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HomeMy WebLinkAboutSan Diego City Employees' Retirement System - Public Financial ReportPRESORTEDSTANDARDU.S. POSTAGEPAIDSAN DIEGO, CAPERMIT 134401 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’ Annual Comprehensive Financial Report (ACFR). The complete audited financial statements and pertinent notes to the financial statements can be found in SDCERS’ 2020 ACFR. SDCERS’ PAFR provides summary financial information and does not conform to Generally Accepted Accounting Principles (GAAP); the SDCERS’ ACFR conforms to GAAP and provides a comprehensive overview of the System’s financial and operating results. SDCERS’ ACFR is available for review at www.sdcers.org within the “Financials & Investments” section or at the SDCERS office. facebook.com/SanDiegoCity- EmployeesRetirementSystem linkedin.com/company/sdcers @SDCERS Remote Call Center & Webinars Due to the ongoing COVID-19 pandemic throughout the entirety of fiscal year 2021, SDCERS maintained an almost entirely remote workforce. Three of our four Call Center staff members worked from home every day, while one staff member would typically come into the office to perform on-site tasks such as scanning and mail duties. We were able to prioritize health and safety while still maintaining an open line of communication for our members by implementing a successful remote Call Center, where staff can both answer and initiate calls from home. We also continued remote member education and offered over 50 webinar opportunities during fiscal year 2021. Lastly, Board and Committee meetings continued to be held remotely, but the public was provided access to watch the meetings live and/or submit public comment ahead of time. SDCERS’ Awards The Public Pension Coordinating Council awarded SDCERS the 2021 Public Pension Standards Award for Funding and Administration. This is the fourth year in a row SDCERS has received this award, which was granted in part because our three plan sponsors pay their Annual Required Contributions in full and on time every year. SDCERS also received the Municipal Information System Association of California (MISAC) Quality Information Technology Practices Award for the fourth consecutive year. This award acknowledges SDCERS is following best practices in IT administration, audit, network, and security. Receiving the MISAC Quality IT Practices Award is an honor and tribute to the dedication and performance of SDCERS’ IT staff and contractors. Compliance Program In fiscal year 2020, SDCERS retained a consultant to help us develop best practices in compliance. In fiscal year 2021, SDCERS’ Legal Division implemented these best practices to develop a new compliance program. This compliance program included drafting a compliance program charter, presenting an annual compliance report to the Board, and adopting an employee code of conduct. By the Numbers SDCERS’ Call Center answered 22,753 calls, and members on average waited less than 90 seconds to speak to a helpful representative. On average, 9% of all calls to SDCERS were answered by the informative introductory message, which is updated throughout the year as needed to provide immediate answers to common questions. SDCERS’ counselors conducted more than 1,500 individual counseling sessions, covering topics such as entering or exiting DROP, service retirement, purchase of service credit, termination, and disability retirements. In addition to counseling sessions, over 50 educational webinars were offered to expand SDCERS’ outreach and ensure members are properly informed. - 4 - SELECTED ACCOMPLISHMENTS Government Finance Officers Association Award for Outstanding Achievement in Popular Annual Financial Reporting Presented to San Diego City Employees Retirement System California For its Annual Financial Report for the Fiscal Year Ended June 30, 2020 Executive Director/CEO Today, Tomorrow, Together. POPULAR ANNUAL FINANCIAL REPORT FOR THE FISCAL YEAR ENDED JUNE 30, 2021 A defined benefit pension plan trust for employees of the City of San Diego, the San Diego Unified Port District and the San Diego County Regional Airport Authority. A fiduciary component