SDCERS

San Diego City Employees Retirement System A Comprehensive Analysis

Overview of Pension Program

Evaluation of Features - Positive

Evaluation of Features - Negative

Proposition B
June 2012 SD Voters Passed Pension Reform Bill Creates 401(k) type defined contribution plan city/airport/port Only Police receive defined benefit in future Limits liability to lifetime of employee/beneficiaries Began 6 yr. freeze on inflation based salary increases Recent judicial ruling - reversed, city attorney response pending Likely to be decided in CA State Court of Appeals If repealed, significant increase in expenses to plan

Future Funding AbilityAlternate Discount Rates ABO

Scenario
Consistent 7.5% returns provide adequate funding, but are unrealistic; 1%, 2%, 4% returns inadequate. Randomized return more realistic require a mean of 7% and sigma ~10%

Future Funding AbilityAlternate Discount Rates PVB

Scenario
Consistent 7.5%, or 4% returns provide adequate funding, but may be unrealistic; 1%, 2% returns inadequate. Randomized return more realistic require a mean of 2.5% and sigma ~5%

Program Recommendations
this should include a summary of the weaknesses associated with the CERS to day and the high level types of ideas to address those weaknesses (then the follow on charts elaborate on the details of some of what we believe are our strongest ideas e.g. in order to address the issue of low return on investment, we suggest local investment in high return start -ups.

Recommendation #1 - Local Investments

Allocate 3% ($150 million) of the pension plans investment portfolio to to create an incubator fund for San Diego-based medical device start-up companies.

San Diego is already home to a robust scientific, academic and entrepreneurial community. Medical device start ups experience a higher success rate that their biotech and pharma counterparts. Future health care trends will create a demand for medical devices that promote efficacy and efficiency. Opportunities for outsized returns from just a few investments could enhance the total return of the overall portfolio. Benefits of injecting $150 million into the local San Diego economy o Increased sales tax revenues o Sustaining if not improving property tax collections o Increased business tax collections o More tax revenue to service ARC o Potential to create new, San Diego-based industries (i.e. Qualcomm)

Recommendation #2 - Leveraged Investing

Leverage the established investing capacity of the pension system to provide actively-managed and efficient investment options for the the citys defined contribution plan participants.

New employees will not be eligible for pension benefits. Instead, they will be eligible for a 401(k)-style savings plan. As an institutional investor, the SDCERS pension has established access to both traditional (stock and bond) and non-traditional (alternative) investments. 401(k) participants will benefit from institutional pricing of investment management services available when they invest in the pension portfolio Participants can invest in Target Date funds that change investment allocations over time as participants age and their risk profiles change.

Recommendation #3 - Renegotiation
Establish a contingency plan that will allow for the renegotiation of some employee benefits.

Current plan benefits for existing retirees and employees are protected under state law. Efforts to revise the law to allow for municipalities to renegotiate some pension benefits with employees Targeted benefits for renegotiation include increasing the early retirement age, reductions to the 13th check, DROP program, early retirement health benefits and service year purchases. Politically difficult but may be a necessary fallback should legal challenges to Prop B succeed.

Follow-Up Strategy
Establish working group to provide support of proposals to present to the Investment Committee and its Private Equity Consultant. The working group consists of:

University of California, San Diego UCSD faculty & alumni credited with forming over 500 start up companies. The University maintains active Technology Transfer Office - strong ties to the San Diego business community. Jane Moores, PhD - Assistant Vice Chancellor - Technology Transfer for the University CONNECT - regional organization links inventors & entrepreneurs w/local business community. Kevin Carroll is the Executive Vice President for CONNECT - oversees the SME CONNECT initiative - serves small to medium-sized companies in SD

David Alvarez - San Diego City Council, candidate for San Diego Mayor. Also SD Citys Budget & Finance and Rules & Economic Development Committees & other boards. Mr. Alvarez also has political support from organized labor.
Helen Robbins-Meyer Ms. Robbins-Meyer is currently the Chief Administration Officer for the City of San Diego. Ray Ellis - former pension board president who ran unsuccessfully for San Diego City Council in 2012. Pension reform top priority of his candidacy. San Diego Municipal Employees Association One of the six labor groups that represent San Diego government workers. Robert Cronk - current president of the Association. Herb Morgan Mr. Morgan is the current president of the Pension Board of Administration and is the Chief Investment Officer for Efficient Market Advisors. Expert in the area of exchange traded funds.