PATTI'S NOTES
SDCERS BOARD AND COMMITTEE MEETINGS April 16, 2010
Submitted by Patricia Karnes

(Long version with appreciation to SDCERS' Mark Hovey for his assistance.) SDCERS Board meeting of April 16, 2010

"Register and Use SDCERS Web-portal." Latest news and update your file.

My Notes are by subject. They are my understanding of what happened. For exact happenings:
1) Web site- Watch delayed Board meetings, with subject access. Simply log-on to the City of San Diego or <http://www.sdcers.org/> www.SDCERS.org and look for the button that links to Channel 24. The Board's back-up materials are also available on PDF.

2)Television- If you live in the city limits, Board meetings are on City Channel 24 usually at 6pm following meeting days, and usually repeat on the weekend. Schedule on Channel 24th web-site, under the City of San Diego.

3) 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 meets approximately every 6 weeks.
Board meetings are at 8:30 a.m. Mark your calendars:
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 21, June 30, Sept 29, and December 15, 2010.

SDCERS MEETING MATERIALS AVAILABLE ON PDF; ADD COURT RULINGS?
Dick Wilken, Retired Employees Association (REA) Board member, thanked the Business & Governance Committee on April 15th for including Board meeting materials in PDF on SDCERS web site.

He requested SDCERS Board televise committee meetings and asked SDCERS to add PDF of court rulings as they are now doing for the Purchase of Service Credit hearing.

SDCERS ASSETS -
Sara Jimenez' April 2, 2010 SDCERS Group Trust Financial Statements:
Statement of Changes in Plan Net Assets for Feb. 28, 2010 showed total net assets for all plan sponsors as $3,865,944,000 compared to Feb. 28, 2009 of $2,887,106 million.

City's share was $3,597,886,000 on Feb. 28, 2010.

Executive Summary of Staff Reports for the April 15th meeting stated the reconciled net invested market value of assets for all plan sponsors wa $4,300,277,715 for Feb. 28, 2010

SDCERS Fiscal Year 2011 BUDGET, STAFF CUTS AND NEW INVESTMENT CONSULTANT
SDCERS Interim Chief Administrative Officer/CEO Mark Hovey will present SDCERS budget to the City Council on Wednesday, May 5th where the City Council will likely question him on the need for investment fees.

Hovey wrote: " This marks the fourth year in a row that we have lowered our administrative expense budget, which at $13.3 million is 30% lower than FY2007 spending," in his March 30, 2010 report to SDCERS' Business and Governance Committee.

Hovey said the budget is down $500,000. Compared to other pension systems, Hovey believes SDCERS is one of the most complex plans, with administrative costs that are in the middle to upper range of expense versus other systems.
Several county pension systems receive administrative support from the county government, and therefore have lower costs. Additionally, legal and actuarial costs are higher with SDCERS given the open legal cases and complexity of plan and actuarial issues. Hovey expects SDCERS will cut costs further in the future, when SDCERS will automate some functions that are currently too manual. Trustee Mark Oemcke thanked Hovey for his efficiency in administration and services to members.

Trustee Mark Oemcke said he would have trouble approving investment fees increasing from approximately $21.7 million to $28 million in the last five years simply because we have more assets under management. This month's selection of Ennis Knupp as new general investment consultant may lead to lower investment management costs should they recommend and SDCERS adopt a move toward index funds or selective passive versus active investing.

Chief Compliance Officer with history of SDCERS to be laid off?
On May 27th, SDCERS Business & Governance Committee will again review the SDCERS budget before it goes to the whole Board for approval. The proposed budget eliminates three positions and re-structures the legal section. Hovey noted that only the Board has the authority to shift attorney Roxanne Parks' Chief Compliance Officer duties to non-attorney Internal Auditor Bob Wilson. Tax questions would continue to be sent to SDCERS' General Counsel and outside tax attorney Ice-Miller. Benefit counselors would lose Park's expertise, though Hovey noted Elaine Reagan also has a strong background in such matters.

Retirees' new REA President Jim Baross (replacing Nancy Acevedo), read a letter from the City of San Diego Retired Employees Association requesting the Board retain Parks until the new Chief Administrator/CEO arrives, as Parks is the only remaining SDCERS attorney with institutional memory of past years.
(Patti's Note: Apparently the City Attorney's office no longer has staff with a history of SDCERS and pensions in San Diego.)

SDCERS General Counsel is searching for a consultant with healthcare insurance expertise to answer questions not in the Municipal Code and required for compliance with the new federal health insurance. This expense will be passed along to the City as part of the retiree health care administrative expenses.