unit of the City of San Diego, CA. SDCERS' MEMBERSHIP as of June 30, 2021 CITY OF SAN DIEGO Active & Inactive Members: 7,914 Retired Members & DROP Participants: 10,858 UNIFIED PORT DISTRICT Active & Inactive Members: 609 Retired Members & DROP Participants: 650 AIRPORT AUTHORITY Active & Inactive Members: 520 Retired Members & DROP Participants: 173 TOTAL SDCERS MEMBERSHIP 20,724 SDCERS is pleased to present the fiscal year 2021 Popular Annual Financial Report (PAFR) to 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 this PAFR is a snapshot of the detailed information contained in the Annual Comprehensive Financial Report (ACFR). The PAFR provides a summary of SDCERS’ financial health, investment performance, and key accomplishments throughout the fiscal year. For more in-depth information, we encourage you to read the ACFR, which you can find on SDCERS’ website at www.sdcers.org under the “Financials & Investments” tab. SDCERS’ fiscal year 2021 investment return (net of fees) is 24.9%, which is indicative of a strong recovery after severe market losses experienced during the beginning of the COVID-19 pandemic. As of June 30, 2021, the Trust Fund’s assets totaled just over $10 billion – the highest level SDCERS has seen in its history! The end of fiscal year total reflects a net increase of about $2.0 billion since June 30, 2020. The fiscal year 2021 investment return of 24.9% is well above our actuarially assumed rate of return of 6.5%. The net investment return is 10.3% over the past three years, 10.7% over the past five years, and 8.7% over the past 10 years. Over the past 20 years, SDCERS’ net investment return is 7.8%, which is in the top 7% for public pension plans. The key driver of SDCERS’ performance in fiscal year 2021 was very strong returns from stocks. Over the fiscal year, U.S. stocks returned 46.7% and non-U.S. stocks returned 39.4%. The economy, which declined over 30% in the second quarter of 2020, rebounded as new virus cases began to decline and consumer spending picked up. Businesses benefitted as consumers began to spend more, which resulted in rising stock prices. Given that SDCERS has about 45% of its portfolio invested in stocks, this was an economic environment that led to very good returns for the fund. SDCERS employs an independent actuary to conduct annual actuarial valuations. The most recent valuations, dated June 30, 2020, show that the City’s plan is 70.2% funded, the Unified Port District’s plan is 74.5% funded, and the Airport Authority’s plan is 89.6% funded. All three plan sponsors paid 25.00% 15.00% 5.00% -5.00% -15.00% -25.00% Total Fund* 16.8% 3.3%1.1% 13.5% 8.2% 13.6% 0.9% 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 7.0% 0.5% 24.9% 2021 2020 2019 City of San Diego Unified Port District Airport Authority Custodial Funds Total Total Total Cash & Cash Equivalents $198,624 $38,287 $67,009 $51 $303,971 $302,688 $351,168 Receivables 362,960 21,098 8,043 37 392,138 240,109 569,105 Investments, at Fair Value 9,452,148 545,461 200,305 - 10,197,914 8,189,137 8,296,129 Securities Lending Collateral 316,980 19,240 8,705 - 344,925 115,948 142,430 Capital Assets plus Prepaid Expenses 2,971 162 27 - 3,160 3,888 4,558 TOTAL ASSETS $10,333,683 $624,248 $284,089 $88 $11,242,108 $8,851,770 $9,363,390 Current Liabilities 559,307 32,305 11,847 52 603,511 418,382 773,170 Supplemental Benefits Payable 11,674 313 78 - 12,065 11,821 11,778 Securities Lending Obligations 316,998 19,239 8,703 - 344,940 115,969 142,439 TOTAL LIABILITIES $887,979 $51,857 $20,628 $52 $960,516 $546,172 $927,387 FIDUCIARY NET POSITION $9,445,704 $572,391 $263,461 $36 $10,281,592 $8,305,598 $8,436,003 2021 2020 2019 City of San Diego Unified Port District Airport Authority Custodial Funds Total Total Total Plan Sponsor Contributions $367,136 $19,705 $8,522 $- $395,363 $379,722 $350,319 Member Contributions and Other Contributions 64,508 3,547 3,051 - 71,106 73,250 67,061 DROP Contributions 5,060 301 148 - 5,509 4,983 5,099 Healthcare and POB Contributions - - - 44,064 44,064 44,466 - Net Investment Earnings 1,980,289 119,759 53,140 - 2,153,188 20,502 518,191 TOTAL ADDITIONS $2,416,993 $143,312 $64,861 $44,064 $2,669,230 $522,923 $940,670 Benefit Payments 569,799 29,759 8,616 - 608,174 566,817 540,467 Healthcare and POB Benefits - - - 43,233 43,233 43,633 - Refunds of Member Contributions 6,397 220 133 - 6,750 8,073 5,588 Administrative Expenses 11,160 760 423 840 13,183 12,624 11,267 DROP Interest Expense 21,218 607 71 - 21,896 22,221 22,549 TOTAL DEDUCTIONS $608,574 $31,346 $9,243 $44,073 $693,236 $653,368 $579,871 CHANGES IN FIDUCIARY NET POSITION 1,808,419 111,966 55,618 (9) 1,975,994 (130,445)360,799 FIDUCIARY NET POSITION AT JULY 1*7,637,285 460,425 207,843 45 8,305,598 8,436,043 8,075,204 FIDUCIARY NET POSITION AT JUNE 30 $9,445,704 $572,391 $263,461 $36 $10,281,592 $8,305,598 $8,436,003 FINANCIALS (Continued) STATEMENT OF FIDUCIARY NET POSITION As of June 30 (Dollars in Thousands) STATEMENT OF CHANGES IN FIDUCIARY NET POSITION For the Years Ended June 30 (Dollars in Thousands) - 3 - This table reflects the financial activity of SDCERS for the fiscal year and presents information to illustrate how SDCERS’ fiduciary net postion changes as a result of this activity. Contributions from both Sponsors and Members, Healthcare and POB Contributions and Net Investment Earnings are the main additions to the pension system. The payment of retirement benefits accounts for the majority of deductions from the trust funds. This is a summarized version of the data presented and analyzed in SDCERS’ ACFR. * Beginning Fiduciary Net Position for the Custodial Funds at July 1, 2019 was restated due to the implementation of GASB Statement No. 84. This table depicts a summary presentation of the assets and liabilities of SDCERS and reflects the resources available to pay benefits to members and beneficiaries at the end of the fiscal year. The Statement of Fiduciary Net Position is presented with a more detailed analysis in SDCERS’ Annual Comprehensive Financial Report (ACFR). - 2 - ACTUAL ASSET ALLOCATION As of June 30, 2021 GROWTH OF INVESTMENTS, AT FAIR VALUE Periods Ending June 30 Plan Sponsor 2020 2019 2018 2017 2016 City of San Diego Funded Ratio 70.2%71.6%70.8%71.2%71.6% UAL (billions)$3.3 $3.0 $3.0 $2.8 $2.6 Unified Port District Funded Ratio 74.5%75.6%74.2%74.3%74.4% UAL (millions)$161.8 $146.1 $149.2 $138.4 $129.5 Airport Authority Funded Ratio 89.6%90.8%89.0%89.2%89.4% UAL (millions)$24.8 $20.3 $22.4 $19.8 $17.6 The chart summarizes key information from the most current independent actuarial valuation performed for 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. Data for FY 2020 is the most recent available from SDCERS’ actuary. Agency funds that do not represent the assets of SDCERS are excluded from the financial summary. FUNDED RATIO AND UNFUNDED ACTUARIAL LIABILITY (UAL) As of June 30 FINANCIALS *Total Fund returns are shown net of investment management fees beginning FY 2012. HISTORICAL INVESTMENT PERFORMANCE Periods Ending June 30 SDCERS’ Long-Term Earnings Assumption Rate for the year ended June 30, 2021 is 6.5% 100% of their Actuarially Determined Contributions in FY 2021, continuing to fulfill their strong commitment to funding plan benefits. Towards the end of fiscal year 2021, a substantial event affecting SDCERS occurred: Proposition B, the ballot measure implemented in 2012 that closed the pension plan to all City employees hired on or after July 20, 2012 (except sworn police officers), was overturned. This means SDCERS is no longer a partially closed pension system, which is a significant factor that may influence our investment strategy moving forward. Negotiations between the City and relevant labor unions are ongoing to determine exactly how the reversal of Proposition B will work, and SDCERS is not a party to these negotiations. I would like to express my thanks to the Board of Administration, the Board’s Committees, and SDCERS staff who worked steadfastly in the best interest of our members and plan sponsors at the onset of the COVID pandemic and thereafter to ensure SDCERS continues to successfully deliver accurate and timely benefits and ensure the Trust Fund’s safety, integrity, and growth. While there were many obstacles to overcome this past fiscal year, working together with our consultants, providers, and stakeholder