San Diego City Employees Retirement System

A Component Unit of the City of San Diego

Popular Annual Financial Report

FOR THE FISCAL YEAR ENDED JUNE 30, 2012

A Defined Benefit Pension Plan for Employees of the City of San Diego, the San Diego Unified Port District and the San Diego County Regional Airport Authority.

INTRODUCTION
We are pleased to present this Popular Annual Financial Report (PAFR) to active and retired Members of our three plan sponsors: the City of San Diego, the San Diego Unified Port District and the San Diego County Regional Airport Authority. The information provided in the PAFR is a snapshot of the detailed information contained in SDCERS Comprehensive Annual Financial Report (CAFR). The PAFR provides a concise summary of SDCERS financial health, investment performance and key accomplishments throughout the fiscal year. For more in-depth information, we encourage you to view the CAFR by visiting www.sdcers.org and clicking on the Forms and Publications page. For the past fiscal year, which ended on June 30, 2012, SDCERS investment returns were 0.9%. SDCERS annualized total investment returns were 12.4% over the past three years. Over the past 10 years, SDCERS investment returns were 7.3%, which is in the top 8% for public pension plans. In FY 2012, SDCERS continued to make progress toward its long-term strategic investment goals, with investment allocation changes in several areas including Global Equity, Emerging Market Debt and Infrastructure. In June of 2012, the San Diego electorate voted in favor of Proposition B, otherwise known as Comprehensive Pension Reform (CPR). In general, Proposition B amended the City Charter to eliminate defined benefit plans for all new City of San Diego hires, excluding sworn police officers. With the exception of police officers, all City employees initially hired on or after Proposition Bs effective date of July 20, 2012 are entered into a defined contribution 401(k) style retirement plan. Then, in September 2012, the California Legislature passed the California Public Employees Pension Reform Act (PEPRA) requiring reduced defined benefit formulas for local public entities, which affects only Port and Airport employees classified as New Members. This law is effective January 1, 2013. Members can find more detailed information on these initiatives by visiting www.sdcers.org and reading the FAQs posted under the Latest News page. SDCERS is working with our three plan sponsors to ensure a smooth transition on these benefit changes. With these reforms in mind, it is important for our Members to understand that changes that may take place to retirement benefits for newly hired employees do not affect the retirement benefits currently in place for those previously hired, or for those already retired. For example, closing the pension system to new hires does not affect contribution rates for those already in the pension system, and would have no effect on SDCERS ability to pay current Member retirement benefits. SDCERS has sufficient assets to pay benefits for decades to come, and will continue to follow its long-standing, disciplined strategy of a well-balanced portfolio that works to the benefit of all our Members and plan sponsors. Sincerely,

Mark A. Hovey
Chief Executive Officer
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INVESTMENTS
In FY 2012, SDCERS established a 5% Global Stocks allocation to take advantage of world-wide market investment opportunities and diversify its holdings beyond Domestic Stocks and International Stocks. Giving skilled managers the flexibility to seek value across global investment markets increases the probability of investment return success. As of June 30, 2012, Infrastructure investments in areas such as energy, industrials and utilities commenced and have grown to $17 million. Additionally, the allocation to Emerging Market Debt in countries such as Russia, Brazil, India and China was in place over the past year and added value to the portfolio. SDCERS Investment team completed a search for a Real Estate Consultant. Hewitt EnnisKnupp was hired based on the firms experience, objectivity and clarity of advice, thoroughness of the due diligence process, focus of investment recommendations and its ability to deliver the required services in a timely manner. A C T U A L A S S E T A L L O C AT I O N
As of June 30, 2012 Domestic Stocks International Stocks Global Stocks Domestic Bonds Emerging Market Debt Real Estate Private Equity Infrastructure Opportunistic Investments Cash Total 31.5% 17.8 4.9 27.4 3.0 10.1 2.9 0.4 0.5 1.5 100.0%

G R O W T H O F I N V E S T M E N T S , AT F A I R VA L U E
For Ten Years Ended June 30, 2012
$6,000

$5,000

$4,000

$3,000

$2,000

$1,000

HISTORICAL INVESTMENT PERFORMANCE

Periods Ending June 30th
25.00%

24.2% 20.3% 16.5%

15.00%

10.8% 5.3%

12.8%

13.4%

5.00%

0.9%
-5.00%

-4.7%

-15.00%

-19.1%
-25.00%

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Total Fund*

* Total Fund returns are shown net of investment management fees beginning July 1, 2010. Returns prior to July 1, 2010 are gross of investment management fees.
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FINANCIALS
Cash & Cash Equivalents Receivables Investments, at Fair Value Securities Lending Cash Collateral Capital Assets plus Prepaid Expenses TOTAL ASSETS Current Liabilities DROP Liabilities Securities Lending Obligations TOTAL LIABILITIES PLAN NET ASSETS

STATEMENT OF PLAN NET ASSETS

As of June 30, 2012 (Dollars in Thousands)
2012 City of San Diego Unified Port District $154,753 $8,730 159,378 9,540 4,824,321 272,228 246,779 13,922 3,459 195 $5,388,690 $304,615 $340,469 $18,899 440,467 10,838 248,394 14,013 $1,029,330 $43,750 $4,359,360 $260,865 Airport Authority $2,972 3,036 92,386 4,738 66 $103,198 $6,432 1,714 4,769 $12,915 $90,283 Total $166,455 171,954 5,188,935 265,439 3,720 $5,796,503 $365,800 453,019 267,176 $1,085,995 $4,710,508 2011 Total $386,667 85,479 4,920,326 326,600 2,313 $5,721,385 $190,438 434,547 326,600 $951,585 $4,769,800

This table depicts a summary presentation of the assets and liabilities of SDCERS. The Plan Net Assets shown are available for future payments of benefits to retirees and beneficiaries of SDCERS.

