San Diego County Employees Retirement Association Received*

Recommendations 15

• 07-24

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  </b> Hire its <b>own risk manager</b> as an officer of the pension fund <b>reporting</b> to CEO and the Board. He/she will work with SDCERA's Chief Investment Officer and investment staff, Albourne, and Ennis Knupp to establish a Risk Management Department. The risk manager should monitor existing asset managers and provide risk analysis and weighting to the Board of Retirement, when choosing new fund managers. He/she should also assist the Board in developing appropriate exit strategies when an investment becomes too risky to retain; unacceptable changes occur in the asset management or its stated strategy; and/or, the investment no longer fulfills its original objective. Response: This recommendation was previously implemented. SDCERA hired an investment officer in August 2006 to cover the areas of fixed income and risk management. It was also decided that an additional level of responsibility for oversight was needed. In January 2007 at the Administrative Retreat, the Board discussed the role of a Risk Officer. The role was discussed in subsequent meetings where it was defined, approved and added to the budget. Recruitment for the position was opened early July 2007. <b>
• 07-25

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  </b> In the interim period, the SDCERA CIO should work with Albourne America, LLC in implementing the "Alpha Engine Diversification" recommendations made by Cliffwater, LLC on December 18, 2006 (see Appendix C). Such actions would further diversify the dollar amounts of Alpha fund assets in terms of the risk attributable to each manager. Response: This recommendation was previously implemented. Staff has been increasing the diversification of the Alpha Engine since its initial expansion in 1999 from one manager to six managers. Additional managers were added over time and the program contained 11 different Two additional managers were recommended at the September 2006 mandates in 2006. meeting. The diversification that was recommended by Interim Consultant Cliffwater was something that was already being worked on. SDCERA's current Alpha Engine consultant, Albourne, has worked collaboratively with Staff to design a comprehensive Strategic and Tactical Plan, which the Board adopted at the May 17, 2007 meeting. The Plan recommends continuing on the path of additional diversification and is consistent with the prior diversification plan of Staff and with Cliffwater's diversification recommendation in January 2007.
• 07-26

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  Upon the completion of its lawsuit with Amaranth, provide its membership with a complete report providing full disclosure of all the reasons for the Amaranth loss. Nothing should be withheld. Response: This recommendation will be implemented. At the conclusion of this litigation all non- confidential information will be disclosed.
• 07-27

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  Whenever possible, a subcommittee of SDCERA Board Members should accompany staff to on-site visits during the vetting process involved in selecting new managers. Response: This recommendation will not be implemented. It is inconsistent with the management structure for the retirement board established by state law, is inconsistent with Governance Policy No. 4 on the role of the board, would impose an undue burden on board members without compensation, could undermine the policy objectives of the Brown Act, and would unnecessarily increase the expenses of the retirement system
• 07-28

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  Should not enter into "side-agreements" with asset managers which restrict the flow of pertinent information, and they should continue their program of eliminating all such outstanding agreements. This recommendation was implemented in 2006 based upon legislative Response: amendments of the Brown Act and the Public Records Act and the retirement system will continue to conduct business in compliance with state law.
• 07-29

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  Board members should periodically review the proposed contracts of new asset managers to better understand the complexities of the agreement. Board members should also receive a copy of the Contract Consultant's report before voting on new asset managers. Response: The recommendation that Board Members receive a copy of the consultants' report before voting on new asset managers had been previously implemented several years ago. The recommendation that Board Members review manager contracts will not be implemented, because it is inconsistent with the management structure for the retirement board established by state law and is inconsistent with Governance Policy No. 4 on the role of the Board. Managers are reviewed by knowledgeable staff and legal experts.
• 07-30

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  Should not substitute its own investment concepts to the methods currently employed by actuaries in the '37 Act counties. Response: This recommendation is incorrect and cannot be implemented under state law. Actuaries are not investment experts. The Actuary uses a simple average of investment consultants' expected passive returns as the actuary's recommendation. The Board accepted the actuary's passive return assumption. In addition, the Board of Retirement adopted an additional 25 basis points of active returns, well below the 148 basis points over the policy benchmark the fund has been able to produce over the last 10 years. The actuary also agreed that this addition was within the acceptable range of his interest earnings recommendation and has stated, ... "the 8.25% adopted in 2005 and 2006 was in our judgment within the range of reasonable investment earnings assumptions for plans like SDCERA and continues to be within that range for 2007." Government Code section 31453 specifies that the retirement board "may, in its sound discretion, recommend a rate which is higher or lower than the interest assumption rate established by the actuarial survey."
• 07-31