groups, SDCERS successfully maintained a teleworking business plan and continued to deliver member services and monthly retirement benefit payments on time and in full. These accomplishments would not have been possible without the Board and staff’s commitment and leadership. Their dedication ensures our plan sponsors, members, and the citizens of San Diego are well-served. SDCERS looks forward to continuing its mission to deliver accurate and timely retirement benefits to its members based on a disciplined investment strategy in the coming year, and all the years thereafter. - 1 - In Fiscal Year 2021, SDCERS conducted a Risk Attribution Study to identify sources of risk in the portfolio. These risks can come from the investments themselves (the risk of investing in a stock or bond, for example), the asset allocation (how much is invested in riskier asset classes), and the differences between SDCERS’ portfolio and the benchmark. The study revealed that investment policy risk, which is the risk that comes from investing in any market (stocks, bonds, real estate, etc.), is the largest source of risk in the portfolio, accounting for more than 95% of total risk. The Risk Attribution Study laid the groundwork for the Risk Reduction Analysis, which was initiated in Fiscal Year 2021 but will be completed in Fiscal Year 2022. The purpose of the analysis is to evaluate conditions that may necessitate reducing risk in the portfolio. This was initially undertaken due to the fact that SDCERS was a closed pension plan, meaning that there would be a growing number of retirees and a declining number of active members in the plan. This shift could result in a reduced appetite for risk. SDCERS’ investment consultant, Aon, and its actuary, Cheiron, worked in conjunction with staff to evaluate when the plan might seek to reduce risk and what the de-risking process would look like. However, the decision to reopen the pension plan altered the makeup of the plan moving forward. The analysis is being updated to incorporate this change and it will culminate in the Asset/Liability Study, which will be presented in March 2022. Sincerely, Gregg Rademacher Chief Executive Officer Domestic Equity Strategies 18.9% International Equity Strategies 15.8 Global Equity Strategies 9.1 Domestic Fixed Income Strategies 19.3 Emerging Market Debt Strategies 4.4 Real Estate Strategies 9.3 Private Equity and Infrastructure Strategies 14.2 Opportunity Fund Strategies 6.4 Cash 2.6 Total 100.0% $9,000 $10,000 $11,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 2012 2013 2014 2015 2016 2017 2018 2019 2020 MIL L I O N S 2021 INVESTMENTS SDCERS is pleased to present the fiscal year 2021 Popular Annual Financial Report (PAFR) to 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 this PAFR is a snapshot of the detailed information contained in the Annual Comprehensive Financial Report (ACFR). The PAFR provides a summary of SDCERS’ financial health, investment performance, and key accomplishments throughout the fiscal year. For more in-depth information, we encourage you to read the ACFR, which you can find on SDCERS’ website at www.sdcers.org under the “Financials & Investments” tab. SDCERS’ fiscal year 2021 investment return (net of fees) is 24.9%, which is indicative of a strong recovery after severe market losses experienced during the beginning of the COVID-19 pandemic. As of June 30, 2021, the Trust Fund’s assets totaled just over $10 billion – the highest level SDCERS has seen in its history! The end of fiscal year total reflects a net increase of about $2.0 billion since June 30, 2020. The fiscal year 2021 investment return of 24.9% is well above our actuarially assumed rate of return of 6.5%. The net investment return is 10.3% over the past three years, 10.7% over the past five years, and 8.7% over the past 10 years. Over the past 20 years, SDCERS’ net investment return is 7.8%, which is in the top 7% for public pension plans. The key driver of SDCERS’ performance in fiscal year 2021 was very strong returns from stocks. Over the fiscal year, U.S. stocks returned 46.7% and non-U.S. stocks returned 39.4%. The economy, which declined over 30% in the second