STATEMENT OF CHANGES IN PLAN NET ASSETS

For the years ended June 30 (Dollars in Thousands)
2012 Plan Sponsor Contributions Member Contributions and Other Contributions Net Investment Earnings (Losses) TOTAL ADDITIONS Benefit Payments Refunds of Member Contributions Administrative Expenses DROP Interest Expense TOTAL DEDUCTIONS NET INCREASE (DECREASE) NET ASSETS AT JULY 1 NET ASSETS AT JUNE 30 City of San Diego Unified Port District $231,200 $12,600 58,948 5,035 29,665 1,747 $319,813 $19,382 $342,428 $16,925 5,010 77 11,139 517 26,267 548 $384,844 $18,067 (65,031) 1,315 4,424,391 259,550 $4,359,360 $260,865 Airport Authority $3,800 2,107 676 $6,583 $1,665 259 183 52 $2,159 4,424 85,859 $90,283 Total $247,600 66,090 32,088 $345,778 $361,018 5,346 11,839 26,867 $405,070 (59,292) 4,769,800 $4,710,508 2011 Total $245,098 110,899 1,039,851 $1,395,848 $336,460 35,119 14,600 24,878 $411,057 983,840 3,785,960 $4,769,800

This table illustrates the additions and deductions to the net assets for FY 2012 as compared to FY 2011. The payment of retirement benefits accounts for the majority of deductions from the fund.

Funded Ratio and Unfunded Actuarial Liability (UAL)

As of June 30
Plan Sponsor City of San Diego Unified Port District Airport Authority Funded Ratio UAL (billions) Funded Ratio UAL (millions) Funded Ratio UAL (millions) 2007 78.8% $1.2 93.5% $16.0 109.0% $(4.2) 2008 78.1% $1.3 92.0% $21.5 102.3% $(1.3) 2009 66.5% $2.1 77.5% $64.8 86.9% $8.9 2010 67.1% $2.2 75.3% $76.7 96.0% $3.0 2011 68.5% $2.2 73.1% $95.5 102.7% $(2.3)

The chart summarizes key information from the most current independent actuarial valuation performed from SDCERS. The Funded Ratio is the relative percentage of actuarial assets to actuarial liabilities. The UAL (Unfunded Actuarial Liability) is the difference in dollars between actuarial assets and actuarial liabilities. Agency funds that do not represent the assets of SDCERS are excluded from the financial summary.
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SELECTED ACCOMPLISHMENTS
Member Communications, New Fact Sheets and Booklets on Website
SDCERS held its annual meeting in September for retired and active members with the executive team presenting the investment performance of the portfolio and new initiatives. SDCERS' staff designed 23 separate Booklets addressing the different benefit tiers for SDCERS' members. In addition, topical Fact Sheets have been developed for all other key benefit provisions, including Death Benefits, Retiree Health and Purchase of Service (PSC). A PSC calculator has also been added to the SDCERS' website, allowing members a fast and easy way to estimate purchases. Further website enhancements are planned in the coming year to provide members with greater access to current information on their retirement benefits.

Operational Initiative to Correct Historical Purchase of Service Credit Underpricing

In response to a June 2010 appellate court ruling, SDCERS undertook a major operational initiative to correct PSC underpricing of contracts issued in calendar years 2003 and 2004. Approximately 2,000 current and former City and Airport employees were affected by the PSC underpricing. The correction process is now complete and resolved approximately $65 million in associated underpricing.

Implementation of New City Retiree Healthcare Plans

SDCERS worked with City staff to develop processes and programming that provide the City with the data required to manage its new retiree health care plans. SDCERS took a leadership role in informing members about changes in future retiree health care and the related elections to be made, including reaching out to deferred vested members to inform them of the upcoming changes.

SDCERS received an award from The Government Finance Officers Association (GFOA) of the United States and Canada for Outstanding Achievement in Popular Annual Financial Reporting, for its Popular Annual Financial Report (PAFR) for the fiscal year ended June 30, 2011.

1,948 40,979 35
Number of individual counseling sessions conducted by SDCERS Retirement Counselors covering topics such as the Deferred Retirement Option Plan (DROP), service retirement, purchase of service credit, termination and disability. Number of calls from Members, beneficiaries and others received by the Call Center and counseling staff requesting assistance with Member benefits, appointments to meet with counseling staff and the Citys Retiree Health Enrollment questions. Number of retirement seminars, new employee orientations, benefit fairs, retiree meetings and other outreach efforts conducted to educate and inform our active and retired Members.

By the Numbers...

SDCERS Membership as of June 30, 2012

City of San Diego Active & Inactive Members Retired Members & DROP Participants Unified Port District Active & Inactive Members Retired Members & DROP Participants Airport Authority Active & Inactive Members Retired Members & DROP Participants Total SDCERS Membership 10,616 8,205 726 475 417 46 20,485

401 West A Street, Suite 400, San Diego, CA 92101

This Popular Annual Financial Report (PAFR) is a summary depiction of SDCERS audited financial statements and other information contained in SDCERS Comprehensive Annual Financial Report (CAFR). The complete audited financial statements and pertinent notes to the financial statements can be found in SDCERS 2012 CAFR. SDCERS PAFR provides summary financial information and does not conform to Generally Accepted Accounting Principles (GAAP); the SDCERS CAFR conforms to GAAP and provides a comprehensive overview of the Systems financial and operating results. SDCERS CAFR is available for review at www.sdcers.org under Forms and Publications, or at the SDCERS office.

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