11, 2009 that no other agency is reporting market volatility of their pension fund on a monthly basis. However, he pointed out that SDCERS' actual gains and losses will only matter on June 30, 2009.
Gains and losses of SDCERS assets will be "smoothed" (averaged) for SDCERS actuarial value on that date in determining the City's annual required payment, ARC.
Goldstone's commented that, "The difference in the range of increase depends on the actuarial method of smoothing used by SDCERS.")

(Patti's comment: There is a range between the top and bottom of the corridor. From what I understand, the bottom of the smoothing "corridor" can be lowered. There is a top to the corridor also, that is why it is called a corridor.)

RETIREE COMMENT ON OUTGOING TRUSTEES:
Terry Flynn- Thanked out going Trustees Peter Preovolos, William Sheffler and President Tom Hebrank for their leadership and coming aboard SDCERS's ship when it had been hijacked. He asked SDCERS Board not to be manipulated by City needs. He said they were not there to take care of the City, they were there to be fiduciaries of the retirement trust. "Stay True," he advised.

Joe Flynn noted Peter Preovolos forged the way, William Sheffler was a treasured resource for the Board, and Tom Hebrank was the salt of the earth, an anchor of analysis and reason. They were leaders of a team who resolved problems and brought SDCERS to the forefront of pension systems in the U.S.

BOARD and ADMINISTRATOR COMMENTS ON OUTGOING TRUSTEES
Tom Hebrank commented that it has been the greatest privilege to be on the Board and be President. He came to the Board as a replacement for someone forced out by threats from the former City Attorney. There was never a shortage of rocks to turn over at SDCERS, he said, and then SDCERS was faced with a global meltdown. He was reminded of the Chinese saying, "May you live in interesting times." So many reforms have been accomplished in such difficult times, he noted. Never quotable, Hebrank said he kept out of the news, by not making news-worthy comments. He hopes SDCERS continues to re-affirm rights to be more independent. While SDCERS was unable to find resolution to legal problems under the previous City Attorney, he hopes the new City Attorney will make a difference. SDCERS' Board is the best of both world: expert appointees and representatives from employees and retirees.
Hebrank noted that the Board could not have accomplished these changes without Wescoe and his fine staff, who accomplished a turnaround. SDCERS is a stronger, best of class organization, he concluded.

Wescoe revealed that on April 10, 2009, as Hebrank leaves, the Port has removed their letter to withdraw, a testimony to Hebrank's leadership.
Wescoe credited Tom with improving member services: web site, member's Call Center, members annual meeting, etc. He recognized Tom for his record of achievement in this political environment and under public criticism of SDCERS. Wescoe also credits Hebrank for SDCERS' record for best transparency and best practices of a pension fund nationally.

Preovolos noted that Tom has been an incredible leader during the time the SDCERS Board had to operate in a non-rule world, and Tom brought this organization back to a "normal" state. Preovolos was thankful and grateful that Tom transitioned this to a world class organization.

Peter Preovolos was recognized as serving during SDCERS'  historical challenge. Preovolos said that people forget there were seven Trustees (out of 13), left to be a quorum and direct SDCERS, when he served as the first President of the re-constituted Board. He continues to serve even after his official post expired. He will stay until the Council approves his successor, at which time he can give a third farewell speech.

(Patti's Comments: While members and they public have not been able to know what Trustees's accomplishments were outside of the third Friday of the month's full Board meetings, we have seen the tremendous respect between Trustees that Preovolos fostered. Trustees continue to express disagreements in trust, good humor and transparency. Also apparent was Preovolos' choice to turn around on a horse, if he found he was sitting in the saddle the wrong direction. He chose to look forward to SDCERS' goal, rather than face backward. In the process, he gave SDCERS a vision to follow and supported others in making great changes. He contributed much to the healing of SDCERS after the crisis.)

Steve Meyer, who has served on several different Boards, expressed appreciation for challenges from Tom and Peter.

Bill Sheffler, (one of the seven who stood up for SDCERS independence and had served on the Pension Reform Committee), had courage, perseverance and a passion for SDCERS' independence and legality, said Wescoe. In particular, Sheffler transformed disability procedures.(Sheffler wasn't here today, calling in earlier in the meeting.)

Wescoe also noted that former Fire representative John Thomson never lost sight of members and SDCERS products, unlike some organizations that fell apart this year.

ELECTED: Arrollado, Lamberth, and Meyer
Franklin Lamberth and Steve Meyer were re-elected General representatives, and sworn in with new Fire representative, Alan Arrollado.

(Additional news
***UPDATE: THREE NEW MAYOR'S CANDIDATES MUST GO TO COUNCIL COMMITTEE BEFORE COUNCIL APPROVAL:

Please welcome them when they join the Board.
Edward Kitrosser, CPA and Managing Partner for Moss Adams LLP, with 40 years in accounting, auditing, tax services, and consulting. He is also active in various charitable and civic non-profits. He would replace Tom Hebrank.

