PATTI'S NOTES
SDCERS BOARD AND COMMITTEE MEETINGS May 27-28, 2010
Submitted by Patricia Karnes

Next SCCERS Meeting is: July 9, 2010

SDCERS Board meeting for May 27-28, 2010
My Notes are by subject. They are my understanding of what happened.

RETIREE HEALTH OPEN ENROLLMENT
Open enrollment is June 7 through July 2.
Open Enrollment Help Day is 3rd Tuesday, June 15 from 10 AM to Noon at Balboa Park Club.
Member Services Director Cynthia Queen reported that the Open Enrollment booklet will be sent out to members, as well as, posted on SDCERS web site.

COLA APPROVED BY BOARD
In accordance with the Muni Code, the Board approved the "…Cost of Living Adjustment (COLA) increase of 2.0% to the retirement benefits for eligible SDCERS pension plan retirees who retired before July 1, 2010 and 0.3% for eligible 1981 pension plan retirees, all effective July 1, 2010. Special Class Safety Retirees are not eligible for COLA increases."

SDCERS ASSETS -
As of March 31, 2010, the unaudited Statement of Plan Net Assets showed total net assets for all plan sponsors as $4,049,059,000 compared to March 31, 2009 of $3,027,381,000.

Executive Summary of Staff Reports, for the May 28th meeting, stated the reconciled net invested market value of assets for all plan sponsors was $4,528,323,592 as of April 30, 2010.

INVESTMENT RETURNS
Staff reported returns from April were up 1.5%.
Returns as of May 27th were down about 6%..
As of May 27th, returns were about 15% since July 1, 2009. This fiscal year ends June 30, 2010.

Note the new Asset Allocation Status Report in the Executive Summary with new re-balancing bands.

Callan Associates, Inc. Investment Measurement Service Quarterly Review, Performance Summary, Periods Ended March 31, 2010, is the last quarterly report manual from Callan. The next report will be from Ennis. It will be smaller and grow in size as SDCERS determines contents.
Callan reported on page 1:
"Greece dominated the headlines on an almost a daily basis as the country struggled to get its budget deficit under control. Borrowing costs have skyrocketed. This has added significant volatility to the developed European markets for much of the quarter. The uncertainty has continued into the current quarter."
On page 3: "SDCERS' first quarter return of 4.2%(private real estate valuations are lagged one quarter) …ranked 15th percentile against public fund peers. Fiscal year-to-date returns were up 20.4%"

Staff's review of reports noted quarter return of $1.6 million.

SDCERS Fiscal Year 2011 BUDGET & STAFF CUTS
Board approved the budget by 10-1 with Trustee Mark Oemcke voting no, preferring a tighter and more aspirational budget. Trustee Dave Hall noted the excellent active discussion of pros and cons regarding the concept that SDCERS budget is driving the Board policies on legal issues and active management fees.

Actuarial Budgeting
While reviewing this notes, Mark Hovey, SDCERS' Chief Financial Officer and Interim Administrator, clarified that "Cheiron does additional work for SDCERS besides just the annual actuarial valuation. The cost of just the valuation is about $150,000, but the annual actuarial budget for FY2010 was $350,000. We expect to finish the year at about $500,000, which is close to the $527,000 spent in FY2009."
At the Business & Governance committee it was clear that figuring out the City Attorney's concept of Substantially Equal is expensive.

Capital Budget for Information Technology: One million dollars are set aside, for FY 2011, for development of replacement software for the pension system. Trustee Ed Kitrosser noted the Board has final approval on each stage of I.T.'s costs. At the moment, staff has only the plan. Precise costs from RFPs are not yet available for Trustees. There will be more expenses in future years.
Trustee Steve Meyer noted that current system components are a greater risk to SDCERS, than the future cost of software. Trustee Mark Oemcke noted that nature of I.T. is to always solve the next set of problems and he was concerned to keep costs tight.