quarter of 2020, rebounded as new virus cases began to decline and consumer spending picked up. Businesses benefitted as consumers began to spend more, which resulted in rising stock prices. Given that SDCERS has about 45% of its portfolio invested in stocks, this was an economic environment that led to very good returns for the fund. SDCERS employs an independent actuary to conduct annual actuarial valuations. The most recent valuations, dated June 30, 2020, show that the City’s plan is 70.2% funded, the Unified Port District’s plan is 74.5% funded, and the Airport Authority’s plan is 89.6% funded. All three plan sponsors paid 25.00% 15.00% 5.00% -5.00% -15.00% -25.00% Total Fund* 16.8% 3.3%1.1% 13.5% 8.2% 13.6% 0.9% 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 7.0% 0.5% 24.9% 2021 2020 2019 City of San Diego Unified Port District Airport Authority Custodial Funds Total Total Total Cash & Cash Equivalents $198,624 $38,287 $67,009 $51 $303,971 $302,688 $351,168 Receivables 362,960 21,098 8,043 37 392,138 240,109 569,105 Investments, at Fair Value 9,452,148 545,461 200,305 - 10,197,914 8,189,137 8,296,129 Securities Lending Collateral 316,980 19,240 8,705 - 344,925 115,948 142,430 Capital Assets plus Prepaid Expenses 2,971 162 27 - 3,160 3,888 4,558 TOTAL ASSETS $10,333,683 $624,248 $284,089 $88 $11,242,108 $8,851,770 $9,363,390 Current Liabilities 559,307 32,305 11,847 52 603,511 418,382 773,170 Supplemental Benefits Payable 11,674 313 78 - 12,065 11,821 11,778 Securities Lending Obligations 316,998 19,239 8,703 - 344,940 115,969 142,439 TOTAL LIABILITIES $887,979 $51,857 $20,628 $52 $960,516 $546,172 $927,387 FIDUCIARY NET POSITION $9,445,704 $572,391 $263,461 $36 $10,281,592 $8,305,598 $8,436,003 2021 2020 2019 City of San Diego Unified Port District Airport Authority Custodial Funds Total Total Total Plan Sponsor Contributions $367,136 $19,705 $8,522 $- $395,363 $379,722 $350,319 Member Contributions and Other Contributions 64,508 3,547 3,051 - 71,106 73,250 67,061 DROP Contributions 5,060 301 148 - 5,509 4,983 5,099 Healthcare and POB Contributions - - - 44,064 44,064 44,466 - Net Investment Earnings 1,980,289 119,759 53,140 - 2,153,188 20,502 518,191 TOTAL ADDITIONS $2,416,993 $143,312 $64,861 $44,064 $2,669,230 $522,923 $940,670 Benefit Payments 569,799 29,759 8,616 - 608,174 566,817 540,467 Healthcare and POB Benefits - - - 43,233 43,233 43,633 - Refunds of Member Contributions 6,397 220 133 - 6,750 8,073 5,588 Administrative Expenses 11,160 760 423 840 13,183 12,624 11,267 DROP Interest Expense 21,218 607 71 - 21,896 22,221 22,549 TOTAL DEDUCTIONS $608,574 $31,346 $9,243 $44,073 $693,236 $653,368 $579,871 CHANGES IN FIDUCIARY NET POSITION 1,808,419 111,966 55,618 (9) 1,975,994 (130,445)360,799 FIDUCIARY NET POSITION AT JULY 1*7,637,285 460,425 207,843 45 8,305,598 8,436,043 8,075,204 FIDUCIARY NET POSITION AT JUNE 30 $9,445,704 $572,391 $263,461 $36 $10,281,592 $8,305,598 $8,436,003 FINANCIALS (Continued) STATEMENT OF FIDUCIARY NET POSITION As of June 30 (Dollars in Thousands) STATEMENT OF CHANGES IN FIDUCIARY NET POSITION For the Years Ended June 30 (Dollars in Thousands) - 3 - This table reflects the financial activity of SDCERS for the fiscal year and presents information to illustrate how SDCERS’ fiduciary net postion changes as a result of this activity. Contributions from both Sponsors and Members, Healthcare and POB Contributions and Net Investment Earnings are the main additions to the pension system. The payment of retirement benefits accounts for the majority of deductions from the trust funds. This is a summarized version of the data presented and analyzed in SDCERS’ ACFR. * Beginning Fiduciary Net Position for the Custodial Funds at July 1, 2019 was restated due to the implementation of GASB Statement No. 84. This table depicts a summary presentation of the assets and liabilities of SDCERS and reflects the resources available to pay benefits to members and beneficiaries at the end of the fiscal year. The Statement of Fiduciary Net Position is presented with a more detailed analysis in SDCERS’ Annual Comprehensive Financial Report (ACFR). - 2 - ACTUAL ASSET ALLOCATION As of June 30, 2021 GROWTH