Herb Morgan, CEO and CIO of Efficient Market Advisors, LLC with 22 years in investment management and advisory services. Frequently interviewed on CBS Market Watch, Investment News and Wall Street Journal, CSNBC television, articles in Forbes.com and Seeking Alpha.com.
He replaces Bill Sheffler.

Richard Tartre retired as Senior VP for Met Life in 2002, where he supervised 3000 employees. He replaces Peter Preovolos.

NEW SDCERS BOARD PRESIDENT ELECTED: MARK SULLIVAN
Board President Tom Hebrank is leaving.
Board voted not to wait for the Mayor's new appointees to come aboard because possible delays in Council approval of new appointees could result in SDCERS' quorum problems as it did in past City political games.

Police representative, Mark Sullivan, Chair of the Business and Governance Committee and VP, was elected by 7-6.  Appointee Raymond G. Ellis was unanimously elected VP and will run meetings when Sullivan has conflicts of interest, such as DROP, or he is not available.

Peter Preovolos said fears and concerns about electing employee/union representatives are unfounded as the Board is not dominated by their representation. Why make employee representatives secondary in status, he asked.

ROUTINE AUDIT OF SDCERS' ACTUARY CHEIRON will be scheduled for the upcoming June 30, 2009 Comprehensive Annual Financial Report (CAFR) as Cheiron has been SDCERS actuary for 5 years. It will be billed to the City to avoid impacting the Port and Airport assets.

SDCERS BUDGET
SDCERS' fiscal year June 30, 2009 budget is running about 15% less than what was anticipated by the end of the third quarter.

The Board will be voting on SDCERS' Fiscal year 2010 budget in May, which will include the impact of the Mayor's 6% reduction.

SDCERS  2010 budget was already 4.8% less than the 2009 budget, with the majority of the cuts from administration expenses. Wescoe noted that SDCERS' budget for 2010 is already down 25% from 2007. Four attorney, benefits and budget analysis positions will remain unfilled. Tax Counsel for IRS issues is greatly reduced.

Expect a surge in investment fees in SDCERS budget due to private equity. Trustee Mark Oemcke noted this may be offset by re-negotiated fees in other investment areas. Steve Meyer, Chair of the Investment Committee, said SDCERS has traditionally been aggressive on negotiating fees. Fees seem to be based on projected growth of the investment, assets under management, and/or expected rate of return, rather than just market value, according to CIO Mark Hovey's report.

In response to a question regarding hiring an outside auditor to do a performance audit on SDCERS' efficiency, best practice, etc., Mark Hovey, Chief Financial Officer, said he is already proactively doing a comparison of SDCERS with four other systems. Wescoe noted that so far SDCERS is doing very well compared to the County.

SDCERS OUTSIDE AUDITOR CONTRACT RENEWED
Macias Gini & O'Connell's contract was recommended for renewal from 2009-2013, by SDCERS Audit Committee, reported outside appointee Michael Collins, Chair of the committee.
MGO has about 800 employees and audits CalPERS, as well as other major California pension systems. MGO has completed four years of SDCERS audits in one year. Fees of RFP's were identical. MGO would charge hourly fees for supplemental problems.
MGO plans to rotate partners for fresh visions of SDCERS.

LEGAL REPORT FROM ELAINE REAGAN- April 6, 2009
Discovery was reopened for the Barton litigation, City's Motion for Summary Judgement set for April 23, 2009. May 8, 2009 is hearing on SDCERS motion to confirm City discovery responses.
The Italiano case is set for a May 1, 2009 hearing on SDCERS' demurrer.
Wescoe comment: SDCERS continues to talk to the new City Attorney regarding non-judicial settlements between SDCERS and the City's lawsuits.

TECHOLOGY AT SDCERS
David Bond continues to take SDCERS forward.
Following the City's policy, SDCERS declined to be used as a success story in HP's advertising.

QUALITY OF SDCERS INVESTMENT TEAM
Wescoe noted that SDCERS has the best caliber, pound per pound, of investment staff in California. Qualifications are very concentrated in the five SDCERS investment staff. For instance, Amanda Montgomery, the latest to join the staff, is from the Harvard Business School.