Membership Services would add expertise to assist Disability applicants.

WILL GOLDSMITH TAKE VESTED RIGHTS TO COURT?
OR
HOW TO FUND SDCERS: SHOULD EMPLOYEES PAY ½ INVESTMENT LOSSES AS THE CITY ATTORNEY INSISTS?
(What should be included in the Substantially Equal split between the City and employees?)

Short Version of What Happened:
On May 28, 2010, the Board's next meeting, Trustees will vote on what will be included in substantially equal split between Employer and Employee starting July 1st. The results could lower the City's Annual Required Contribution (ARC) a little, or if the Board goes with Goldsmith's concept, their vote would lower the City's share considerably….for the short term.

The City Attorney says a 1954 section of the City Charter does not require the City to pay for investment losses and wants employees to pick up half. And apparently he is offering employees ½ of the gains that have traditionally been used to reduce the City's ARC.

What would employees be required to pay? Trustee Gregory Bych noted SDCERS actuary Gene Kalwarski requires in-depth preparation and guidance as there is no path to follow. Kalwarski plans to do a brief outline on defining the UAL at May 28th's Board meeting, as he does not believe he will have time to complete the dollar amounts of a revised City ARC based on the City Attorney's concept, or the cost to employees by the Board's next meeting on May 28th. The following Board meeting is July 9th. Too late for FY2011.

Trustee and Board Vice President Ray Ellis saw the City Attorney's concept very complex and requiring vetting.
Trustee Wayne Kennedy recommended separating out currently prepared options, as the perimeters of the City Attorney's question are unknown.
SDCERS General Counsel, Elaine Reagan, and fiduciary attorney, Ashley Dunning added that there is not sufficient time for preparing the City Attorney' options of C or D for the Board vote on May 28th.

(Patti's Note: The day before, at the April 15, 2010 Mayor's news conference on Channel 24, the Mayor indicated there is too little time to expect the City's Attorney to implement his concept by July 1.)

What Happened at the two hour discussion:
The City's Attorney's investment loss concept distracted from the Board's review of whether, or not, to update employee annual contributions to include ½ of disability costs. This was referred to as options A & B.
Options C & D would refer to the City Attorney's concept if they were to be offered to the Board on May 28th.

The Board had two slightly different legal opinions from respected legal firms who work with many public pension systems in California. Neither of SDCERS two fiduciary legal firms recommended adding ½ investment losses to employees' pension contributions.

SDCERS General Counsel Elaine Reagan noted that the City Attorney provided a legal opinion from an out-of-state firm not familiar with California's laws protecting pension vested rights, and also does not work with any public pension plans.

What does "Normal Retirement Allowance" mean?
The Board pondered two conflicting definitions of "Normal Retirement Allowance", complicated by vested rights and questions of identifying which investment losses would be shared:

1) Goldsmith interpreted, for the first time, that "Normal" included investment losses as part of employee contributions needed to pay future benefits.

2) On the more traditional side, Ashley Dunning and Michael Toumanoff of Manatt, SDCERS' current outside fiduciary legal firm, did not read Normal as including investment losses in the Muni Code/Charter.
Manatt noted, in Exhibit E, that the UAL "…reflecting experience and investment gains or losses and accrued past service liabilities is excluded from the substantially equal contribution provision, as it is, and always has been, the City's sole funding responsibility."

Was the City obligated to cover all of the losses under "vested pension rights"?

Ultimately the Board decided that they needed clarification and looked at what SDCERS would need from the City Council as to policy, and detailed Ordinances, and/or updating the Charter.

SDCERS General Counsel Elaine Reagan said it was possible that new City Ordinances may prove to be in conflict with the Charter. Dunning added that the City may lose in court, like Fresno did, if the Council votes on an Ordinance which impacts "vested rights".

Alternative: Lower the assumed rate of return Goldsmith' outside legal firm, K & L Gates attorney Norman S. Milks also reasoned, in Exhibit D, that if there are investment losses then the Board should lower the assumed rate of return which would raise employees contributions.

Some want employees to share investment losses, or for the Board to lower the assumed rate of return:
Former Pension Reform Committee members Dick Vortmann and April Boling, as well as the San Diego Tax Payer's Association were in support of the City Attorney. Vortmann noted that one side cannot take all the risk in a crap shoot game.
Lani Lutar asked the Board to approve employees paying ½ of investment losses based on the 1954 drafter's intent. She asked for the actuary to send the new ARC to the City for a policy decision.

