SDCERS BOARD MEETINGS May 15, 2009
Submitted by Patricia Karnes

PATTI'S NOTES

(I attended the Board meeting on May 15th. 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.

MAY NOTE: The Board had a crisp meeting, finishing in one hour and fifteen minutes, followed by a Closed Session Meeting at 10:00am and a training session for new Trustees at 1:00pm.

TRUSTEE CHANGES
Mayoral appointees, Edward W. Kitrosser and Herb W. Morgan, sworn in.

COLA INCREASE APPROVED
Most retirees will receive a 2% COLA.
Those retiring July 1, 2008 to June 30, 2009 will receive a COLA of 0.1%,
Pre-1981 plan retirees will receive a COLA of 1.6%.
SDCERS actuary computed the COLA increases per the Municipal Code.

From Staff Report- May 14, 2008 "Authorize Annual Cost of Living Adjustment (COLA) effective July 1, 2009"-
"In previous years when the CPI change was above 2.0%, the CPI excess was added to the cumulative member COLA banks, for use in subsequent years where the CPI change is less than 2.0%." Pre-1981 retirees receive 50% of the CPI.

Trustees Mark Sullivan and Steve Meyer, both in active DROP,  recused themselves from the discussion and vote, because they will receive a COLA increase.

IS THE MARKET IMPACTING CORBETT AND "13TH CHECKS"?
SDCERS  March Year-To-Date Status of Fiscal Year 2009 shows that realized gains were still negative of the hurtle for paying contingent benefits.

Trustee Steve Meyer, General Member Representative, wants retirees to know that the financial market returns do not appear to be reaching the hurtle, by June 30, 2009, to pay their annual Corbett and "13th Check" in November 2009.
Only the Corbett amounts will accumulate until years in the future when market returns reach the hurtles that enable payments to be distributed.

Total Portfolio Value  was $3.6 billion as of April 30, 2009. (It is located on the ACTUAL ASSET ALLOCATION EXPOSURES page.)

"U" SHAPED MARKET RETURN POSSIBLE ?
SDCERS' assets have increased in the last two months. Previous unrealized market losses have been reduced by $182.1 million by March 31, 2009.

Liza Crisafi, SDCERS Chief Investment Officer, noted that a "U" shaped market return was possible, meaning it could go up as fast, as the market went down. She noted that volatility is still high, even if it is down from the peak. She saw a real re-bound in equity managers. Domestic equity and real estate contributed to a significantly higher return, with a somewhat higher risk.

FY 2009 Realized Rate of Return. Is the negative going toward positive territory?
Realized rate of return for the quarter ended 9/30/2008 was +0.19%, quarter ended 12/31/2008 was -3.87%, the most recent quarter ended 03/31/2009 was -2.32%, for a YTD total of as of March 31, 2009 of
-5.92% compounded.

ANNUAL INVESTMENT ALLOCATION CHANGES
SDCERS Board approved investment allocation changes that appear under Mix #2 in SDCERS Asset Allocation Follow-Up of May 14, 2009:
1) Market Neutral holdings will be reduced from 9% to 5%.
2) Domestic Fixed will be increased by 4%, from 21% to 25%.
The expected long term return with this mix is 8.54%, with no increase in risk.

Working hard for SDCERS members, Liza reported that the investment team discussed commodities, inflation, deflation, and risk. They decided 5% of equity was already invested in commodities, and not to add more. Real Estate was also a protection if inflation hits in 18 months to two years.

Wescoe recognized the quality of his SDCERS staff, as he commented on his third anniversary with SDCERS. Never have retirees been served by a better staff, he said.

SDCERS BOARD APPROVES SDCERS BUDGET - CFO Mark Hovey's May 14, 2009 Budget report
Board approved the budget which included a "…$275,000 reduction to Salary and Fringe. This pertains to the 6% pay and benefit reduction negotiated by the City and its bargaining units, which SDCERS management supports and will apply to all of its employees." The budget also included the reduction in management fees described below.

"In total, the expense budget, being submitted for approval, totals $38.7 million….down $2.7 million (6.4%) from the FY2009 budget. Administrative expenses are now down $1.8 million (11.5%) from the FY09 budget, and Investment Management expenses are down $0.9million (3.4%) from the FY09 budget."

Administrative expenses in FY09 were $7,535,377, FY10 administrative expenses are down to $6,763,414.
Total management fees in FY09 were $25,736,834 and in the FY10 budget, management fees are down to $24,872,434.