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  Adopt the San Diego County's resolution covering Tier I and II retirees. Response: This recommendation is not necessary given the action that the Board of Retirement adopted on May 3, 2007.
• 07-32

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  </b> By separate action, give Tier A retirees a one-year moratorium and earmark their funding in the 401(h) until June 30, 2008. It would also give more time for the Board of Retirement and the Board of Supervisors to sort through all the issues. Response: This recommendation will not be implemented. The actions of the San Diego County Employees Retirement Association (SDCERA) Board on May 3, 2007 and the San Diego County Board of Supervisors on June 19, 2007, make this action unnecessary. Establish a new retiree health plan for its active members (Tier A).
• 07-33

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  This plan could be set up as a part of the normal salary benefits negotiated between the County and its employee groups and unions. By taking this position, the County could remain competitive in the labor market and still control its costs. Then, the County could decide whether RESPONSE TO 2006-2007 GRAND JURY REPORTS (District: All)) SUBJECT: or not to include the Tier A members who have retired between March 8, 2002 and June 30, 2007, in their plan or "grandfather" them into SDCERA's 401(h) plan covering existing Tier I and <math>\Pi</math> retirees. Response: This recommendation will not be implemented. Pursuant to the actions of the San Diego County Employees Retirement Association (SDCERA) Board on May 3, 2007 and the San Diego County Board of Supervisors on June 19, 2007, Tier A members of the retirement system will not lose health insurance coverage from SDCERA.
• 07-34

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  Consult with the actuary to determine how much of the health reserve could be used to pay down part of the unfunded liability. SDCERA Response to Grand Jury Report Filed May 15, 2007 - 3 Response: This recommendation will not be implemented because it would be unlawful. This recommendation would likely constitute a breach of the terms of the Ellsworth Settlement Agreement.
• 07-35

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  Should not adopt the amended provisions of the Brown Act and continue to make its investment decisions at open meetings. Response: This recommendation will not be implemented. This recommendation would limit investment opportunities and potentially adversely impact the performance of the SDCERA investment fund.
• 07-36

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  </b> The SDCERA CEO should consider improving acoustics in the room by possibly installing overhead speakers. Also, since those making presentations are of different heights, they should have the option of using a hand microphone. Response: Agree. The Retirement Association is working with their vendors to fine tune the system. Changes will be made as recommended and required. SDCERA Response to Grand Jury Report Filed May 15, 2007 -
• 07-37

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  </b> Investment Committee meetings should focus on investments and not include non-related agenda items. These interfere with the time allotted for presentations from new asset managers and regular reports from current investment consultant(s). Response: This recommendation will not be implemented because this arbitrary agenda limitation would probably require the scheduling of special meetings, which does not facilitate public participation. The Board of Retirement meets twice a month. The first meeting has an emphasis on administrative matters and the second has an emphasis on investment matters. However, neither agenda is exclusive. Any matter, which needs to be discussed, must be put on the agenda in a timely fashion. Utilizing regular meetings to timely address board business benefits members and the public who wish to plan for meeting attendance. <i>
• 07-38

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  </b> Advise its trustees, staff, and outside consultants of the necessity to cooperate with legally constituted investigations. SDCERA Response to Grand Jury Report Filed May 15, 2007 - 5 Response: This recommendation was followed at all times. Witnesses scheduled through SDCERA were informed of the confidential nature of the Grand Jury's investigative process and that he/she should not discuss their testimony with anyone except legal counsel. SDCERA's legal counsel conferred with the Office of County Counsel concerning the appropriate scope and form of questions pertaining to pending legal matters and understood that the Grand Jury concurred that witnesses were not at liberty to respond to questions, which fell within the scope of privileged matters. It is also improper to criticize a witness for limiting testimony to non- privileged matters within the scope of his or her personal knowledge or expertise as to the retirement system. The stated perception that the Grand Jury's study was thwarted is belied by the factual and technical detail of the report itself. It is irresponsible and unfair to make such an assertion in the absence of clear and convincing support. SDCERA Response to Grand Jury Report Filed May 15, 2007 - 6 RESPONSE TO 2006-2007 GRAND JURY REPORTS (District: All)) SUBJECT: County of San Diego Response to Grand Jury Report: "San Diego County Employees Retirement Association, The Quest for 'Alpha'" Issued May 15, 2007