Vortmann, Boling and Lutar made the recommendation that the Board lower SDCERS' Assumed Rate of Return to cover "risk", if Trustees did not vote for the City Attorney's concept.

The representative from the City Attorney's office told the Trustees that they would be violating the Charter if they didn't vote for the City Attorney's concept as the level of contribution is not vested, nor is the method of calculation.

(Patti's Note: Why would Boling, Vortmann and Lutar want to raise SDCERS assumed rate of return, when SDCERS actuary Gene Kalwarski estimated at his last presentation at the City Council, that lowering the rate from the current 7.75% to 5% would double the unfunded actuarial liability to $5 billion and increase the City's ARC?)

What is happening with the UAL?
Boling also expressed concern that the Unfunded Actuarial Liability (UAL) is not decreasing with any speed.

Trustee Mark Oemcke also has repeatedly expressed concern about the City not making progress on paying down the UAL.

Regarding the current UAL, SDCERS' Sara Jimenez written report stated on April 2, 2010 that compared to the June 30, 2009 Valuation "…"…the unfunded actuarial liability for all employers of $2,180,073,640. This amount increased by $857+ million from the June 30, 2008 valuation total of $1,323,371,638."

But later, Interim Chief Administrator/CEO Mark Hovey's reported that SDCERS is up approximately $1 billion as of March 31, 2010, compared with 2009 assets, and up 20% for the year to date.

(Approximately 11 weeks to a new Valuation for June 30, 2010, new funding ratio and a new UAL.)

Considerations on sharing the loss:
Dunning said California's constitution trumps the City Charter. She noted the State constitution protects the vested right to have the City pay the UAL. This system has been in place since 1926. Dunning advised the Board to look at members' expectations of vested rights.

Dunning noted GASB requires a specific provision excluding accrued liabilities from splits with employees.

Dunning pointed out that the 1954 opinion could support either position and a 1962 opinion on accrued liabilities could be taken either way also.

Reagan added that it was outrageous to depend on interpretation swinging with each new City Attorney elected. Trustees also have US and State laws to follow, she said, which were enacted to avoid political meddling, which appears to be the case here.

When Trustee Richard Tartre asked if 65 years of court cases trump the City Attorney, Reagan responded yes, 90 years of City tradition.

Trustee Herb Morgan asked what the Charter meant when it was written? Reagan answered that it was a different plan then.

In response to a question from Trustee Edward Kitrosser, Reagan replied that the City had benefited from investment gains reducing the City's ARC in the past.

Trustee and Investment Committee Chair, Steve Meyer also wondered how Trustees would do their duty without interpreting the City Charter. He noted that 1954 Charter entry was written before SDCERS switched to some investments that could result in losses. He noted the City has a conflict of interest.

Earlier, Michael Conger, representing the Police, talked of getting the City out of debt by raising the repayment schedule. He quoted Vortmann on the City having an addiction to underfunding the pension plan.

Ann Smith from the MEA talked about "vested rights" of the plan sponsor's covering losses, and questioned the City's intent. She noted the City Attorney was not on a factual or legal basis.

Board's Decision
Ashley Dunning, SDCERS fiduciary attorney from Manatt, told Trustees that their first fiduciary responsibility is to members and not to political influences. She said that the Board's first response is to determine if employees' contributions are to include half of investment losses for the first time, based on a 1954 entry into the City Charter and a City Attorney's interpretation.

Trustees' second responsibility is to minimize, where possible, the City's contributions to the system.

Dunning added that the Board must make a decision on what substantially equal includes and on the impact to employees' vested rights.

Unknown Actuary Territory:
The actuarial feasibility of the City Attorney's concept was not certain.

Trustee Mark Oemcke noted there were many parts of the UAL to analyze.

Kalwarski, the actuary, said the problem includes investment returns not earned when the City didn't pay the complete funding in past years. He contemplated that there were hundreds of ways to apply this.

Gene Kalwarski had never seen a pension plan as described by the City Attorney that requires employees to pay a share of investment losses. Gene requested precise explicit details to enable him to engineer calculations in order to evaluate impacts on the City and members. He also asked for legal parameters. There was some question if it was even possible to do the necessary calculations. He advised against using the City Attorney's estimated $4000 average cost per employee for investment losses, as the true cost may be much more.

One Trustee called the City Attorney's plan the "Actuary Full Employment Act" and noted if the actuarial work could be done it will increase SDCERS budget.