OF INVESTMENTS, AT FAIR VALUE Periods Ending June 30 Plan Sponsor 2020 2019 2018 2017 2016 City of San Diego Funded Ratio 70.2%71.6%70.8%71.2%71.6% UAL (billions)$3.3 $3.0 $3.0 $2.8 $2.6 Unified Port District Funded Ratio 74.5%75.6%74.2%74.3%74.4% UAL (millions)$161.8 $146.1 $149.2 $138.4 $129.5 Airport Authority Funded Ratio 89.6%90.8%89.0%89.2%89.4% UAL (millions)$24.8 $20.3 $22.4 $19.8 $17.6 The chart summarizes key information from the most current independent actuarial valuation performed for 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. Data for FY 2020 is the most recent available from SDCERS’ actuary. FUNDED RATIO AND UNFUNDED ACTUARIAL LIABILITY (UAL) As of June 30 FINANCIALS *Total Fund returns are shown net of investment management fees beginning FY 2012. HISTORICAL INVESTMENT PERFORMANCE Periods Ending June 30 SDCERS’ Long-Term Earnings Assumption Rate for the year ended June 30, 2021 is 6.5% 100% of their Actuarially Determined Contributions in FY 2021, continuing to fulfill their strong commitment to funding plan benefits. Towards the end of fiscal year 2021, a substantial event affecting SDCERS occurred: Proposition B, the ballot measure implemented in 2012 that closed the pension plan to all City employees hired on or after July 20, 2012 (except sworn police officers), was overturned. This means SDCERS is no longer a partially closed pension system, which is a significant factor that may influence our investment strategy moving forward. Negotiations between the City and relevant labor unions are ongoing to determine exactly how the reversal of Proposition B will work, and SDCERS is not a party to these negotiations. I would like to express my thanks to the Board of Administration, the Board’s Committees, and SDCERS staff who worked steadfastly in the best interest of our members and plan sponsors at the onset of the COVID pandemic and thereafter to ensure SDCERS continues to successfully deliver accurate and timely benefits and ensure the Trust Fund’s safety, integrity, and growth. While there were many obstacles to overcome this past fiscal year, working together with our consultants, providers, and stakeholder groups, SDCERS successfully maintained a teleworking business plan and continued to deliver member services and monthly retirement benefit payments on time and in full. These accomplishments would not have been possible without the Board and staff’s commitment and leadership. Their dedication ensures our plan sponsors, members, and the citizens of San Diego are well-served. SDCERS looks forward to continuing its mission to deliver accurate and timely retirement benefits to its members based on a disciplined investment strategy in the coming year, and all the years thereafter. - 1 - In Fiscal Year 2021, SDCERS conducted a Risk Attribution Study to identify sources of risk in the portfolio. These risks can come from the investments themselves (the risk of investing in a stock or bond, for example), the asset allocation (how much is invested in riskier asset classes), and the differences between SDCERS’ portfolio and the benchmark. The study revealed that investment policy risk, which is the risk that comes from investing in any market (stocks, bonds, real estate, etc.), is the largest source of risk in the portfolio, accounting for more than 95% of total risk. The Risk Attribution Study laid the groundwork for the Risk Reduction Analysis, which was initiated in Fiscal Year 2021 but will be completed in Fiscal Year 2022. The purpose of the analysis is to evaluate conditions that may necessitate reducing risk in the portfolio. This was initially undertaken due to the fact that SDCERS was a closed pension plan, meaning that there would be a growing number of retirees and a declining number of active members in the plan. This shift could result in a reduced appetite for risk. SDCERS’ investment consultant, Aon, and its actuary, Cheiron, worked in conjunction with staff to evaluate when the plan might seek to reduce risk and what the de-risking process would look like. However, the decision to reopen the pension plan altered the makeup of the plan moving forward. The analysis is being updated to