PATTI'S NOTES
SDCERS BOARD MEETING January 22, 2010
Submitted by Patricia Karnes

Special thanks to SDCERS' Interim Administrator/CEO Mark Hovey for reviewing my numbers and explanations on SDCERS' presentation of the June 30, 2009 Valuation.

(These notes are from the Board meeting on Friday. Notes are by subject. They are my understanding of what happened.)
SDCERS Web Access - Board meetings, with subject access, are available for viewing at www.sdcers.org
TELEVISION- If you live in the City limits, Board meetings are on Channel 24 usually at 6pm following meeting days, and usually repeat on the following Sunday.
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 BOARD GOES TO NEW SCHEDULE FOR REGULAR BOARD MEETINGS
Board Meetings are at 8:30 a.m. MARK YOUR CALENDARS:
January 22, no meeting in February, March 5, April 16, May 28, no meeting in June, July 9, August 20, no meeting in September, October 1, November 5, and December 17, 2010.
Special Meetings may be scheduled as needed with 72 hours notice.

Committee Meetings, not televised yet:
On the Thursday before the regularly scheduled Board meeting:
Disability Committee will meet from 8:30 am - 10:00 am
Business & Governance will meet 10:30 am - 12:00 PM
Investment Committee will meet 1:30 PM - 4:00 PM

Audit Committee will continue to meet quarterly on Wednesdays at 9:00 am.
on April 7, June 30, Sept 29, December 15, 2010.

SDCERS ASSETS
$4.374 billion in assets for the City, Port and Airport plans for December 31, 2009 was reported by custodial State Street Bank.
Cost of Benefit payments and operating expenses was $22.8 million in December. 

Sara Jimenez, SDCERS Principal Accountant, reported for November 30, 2009:
"SDCERS Group Trust Financial Statements":
Total SDCERS- November 30, 2009 was $3,854,181,000.
City's share was $3,589,448,000.
Port's share was $207,484,000.
Airport's share was $57,249,000.

JUNE 30, 2009 VALUATION- Gene Kalwarski from Cheiron

ANNUAL REQUIRED CONTRIBUTION:
City's Annual Required Contribution (ARC), due July 1st, jumped from $154.2 million to $231.7 million, about a 50% increase.
SDCERS' interim Administrator/CEO, Mark Hovey, explained the increase in the ARC reported in the paper was not due to Cheiron "underestimating" the ARC, since Cheiron just now did the valuation and was not in position to calculate a precise ARC until just now. The most recent estimate done in September 2009 isolated the ARC impact of changing just one variable from the set of actuarial assumptions that must be evaluated each year, that one variable being investment returns.

Gene said 95% of the increase was due to investment losses.
Page 14 of the June 30, 2009 Valuation on SDCERS web site says:
Return on market value of assets was minus -19.2%.
Return on actuarial (smoothed) value of assets was minus -6.2%.

In contrast, as of Dec. 31, 2009, this year's preliminary return of market value of assets is 15%. (SDCERS' assumed rate of return is 7.75%.)

FUNDED RATIOS
The City's pension funding level is in approximately the 45th percentile in comparison to other retirement systems.
City's funded ratio in 2009 was 66.5% and the unfunded actuarial liability was $2.11 billion.
Historical Comparison:
City's funded ratio in 2004 was 65.8% and the unfunded actuarial liability was $1.37 billion.

The Port's ARC went from $7.2 million to $11.5 million, increasing the Port's ARC by over 50%. Their funding ratio fell from 92% to 77.5%.

The Airport's ARC jumped from $3.0 million to $4.3 million. Their funding ratio fell from 102.3% to 86.9%, which was within Gene's definition of 86.5% as a strong funding ratio.

ASSETS

City's pension ACTUARIAL VALUE:
June 30, 2009 actuarial value of assets was  $4,175,228,585. 
Funded ratio, of actuarial value of assets to actuarial liabilities, was 66.47% using GASB No. 25 Basis.

City's pension MARKET VALUE
June 30, 2009 market value of assets was $3,479,357,154.
Funded ratio, of market value of assets to value of benefits, was 66.50% using FABS No. 35 Basis.

Here is some history for comparison:
City's pension June 30, 2008 actuarial value of assets was $4,660,346,403 and the funded ratio, of actuarial value of assets to actuarial liabilities, was 78.1% using GASB No. 25 Basis.
City's pension June 30, 2008 market value of assets was $4,408,719,440 ratio, of market value of assets to value of benefits, was 90.76% using FABS No. 35 Basis.

GASB Solvency Testing on page 26 of the Valuation was brought up by Trustee Mark Oemcke:
Retirees and Beneficiaries are covered 99.08% as indicated by far right column "B Portion of Actuarial Liabilities Covered by Reported Assets.
Remaining Active Members' Liabilities are covered 0.00%. Gene explained that the far right  "C" column of the Table shows active employee pension liabilities are not covered, The column shows 0.00% "Portion of Actuarial Liabilities Covered by Reported Assets".

Procedure change: Both the presentation of the Valuation for June 30, 2009 and the Board's approval of that Valuation were done at this same meeting, and not over two months as done in previous years.

However, the Port wanted their actuary to look over numbers before Board approval. The Board voted to delay approval of the Port's valuation to their next meeting on March 5th.

QUESTIONS ON IMPACTS to the City's Annual Required Contribution (ARC):

Gene noted that the City is in worse shape, than the Port's and Airport's shape, in part due to underfunding, the MPI and MPII experiences, and a different amortization period.