Investment Budget:
Mark Hovey, SDCERS Interim Administrator/CEO and Chief Financial Officer, April 9th report said: "At $28.7 million, Investment Management expenses represent 68.2% of the total SDCERS budget, compared to 64.3% of the FY 2010 budget. Investment Management expenses for FY 2011 are up $3.8 million (15.3%).
There were many positive recommendations among Board members for reducing FY 2011 investment fees. Hovey pointed out that the new investment consultant, Ennis, might go from a style that is active, to more passive management, lowering costs. Hovey also said that active management did result in $35 million in extra returns last year.
Trustee Ray Ellis and Trustee Herb Morgan looked to the Investment Committee to "vet" the situation and reduce costs.
Trustee Mark Oemcke recommended a lower budget figure as aspirational to staff, and also recommended lowering fees by increasing diversification and exposure.

Total budget is up 8.6% to $42.0 million for FY 2011.

Hovey's budget report noted that FY 2011 is down 7 positions to 58 headcount. Three positions were eliminated and four positions were not budgeted. At the Business & Governance Committee, Trustee Steve Meyer noted the need to maintain the service level at SDCERS.

Hovey's report continued:
"At $13.4 million, Administrative expenses represent 31.8% of the total SDCERS budget…."

On legal expense items: Hovey reported: "The total outside legal budget of $1,420,000 is comprised of litigation/fiduciary counsel ($950,000), tax counsel ($80,000), and disability counsel ($390,000)."
Trustee Susan Gonick thought raising the legal amount for additional lawsuits at this time was arbitrary and recommended waiting to evaluate the legal situation. Trustee Steve Meyer was concerned that if SDCERS raised the legal expense, SDCERS would be seen as going to war. At the end of the discussion, Hovey said he will notify the Board if legal costs need adjustment due to the impact of new litigation.

SDCERS AUDIT COMMITTEE
Chair Michael Collins was pleased to see the Board takes time to discuss issues.

RETIREES CONCERNS on "SUBSTANTIALLY EQUAL" Investment losses
On May 3, 2010, SDCERS was served with the City's Petition for Writ of Mandate.

On May 28, 2010 the Board disbanded the Ad Hoc Committee for the old Barton litigation and banded together a new Ad Hoc Committee on the litigation of Purchase of Service Credits and the Substantially Equal lawsuit. Chair Trustee Susan Gonick, Board VP Ray Ellis, Trustee Wayne Kennedy, Trustee Alan Arrollado, and Trustee Edward Kitrosser.

1) Court Information: SDCERS General Counsel Elaine Reagan's Litigation Chart shows: "City of San Diego v. San Diego City Employees' Retirement System, Case No. 37-2010-00091207-CU-WM-CTL. (Substantially Equal) Judge: Joan Lewis" "Writ of Mandate action seeking an order compelling the Board to calculate employee contributions including 'substantially equal' share of cost of actuarial looses, including investment losses." "SDCERS responsive pleading due June 2, 2010." "July 16, 2010- Hearing on Writ."

2) Board action needed: SDCERS General Counsel Elaine Reagan's May 11th report:
"The Board must also consider whether members have, or may have, a vested right to have the City continue to pay 100% of the UAL, after ninety years of doing so…."
"…the Board should determine the meaning of the substantially equal language in Charter 143 and adopt a Rule that reflects its interpretation."

3) Actuary notes: At the Board meeting, Gene Kalwarski included some.
questions of interest to retirees:
· "Will allocating gains and losses to members jeopardize the IRS qualification status of this plan? Allocating gains and losses to members may mean that the benefits are not 'definitely determinable' in advance. This is a major IRS requirement."
· "Should active employees be responsible for gains and losses incurred on retiree liabilities? If not, who pays for them?"
· "Can the cost to members exceed the expected value of their benefits?"

Comments to Board on City 's Lawsuit:
I spoke as an individual, not as VP Advocacy, City of San Diego Retired Employees Association (REA). I asked the Board to focus on their long-term fiduciary responsibility to see members' pensions are funded. In the past the City has asked to do short term solutions to funding, with the result that the City had difficulty obtaining bonds. Would this happen again? I appreciated SDCERS actuary's question: "Should active employees be responsible for gains and losses incurred on retiree liabilities? If not, who pays for them?" In conclusion: How can SDCERS remain funded under the City Attorney's lawsuit?