incorporate this change and it will culminate in the Asset/Liability Study, which will be presented in March 2022. Sincerely, Gregg Rademacher Chief Executive Officer Domestic Equity Strategies 18.9% International Equity Strategies 15.8 Global Equity Strategies 9.1 Domestic Fixed Income Strategies 19.3 Emerging Market Debt Strategies 4.4 Real Estate Strategies 9.3 Private Equity and Infrastructure Strategies 14.2 Opportunity Fund Strategies 6.4 Cash 2.6 Total 100.0% $9,000 $10,000 $11,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 2012 2013 2014 2015 2016 2017 2018 2019 2020 MIL L I O N S 2021 INVESTMENTS SDCERS is pleased to present the fiscal year2021 Popular Annual Financial Report (PAFR) to 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 this PAFR is a snapshot of the detailed information contained in the Annual Comprehensive Financial Report (ACFR). The PAFR provides a summary of SDCERS’ financial health, investment performance, and key accomplishments throughout the fiscal year. For more in-depth information, we encourage you to read the ACFR, which you can find on SDCERS’ website at www.sdcers.org under the “Financials & Investments” tab. SDCERS’ fiscal year 2021 investment return (net of fees) is 24.9%, which is indicative of a strong recovery after severe market losses experienced during the beginning of the COVID-19 pandemic. As of June 30, 2021, the Trust Fund’s assets totaled just over $10 billion – the highest level SDCERS has seen in its history! The end of fiscal year total reflects a net increase of about $2.0 billion since June 30, 2020. The fiscal year 2021 investment return of 24.9% is well above our actuarially assumed rate of return of 6.5%. The net investment return is 10.3% over the past three years, 10.7% over the past five years, and 8.7% over the past 10 years. Over the past 20 years, SDCERS’ net investment return is 7.8%, which is in the top 7% for public pension plans. The key driver of SDCERS’ performance in fiscal year 2021 was very strong returns from stocks. Over the fiscal year, U.S. stocks returned 46.7% and non-U.S. stocks returned 39.4%. The economy, which declined over 30% in the second quarter of 2020, rebounded as new virus cases began to decline and consumer spending picked up. Businesses benefitted as consumers began to spend more, which resulted in rising stock prices. Given that SDCERS has about 45% of its portfolio invested in stocks, this was an economic environment that led to very good returns for the fund. SDCERS employs an independent actuary to conduct annual actuarial valuations. The most recent valuations, dated June 30, 2020, show that the City’s plan is 70.2% funded, the Unified Port District’s plan is 74.5% funded, and the Airport Authority’s plan is 89.6% funded. All three plan sponsors paid 25.00% 15.00% 5.00% -5.00% -15.00% -25.00% Total Fund* 16.8% 3.3%1.1% 13.5% 8.2% 13.6% 0.9% 2012 2013 2014 2015 2016 2017 2018 20192020 2021 7.0% 0.5% 24.9% 2021 2020 2019 City of San Diego Unified Port District Airport Authority Custodial Funds Total Total Total Cash & Cash Equivalents $198,624 $38,287 $67,009 $51 $303,971 $302,688 $351,168 Receivables 362,960 21,098 8,043 37 392,138 240,109 569,105 Investments, at Fair Value 9,452,148 545,461 200,305 - 10,197,914 8,189,137 8,296,129 Securities Lending Collateral 316,980 19,240 8,705 - 344,925 115,948 142,430 Capital Assets plus Prepaid Expenses 2,971 162 27 - 3,160 3,888 4,558 TOTAL ASSETS $10,333,683 $624,248 $284,089 $88 $11,242,108 $8,851,770 $9,363,390 Current Liabilities 559,307 32,305 11,847 52 603,511 418,382 773,170 Supplemental Benefits Payable 11,674 313 78 - 12,065 11,821 11,778 Securities Lending Obligations 316,998 19,239 8,703 - 344,940 115,969 142,439 TOTAL LIABILITIES $887,979 $51,857 $20,628 $52 $960,516 $546,172 $927,387 FIDUCIARY NET POSITION $9,445,704 $572,391 $263,461 $36 $10,281,592 $8,305,598 $8,436,003 2021 2020 2019 City of San Diego Unified Port District Airport Authority Custodial Funds Total Total Total Plan Sponsor Contributions $367,136 $19,705 $8,522 $- $395,363 $379,722 $350,319 Member Contributions and Other Contributions 64,508 3,547 3,051 - 71,106 73,250 67,061 DROP Contributions 5,060 