DISCUSSION OF INVESTMENT MANAGEMENT FEES
Amanda Montgomery, Investment Officer, prepared a five year "Review of SDCERS' Investment Manager and Consultant Fees", dated May 1, 2009 that is available through SDCERS. She noted that, "Most managers are paid on a tiered fee structure. Therefore, when assets under management increase, fees paid as a percentage generally decrease; and when assets under management decrease, fees paid as a percentage generally increase."
"TOTAL Fees as a percentage of the portfolio have ranged from 46.73 to 50.40bps."

Question of SDCERS Board: Would it be cheaper to further reduce fees, or would it cost SDCERS income?

Fees reflect the amount of money SDCERS has invested, said SDCERS Administrator David Wescoe, and he looks forward to the growth of SDCERS assets. A savings account would give SDCERS a return of 1.5% return. Passive management would give 20 basis points. He summed up, "…cut management fees at the peril of losing higher returns." He expects returns will show fees are small in comparison with the higher returns of active management's. He noted SDCERS compares favorably  to other pension systems.

Trustee Mark Oemcke noted that the Board will be doing the annual review of management structure soon, and that may affect fees. It appeared to him that there was a small increase in long term investment returns using active management.

CFO, Mark Hovey, announced an updated projection resulted in a  reduction of $383,000 in fees for the private equity programs since the April meeting.

PRIVATE EQUITY (P.E.) - An investment in entrepreneurs and innovation will continue with the strategic plan and policy discussions next month, after 8 years of discussion about private equity at SDCERS.

Sixty-three firms, who participated in the RFP, were divided into generalists and specialists. Stepstone and Credit Swisse were selected as generalists. Next step is to review specialists who fit SDCERS' goals.

Dave Hall asked how the Watch List would work (for non-performance as SDCERS could not just terminate and cash out)? Corey Buuhoan, Investment Officer, said P.E. must be rated by their exceeding, meeting, or under-performing their goals.
New Trustee Herb W. Morgan added that SDCERS can keep diversification of investments by limits in sub-classes.

COMPLIANCE REPORT- Roxanne Story Parks, Chief Compliance Officer reported the new Compliance Policy will go to the Business and Governance Committee for approval in June.
She is also "…reviewing all of SDCERS' taxation and withholding practices, and working with the Financial Services and Benefit Administration Divisions and developing related internal procedures."

LITIGATION- Elaine Reagan, General Counsel's report
There are two lawsuits resulting from the IRS determination that the Union Presidential pension benefits were not acceptable to the IRS.
1) "On April 24, 2009, Gary Collins, Harry Eastus, William Farrar and the POA filed a complaint naming the City, City Council, SDCERS and the Board as defendants.  The complaint contains causes of action for Unconstitutional Impairment of Contract, Violation of Public Policy, Breach of Contract, Negligence, Breach of Fiduciary Duty, Intentional Infliction of Emotional Distress, Negligent Infliction of Emotional Distress, Declaratory Relief, Writ of Mandate, Promissory Estoppel aka Detrimental Reliance, Equitable Estoppel, Quasi-Contract aka Quantum Meruit or Unjust Enrichment or Restitution and Specific Performance."

2) Judith Italiano v. City and SDCERS.
May 8, 2009: SDCERS' demurrer to causes of action for infliction of emotional distress and breach of fiduciary duty.

Case regarding SDCERS' right to employ their own Counsel.
May 8, 2009: Hearing on SDCERS motion to confirm City discovery responses.
May21, 2009: Mediation.
July 31, 2009: Hearing on City Motion for Summary Judgement.

MEMBERSHIP SERVICES
Appointments are up between 3 and 4 times the normal number of 185 for this time period, to an estimated 575 appointments, due to DROP changes. Staff is working 6 days a week.

DISABILITY
Changing Day and Time in July
Trustee Dave Hall, who is the new Chair of the Disability Committee, announced starting in July, Disability Committee meetings will be changed to Tuesday mornings of monthly Board meeting weeks, at 8:30am. However, the next meeting is June 8, at 10am.

Accommodation
Also, Dave Hall (Former police officer and retiree representative on the Board), noted that SDCERS only has to show that the City can accommodate, not that it has accommodated. (I understand that it is not the policy of the City to accommodate.)

Regarding Disability Rule changes of definitions:
Usual and Customary Duties is now defined as not including rare or remote duties) in Rule 7.20.

Showing Proof
Rule 7.8 defines where Applicant has burden of proof and where SDCERS has burden of proof.

Subpoena Power
Authority given to General Counsel to issue subpoenas to compel attendance of witnesses, and the production of documents or things.