(Patti's Note: Below are some possible considerations that may float to the City Council and City Attorney, some were mentioned at this meeting, and some are my guesses at what Kalwarski was pondering when he told Board President Mark Sullivan this was "peeling the onion":

1) The long term impact on funded ratio in the future?
The City's old retirement plan is closed for new hires. It has a diminishing number of employees to divide up the old plan's share of investment losses.
Share cost will go up per employee as old plan members retire or leave. Who will pay when no employees are left?

Steve Meyer asked a related question about closed plans and Kalwarski said he would need to look at the issues raised.

2) Board President Mark Sullivan noted unintended consequences of employees choosing to leave rather than pay for losses. Costs to the City would go up if employees opt to retire earlier than Kalwarski's actuarial expectations.
The City saves if employees leave without a retirement.

3) Do new plan members pay for losses that occurred before they were hired?

4) Half of the losses of the whole pension fund would fall exclusively on current and future employees, under Goldsmith's concept.

5) If pro-rating, how is that to be figured out? Are age, salary and promised pension benefits a factor? Is the rate based on last June Valuation or looking forward using SDCERS current quarterly returns?

6) Normally SDCERS has gains. All gains were credited to the City's contribution in the past. Would having gains credited to their contribution become a "vested right" for employees? How would gains be credited to employee contributions?

7) Would contributions for losses be credited to individual employees'
pension accounts and be refundable if they leave the City?
Would gains be paid retrospectively if an employee left the City, asked Attorney Ann Smith from the MEA?

8) As SDCERS' investment gains and losses are amortized and averaged
("smoothed") how would SDCERS calculate individual balances due? Where is the beginning and end of losses and gains to calculate employees'
contributions?

REAL ESTATE INVESTMENT REPORT
SDCERS investment team member Jamie Hamrick announced there will be a special real estate presentation in May.

(Patti's Note: Jay Goldstone mentioned the impact of SDCERS real estate losses impacting the ARC at the April 21st City Council Budget Committee.)

SETTING A PRECEDENT: SDCERS SELF-CORRECTS:
Mark Hovey continues to negotiate with Mary Lewis in the Mayor's office at this time on correcting the Pre-1981 plan.[Two different issues here:
1)Hovey is working with Mary Lewis on payment of interest associated with
1981 Waiting Period service purchases that were incorrectly priced, and 2) The Board just passed a Resolution and amended Board Rules 4.00 and 4.30 to correct the 1981 Plan refunded contributions. SDCERS is no longer working with the City Attorney on a remedy - it's fixed.]

Elaine Reagan's report of March 22, 2010 to SDCERS Board includes the analysis that :
"THE BOARD HAS SOLE AUTHORITY TO INTERPRET RETIREMENT ORDINANCES AND DETERMINE WHO MAY BE ADMITTED TO BENEFITS."
"…SDCERS' tax council, recommends that the Board pass a Resolution documenting its interpretation of Ordinance 0-17770, including its finding on whether the City is estopped from contesting the validity of the Section …."
(Patti's Note: As I understand it, the City has made an unreasonable delay, and "intent" was established by the Preamble of the Ordinance, the MOUs, etc. And there was also a vote by members on purchase of pre-1981 plan service for city general members.) Part of the Resolution No. 2010-01 refers to members having "relied upon"
the validity of their agreement with the City and "that the City is barred by the Doctrine of "latches" from now disputing the validity of the 1992 vote."

Updating Board Rules for ELECTING BOARD PRESIDENTS was continued to May 28th with directions to SDCERS General Counsel for preparing a Board Rule.
The change is primarily due to reducing the number of SDCERS meetings annually.
Appointed Trustees and Elected Trustees report they are one team and not split between "elected" and "appointed".

OUTSIDE APPOINTMENT to SDCERS AUDIT COMMITTEE:
SDCERS Board considered financial experts James B. Smith III and David W.
Kramer for the vacant position of outside appointee to SDCERS Audit Committee. Both had excellent qualifications.

David Kramer was selected for the term ending September 2012, because of his experience with risk management.
James B, Smith's name will be retained for future openings.
Audit Committee meeting was postponed to April 21 at 9:00am.

FROM SDCERS General Counsel Elaine Reagan's Legal Calendar:
People v. Lexin: May 10, 2010 Ruling on Petition for Rehearing due.

MEA; Italiano v. City ; SDCERS: April 26, 2010 Cross-motions for summary judgment regarding liability.

City v. SDCERS, Judge Barton: May 21, 2010 Hearing on Motions for Summary Judgment by all parties.

SDCERS v.City and City Attorney Aguirre, Judge Barton: Trial continued pending consultation with Board regarding filing amended compulsory cross complaint. Status conference set for April 23.