Actuary, and former SDCERS Trustee, Bill Sheffler, who had frequently mentioned "substantially equal" during his year on the Pension Reform Committee with April Boling, said the plan sponsor's intent rules, unless it is contrary to the plan or law. He pointed out that SDCERS has a long-term history of large gains, which would reduce employee contributions in the future and mean employee pain would be short-term. (It should be verified that Sheffler is doing some actuarial numbers for the City Attorney on this topic.)
Sheffler encouraged the Board to re-consider the legal advice from their staff.

"SUBSTANTIALLY EQUAL": Include Disability costs - Choice A
Comments: Joe Flynn complimented SDCERS staff on the good quality of their General and Fiduciary legal counsel.
Attorney Mike Conger represented the police on the issue of splitting disability costs with the City. The police would be the most impacted by the change. He recommended the Board look at what is meant by "normal retirement allowances" in the Muni Code. He read it as only including service retirement and not including disability or death costs.

Disability inclusion approved: The Board voted 8-3 for Option A. Hovey explains that Option A on substantially equal includes a portion, not all, of the costs associated with disability benefits. The City pays 100% of disability benefits above what a member would otherwise receive from their accrued service benefit. (Voting against option A were Board President Mark Sullivan, and Trustees Alan Arrollado and Edward Kitrosser.)

It was not clear if the previous actuary for SDCERS had included disability when determining the formula for substantially equal. SDCERS actuary, Gene noted that old rates were constructed under circumstances no one can understand now. They were inherited he pointed out.

The result: the City's ARC will drop to $229.1 million from $231.7 million and Employee Contributions will rise.

OTHER LEGAL
SPECIAL NOTE: During a break at the Business & Governance Committee meeting, Bob Wilson, SDCERS Internal Auditor, said Roxanne Story Parks (formerly SDCERS Chief Compliance Officer and Associate General Council) will be starting at the City Attorney's office in June. Roxanne has an agreement of no conflict of interest with the City Attorney and will not be working on pensions.

THREE OTHER LEGAL CASES ON SDCERS LITIGATION CHART
1) Judge Barton on SDCERS v. City of San Diego and City Attorney, Michael Aguirre. No date of upcoming hearing. Reagan wrote: "First and Third causes of action dismissed on April 23, 2010, and Court advised SDCERS will not amend Second cause of action. Intervenors and City currently negotiating resolution of complaints in intervention, after which judgement will be entered on entire action."

2) Saathoff and firefighters' discontinued "Presidential Leave": Reagan wrote: "June 4, 2010: Hearing on SDCERS' demurrer to first amended complaint."

3) Judith Italiano's discontinued "Presidential Leave": Reagan noted: "June 3, 2010: Cross-motions for summary judgement regarding liability."

DISABILITY
There is a noticeable increase in disability applications. (Is this the result of even fewer City employees doing more, for at least the 8th year in a row? Or is this a another purge of light-duty employees in temporary positions that are sacrificed in the Mayor's cut backs, in order to keep employees who can do it all?)

DESIGNING NEW PENSION SOFTWARE FOR SDCERS
L. R. Wechster is a consultant for planning computer software system upgrades. He will draw up specifications for RFPs for SDCERS to replace PensionGold. David Bond, SDCERS Tech, has already found his expertise and contribution on tech valuable for SDCERS

At the Business & Governance Committee, L.R. Wechsler said SDCERS ranks "medium" in public pension complexity. He pointed out the City of Milwaukee as the most complex.
Bob Wilson, Internal Auditor, noted the current system at SDCERS requires hand processing for members with breaks in service.

REAL ESTATE
The Board corrected a tactical range in SDCERS Real Estate Strategic Plan and 2010 Real Estate Investment Plan.
As the market recovers, staff hopes leverage benefits SDCERS.

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"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 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:
no meeting in June. Next meetings are 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 June 30, Sept 29, and December 15, 2010.