INVESTMENT ALLOCATION STUDY BY CALLAN
Callan consultants will formalize SDCERS' annual allocation study for presentation and vote in May by the full Board.
Liza Crisafi's report of April 3rd says " "The primary purpose is to review the asset allocation targets relative to achieving the targeted return that were put into place as a result of the comprehensive long-term strategic asset allocation/liability projection study that was completed in September of 2007." Is there a compelling reason to change allocations and, if so, what is the new allocation target? "Asset allocation is the single most important determinant of future returns." It considers time horizon, risk tolerance, target rate of return and diversification.
Callan will show the Board different allocation mixes with expected long term returns of 7.75% to 8.50%. Active management makes a difference.
Note: Callan was removed from SDCERS watch list as they are not merging with Mercer consultants after all.

PRIVATE EQUITY
Board approved $60,000 cap for attorneys, Pillsbury, Winthrop, Shaw and Pittman . LLP, to negotiate a contract to hire two consultants, Credit Suisse Securities (USA) LLC and Stepstone Group, LLC, for private equity investments. Contracts are expected by the end of April.
Cory Buuhoan reported "…Staff estimates SDCERS' Private Equity Program to be fully operational and ready to make investment commitments in the second half of 2009.

REAL ESTATE
Invesco is being reviewed as under-performing.

MARKET NEUTRAL
Search is in progress.

CASH OVERLAY PROGRAM
Overview and performance by Clifton Group to Investment Committee in May.

COMMODITIES
In May, the Board will consider possible future allocation in commodities, because they are  "inflation-sensitive". Includes agricultural products, metals, and energy products. "Effective diversifier" for fund. High return volatility, difficulty monitoring, supply/demand imbalances, high fees, long periods of under performance, requires education, zero return long-term. Will the price/demand of commodities be going up, Callan asks?

DROPPING DROP IMPACTS MEMBERSHIP SERVICES, ETC.
Send Membership Services Director Cynthia Queen, and her staff, flowers and strength to cope with a tripling of active DROP changing to retired status. Explaining DROP is difficult and complicated, said Steve Meyer.
This year the three counselors already have over 500 appointments booked before June 30, 2009, when DROP active and retiring are scheduled for further reductions. (Counselors had about 185 appointments booked at this time last year.) Expect 450 DROP to retire by June 30th , Cynthia Queen said.

Queen reported that starting last Wednesday, another wave hit, when 100 members called to enter DROP by June 30th because of new MOU benefit reductions. Apparently there are 1000 active members currently eligible to join DROP.
Wescoe noted that serving this high number of members, regarding DROP, will be a new achievement level for Membership Services. It would not have been possible three years ago before the formation of Membership Services,
which now includes interactive computer services and calculations, etc.

SDCERS is busy determining upcoming impacts on member's retirements and how to administer the new pension plan. Trustee Steve Meyer noted that the Board goes by California State law before the City's Municipal Code.

The Port's plan is also changing. Trustee Wayne Kennedy asked for a Board presentation on the new pension plans.

****CHECK YOUR RECORDS AT SDCERS ONLINE
For "Year of Data", Wescoe again asked both active and retired members to go on-line and check their personal record at SDCERS for corrections. Contact SDCERS dedicated Call Center for help if you have questions. Wescoe said members, without computers, can make an appointment with a counselor and review their record.

DISABILITY
Two members spoke to the full Board today regarding complications in the process of their applications. Memory problems probably did not help one member fill in the application properly or to realize that she needed an attorney. Now her case lacks evidence to prove to SDCERS that her work comp. disability is work-related.
The Board thought that this member's next option was to file a "writ" and sue the City. However the Mayor's representative on the Board from Risk Management, Gregory Bych, said this wasn't a City issue, it was a SDCERS issue. (He may not have understood that the member would sue the City regarding the City rules for SDCERS' disability process.) The Board denied re-consideration.

The other member was caught up in time delays and perhaps the Board did not have her department documentation that her light duty job was not a permanent accommodation. Losing your job, and/or explaining why that happened, is not documentation. (Patti's comment: It is illegal to fire injured employees, but apparently not to put them into temporary jobs or lay them off. On the other hand, disability retirement means the applicant cannot do the job. Painful questions about the City's job of accommodating injured works often plague the SDCERS Board. )

Bill Sheffler, outgoing Chair of the Disability Committee, did reduce the
disability applications backlog for approval/denial of disabilities from 37 months to 18 months, which was much appreciated by the Board, applicants and staff.

Dave Hall, retiree representative, will remain on the Disability Committee. He noted that his personal goal, on the Disability Committee, is to ensure that the awful injury/illnesses are work-related in determining disability retirements. He wanted the full Board to know that the Disability Committee considers all the facts and asks questions before making a recommendation to the full Board.
Steve Meyer expressed another concern about this process that will come up for the full Board in May.
_____________________________
Next SDCERS Business & Governance Committee is May 14 at 8:30am.
Next SDCERS Investment Committee is May 14 at 1:30pm.
Next SDCERS Board Meeting is May 15 at 8:30am.
All in the SDCERS meeting room on the 3rd floor of 401 West  A