PATTI'S NOTES
SDCERS BOARD MEETINGS
June 19, 2009

(I attended most of the Board meeting and the remainder on television re-play on June 19th. 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.

ASSETS STATUS REPORT
Executive Summary of Staff Reports: - June 18, 2009
"The value of the reconciled net invested assets as reported by the custodial bank as of May 31, 2009 was "$3,751,057,894."

"$22.6 million was needed for May benefit payments.  These funds were used to pay monthly benefit payments as well as operating expenses."

Status of Realized and Unrealized Gains / Losses
"The realized gains for the first ten months of FY 2009 totaled -$301.4 million.  The level of unrealized losses totaled -$509.7 million.  These values are unaudited." (For comparison in February 2009, the unrealized loss had been -$907.6 )
(****REMINDER: RETIREES SHOULD NOT EXPECT EXTRA PAYMENTS FOR CORBETT OR 13TH CHECK PAYMENTS IN NOVEMBER 2009 BECAUSE OF NEGATIVE RETURNS.)

MORE RETIREES in JUNE- Director of Membership Services- Cynthia Queen
Triple the volume of last year, 329 active DROP retired (approximately half of the current active DROP members). There were 16 regular retirements.
65 active employees signed up for DROP.
(On May 31st, there were 6264 retired, including DROP.
There were 9596 active employee members of SDCERS. Deferred/inactive count was 2943.)

NON-AGENDA COMMENT: Patti  on SDCERS' slipping funding ratio.
City of San Diego Retired Employees Association President Nancy Acevedo had requested I comment on the phrase that was re-emerging regarding SDCERS' funding level: "relax and trust us".
This is a Hot Button phrase, I noted. The more the Board, or staff, say it, the more retirees will pay attention. Some retirees attended a year of weekly Pension Reform Committee meetings and have attended the last five years of SDCERS' meetings as a result of hearing "relax and trust us".
I re-called that a former administrator and former trustee had a team sport going. They re-assured retirees and active employees that their pensions were secure at 60% funding levels.
To retirees they pointed out that active employees' pensions were not covered. Then they told active employees that retirees' pensions were not funded.
I requested that the Board not panic us, as we have heard "assurances" before, followed by red lights.
Then I added my own comments: There is the temptation to think the Board can be magicians for a troubled city, but they would only be fooling themselves. It is for the City to decide what the City can pay, not for the Board to continue to pressure SDCERS Investment program to pursue precarious dreams of rescuing the City from bad financial times, as well as MPI and MP2. Lessening the City's burden by actuarial adjustments in the short-term, could deepen the problem in the long-term, again.

RESPONSE TO PATTI'S COMMENT: Retiree representative on the Board, Dave Hall, responded later in the meeting. Dave encouraged retirees to come to the meetings and voice their opinions. He focused on long term (the City paying the amortization schedule, investments in future markets, etc.,) to correct SDCERS' funding level. He saw retirees as having less time to wait for the corrections.

PRIVATE EQUITY DISCUSSION: Board split 10-2 to move forward in the private equity process.
New Trustee Herb Morgan has no issues with the staff process on private equity. He wasn't on the Board when the private equity process was started. He voted "no" on items related to implementing Private Equity as he objected to Private Equity as an asset class for SDCERS.

While he regarded the staff process to put private equity in place as appropriate, he objected because:
1) Cost of going in, the variable costs (additional legal fees, etc), cost of management with uncertain returns.
2) Possible high risk of over-allocation at in-opportune times. (If the market falls, the $300 million in private equity becomes 8% to 20% of the fund's assets, instead of the targeted 5% that it would be if SDCERS' assets were higher.
3) Management fraud. The manager has the check book for SDCERS investment. SDCERS noted that San Diego County could not fire managers.
4) Questions if there really are greater returns through leverage. Is private equity really cool, mysterious and sexy? Herb doesn't believe it. As reporting is voluntary, there is no negative reporting and no verification process.
5) He did not feel that private equity was necessary to earn a long term 7.75% return for SDCERS.
6) He recommended looking for evaluations outside of consultants' reports.

SDCERS Assistant Investment Officer Corey Buu-Hoan recommended the Board ask good question and understand the risk before voting. Corey's background includes working at AIG in emerging markets and seeing investments nationalized by foreign countries. Corey pointed out that the first private equity investment may be all in one country, as initially the plan called for investing approximately $100 million a year for three years.
He noted a scaling back from $300 million, keeping private equity at a targeted 5% of the fund, to be invested in private equity over 5 years. He said investments would only go forward if they were appropriate. There is no rush. SDCERS is requiring that managers buy 1% of the same private equity fund as SDCERS. Cory noted that there is a loss the first year of investing, and SDCERS could not withdraw without severe penalties.