Gene will be back Mar 5th to discuss the impact of the new City employee's benefit plan on next year's June 30, 2010 Valuation.

Gene will also be working with the City's fiduciary counsel on the "substantially equal" split of Employee and Employer contributions in March. The City pays more as it also includes the unfunded actuarial liability (UAL). Employees are not responsible for UAL debts, said SDCERS' General Counsel, Elaine Reagan. The City has the sole obligation to cover gains and losses. Gene said it appears the meaning of "substantially equal" will vary with Safety, Legislative, etc.
Gene also will talk about the cost of living annuity and survivorship in March.

Gene said many DROP participants retiring last June were already considered retired as they were in DROP, so this did not help, or hurt, the ARC.

Trustee Greg Bych asked if the 6% salary reduction helped. Gene said the reduction did not help, as he noted that the overall City payroll amount counted. However, what did favorably impact the ARC, was the salary freeze (not giving a pay increase). Also, more retirements, etc., offset what the City saved by salary changes. Gene will evaluate the impact on the ARC from the loss of employees after the City lays off employees.

Gene said the "CORRIDOR" increased the City's ARC, the most, as it limited yearly averaging of investment gains/losses.  Instead of "smoothing" 25% of gains/losses this year, the corridor formula resulted in 55% of last year's investment losses impacting the 2011 ARC. Next year, Gene said the corridor would show only 25% of the June 30, 2009 investment losses. If the corridor limits had been removed the ARC would have been $40 million less. (The funding ratio would have been less also.)

Trustee Wayne Kennedy asked if SDCERS should do more frequent "experience" studies of factors such as changes in City staffing, etc. Gene responded in his elliptical way, saying that  depends on the results of the upcoming experience study he will be doing on SDCERS.

(Note: There is also interesting SDCERS membership information in the Appendix A, starting on page 33.)
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COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR) IS OUT
The CAFR is on SDCERS' web site. Hovey said printed copies are expected to be released later in January.

CHIEF ADMINISTRATOR'S COMPENSATION AT SDCERS AND RECRUITING GOALS
Chair of the Ad Hoc compensation committee, Trustee Wayne Kennedy, said they are looking to see if SDCERS is competitive with other systems in California. He noted Alameda County pays 40% higher and some pay a bit lower. He believes the current salary is probably adequate to recruit a new Administrator/CEO, but he recommended the Board investigate re-pegging the position to executive level 4 or 5 in the City's personnel system, to allow for growth.

ELECTION PROCESS OF BOARD PRESIDENT
The Board is also looking at revising the process to elect Board President election. Elaine Reagan, General Counsel, wrote in her December 28, 2009 report that currently "…there are no instructions on the process for nomination and election of the Board President."
She added: "The purpose of this discussion is to promote discussion and guidance from the Trustees on a proposed process. Staff will then follow up with a proposed process at the March 2010 meeting."
Also, currently Board President elections are held in April of odd-numbered years. The new Board meeting schedule does not guarantee a meeting will fall in April in future years.

CHIEF COMPLIANCE OFFICER REPORT, January 8, 2010- Roxanne Parks
Under "Internal Tax Procedures":
"…working on Internal Procedures addressing required minimum distributions, and tax reporting and withholding on disability retirement and death benefit payments.  … working with staff on the options available to beneficiaries of members who die while participating in DROP, to ensure that these options comply with the after-death required minimum distribution rules."


1981 PLAN CORRECTIONS ARE NOT DOCKETED AT THE CITY COUNCIL YET

LEGAL
SDCERS' General Counsel, Elaine Reagan January 6, 2010 report included:

"Retiree Health". Working with City Risk Management and the City Attorney's office, … assisted Finance and Benefits Administration staff with numerous questions on the impact of Municipal Code amendments to the retiree health benefit and helped formulate written procedures for processing retiree health claims."

"SDCERS received dismissals in two cases: Firefighters vs. City/SDCERS (Blizzard) and Collins vs. City City/SDCERS (Collins, Farrar and Eastus Presidential Leave claims)."

"Motions for Summary Judgement are scheduled for April 26, 2010 in MEA vs. City/SDCERS (Italiano)."

"Hearing on SDCERS' demurrer is scheduled for March 12,2010 in Firefighters vs. City/SDCERS (Saathoff Presidential Leave claim and Cash Leave Benefits for Annual Leave Plaintiffs)."

SDCERS vs. City Attorney Michael Aguirre
SD Superior Court Case no. GIC 841845
Consolidated with: SDCERS vs. City of San Diego, GIC 851286, Judge Hon. Jeffery Barton
Current Status- Settlement proposal to City pending.
Trial set for March 18, 2010.

LITIGATION, ACTUARY WORK AND ANNUAL BUDGET
SDCERS was pleased with two dismissals in active litigation and hopes the trend will continue as the legal expenses are over budget. Outside legal expenses were to be discussed in Closed Session.
Hovey reported that actuary costs are going to be over budget due to continuing demand for work beyond the Valuation.
As other budget areas are under budget, SDCERS may come in on budget by June 30th, the end of the fiscal year.

INVESTMENTS
Investment management fees have gone up, reflecting investment returns of 15%.

Oemcke was interested in the impact of active vs. retired unfunded liability on the asset study.

An investment analyst firm, BlackRock, reviewed SDCERS active re-balancing policy of asset allocations and made minor recommendations, such as adding trading costs into consideration, re-balancing ½ way to the selling/buying point, adding options and alternative solutions when re-balancing in this market.

NEXT MEETING: MARCH 5, 2010 AT 8:30 AM at SDCERS- 401 WEST A