Chief Investment Officer Liza Crisafi recommended private equity for diversification, superior returns and felt that private equity could be monitored closely.

Trustee Mark Oemcke said 5% allocation to private equity is the minimum to make an impact on the fund. He expects more external valuations of private equity in the future. He also noted that the best way to get returns is by the best managers.

SDCERS Administrator David Wescoe noted the process to consider private equity began before he arrived at SDCERS. He has good confidence in his staff's ability for a successful program. He sited  the experience that SDCERS' consultant, Callan, has had with 40-50 clients who are earning superior returns. He noted SDCERS is late in the game. He saw the approach as very flexible. However, he also noted that he will spent time explaining it, in a transparent way, to three plan sponsors, members, City, public, critics and the press. He concluded saying, no one calls when the market is up, but the phone rings off the hook when the market goes down..

Wescoe said he understood and respected Franklin Lambert, general representative Trustee, when Franklin voted "no" because he could not explain private equity to those he represents. Franklin said "What glimmers may not be gold."

ACTIVE OR PASSIVE MANAGEMENT DISCUSSION
Staff reported returns were higher with active management.

LEGAL REPORT- Elaine Reagan, General Counsel
Future:
July 31, 2009 Hearing on City Motion for Summary Judgement and related motions. Superior Court Case No. GIC 841845, consolidated with Case GIC 851286. Judge Hon. Jeffery Barton. SDCERS Complaint: Declaratory Relief on Right to Employ Counsel. City's Cross-complaint: Validity of MPI and MPII and certain retirement benefits.  SDCERS' Cross-complaint: Recovery of monies owed by City to SDCERS but not paid because of MPII.

Reagan has finished revision of Board's Policies and Rules.

Trustees with a loyalty issue of current or future DROP contracts must recuse on DROP issues because of potential financial impact.

AUDIT COMMITTEE- Chair Michael Collins- "Fair value of assets."
New member: appointee Trustee Ed Kitrosser took general representative Trustee Steve Meyer's spot.

Internal Auditor, Bob Wilson noted that the outside auditor Macias, Gini & O'Connell LLP (MGO) will start work in July for Fiscal Year 2009. There are 12 MGO partners.
An opinion letter is expected in November. MGO looks at best practices and reviews actuary work with their own actuary. Mr. Collins expects to hear more on determining the "Fair Value of Assets", including derivatives, from MGO. There was a discussion regarding valuation of fair value in this market with much interest by Trustee Mark Oemcke.

Bob Wilson spoke about risk assessment. In general, SDCERS ratings are in the satisfactory area. More work needs to done in accuracy of data. Hence the current year "Year of Data" at SDCERS.  SDCERS has good ratings in governance and technology. Appointed Trustee Wayne Kennedy said it is important to update risk plans as risks change over time. Mark Oemcke noted SDCERS is the most looked at pension plan in the nation.

The next Audit Committee meeting is on September 16th. Call for time.

SDCERS NETWORK FIREWALL- David Bond, Director, Information Technology' report of June 18, 2009
"We successfully implemented our network firewall the evening of May 27. The firewall provides a highly-secure layer of network protection between the City, SDDPC and Internet for SDCERS' systems and member data."

COMPLIANCE REPORT- Chief Compliance Officer Roxanne Story Parks
Roxanne is reviewing all of SDCERS' taxation and withholding practices.

Fraud and Criminial Acts Policy -
After review by Board President, General Counsel, Internal Auditor and members of the Business and Governance, Roxanne's policy went to the Board for approval. Internal Procedures on Fraud and Criminal Acts is a separate policy.

DISABILITY COMMITTEE- Revisions of the rules for the Re-Exam Process for those not of retirement age.
Includes the Board's right to suspend benefits for failure to submit affidavits requested by SDCERS Board. Applicant has burden of proof, etc. Joe Flynn made comments on changes to the disability process. Dave Hall thanked him at the full Board meeting.
For more information contact SDCERS.
Currently there are 17 cases referred for re-exam, 4 pending, 8 still eligible for benefit, 5 no longer disabled and benefits terminated, 1 appeal pending.