301 148 - 5,509 4,983 5,099 Healthcare and POB Contributions - - - 44,064 44,064 44,466 - Net Investment Earnings 1,980,289 119,759 53,140 - 2,153,188 20,502 518,191 TOTAL ADDITIONS $2,416,993 $143,312 $64,861 $44,064 $2,669,230 $522,923 $940,670 Benefit Payments 569,799 29,759 8,616 - 608,174 566,817 540,467 Healthcare and POB Benefits - - - 43,233 43,233 43,633 - Refunds of Member Contributions 6,397 220 133 - 6,750 8,073 5,588 Administrative Expenses 11,160 760 423 840 13,183 12,624 11,267 DROP Interest Expense 21,218 607 71 - 21,896 22,221 22,549 TOTAL DEDUCTIONS $608,574 $31,346 $9,243 $44,073 $693,236 $653,368 $579,871 CHANGES IN FIDUCIARY NET POSITION 1,808,419 111,966 55,618 (9) 1,975,994 (130,445)360,799 FIDUCIARY NET POSITION AT JULY 1*7,637,285 460,425 207,843 45 8,305,598 8,436,043 8,075,204 FIDUCIARY NET POSITION AT JUNE 30 $9,445,704 $572,391 $263,461 $36 $10,281,592 $8,305,598 $8,436,003 FINANCIALS (Continued) STATEMENT OF FIDUCIARY NET POSITION As of June 30 (Dollars in Thousands) STATEMENT OF CHANGES IN FIDUCIARY NET POSITION For the Years Ended June 30 (Dollars in Thousands) - 3 - This table reflects the financial activity of SDCERS for the fiscal year and presents information to illustrate how SDCERS’ fiduciary net postion changes as a result of this activity. Contributions from both Sponsors and Members, Healthcare and POB Contributions and Net Investment Earnings are the main additions to the pension system. The payment of retirement benefits accounts for the majority of deductions from the trust funds. This is a summarized version of the data presented and analyzed in SDCERS’ ACFR. * Beginning Fiduciary Net Position for the Custodial Funds at July 1, 2019 was restated due to the implementation of GASB Statement No. 84. This table depicts a summary presentation of the assets and liabilities of SDCERS and reflects the resources available to pay benefits to members and beneficiaries at the end of the fiscal year. The Statement of Fiduciary Net Position is presented with a more detailed analysis in SDCERS’ Annual Comprehensive Financial Report (ACFR). - 2 - ACTUAL ASSET ALLOCATION As of June 30, 2021GROWTH OF INVESTMENTS, AT FAIR VALUE Periods Ending June 30 Plan Sponsor20202019201820172016 City of San DiegoFunded Ratio70.2%71.6%70.8%71.2%71.6% UAL (billions)$3.3 $3.0 $3.0 $2.8 $2.6 Unified Port DistrictFunded Ratio74.5%75.6%74.2%74.3%74.4% UAL (millions)$161.8 $146.1 $149.2 $138.4 $129.5 Airport AuthorityFunded Ratio89.6%90.8%89.0%89.2%89.4% UAL (millions)$24.8 $20.3 $22.4 $19.8 $17.6 The chart summarizes key information from the most current independent actuarial valuation performed for 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. Data for FY 2020 is the most recent available from SDCERS’ actuary. Agency funds that do not represent the assets of SDCERS are excluded from the financial summary. FUNDED RATIO AND UNFUNDED ACTUARIAL LIABILITY (UAL) As of June 30 FINANCIALS *Total Fund returns are shown netof investment management feesbeginning FY 2012. HISTORICAL INVESTMENT PERFORMANCE Periods Ending June 30 SDCERS’ Long-Term Earnings Assumption Rate for the year ended June 30, 2021 is 6.5% 100% of their Actuarially Determined Contributions in FY 2021, continuing to fulfill their strong commitment to funding plan benefits. Towards the end of fiscal year 2021, a substantial event affecting SDCERS occurred: Proposition B, the ballot measure implemented in 2012 that closed the pension plan to all City employees hired on or after July 20, 2012 (except sworn police officers), was overturned. This means SDCERS is no longer a partially closed pension system, which is a significant factor that may influence our investment strategy moving forward. Negotiations between the City and relevant labor unions are ongoing to determine exactly how the reversal of Proposition B will work, and SDCERS is not a party to these negotiations. I would like to express my thanks to the Board of Administration, the Board’s Committees, and SDCERS staff who worked steadfastly in the best interest of our members and plan sponsors at the onset of the COVID pandemic and thereafter to ensure SDCERS continues to successfully deliver accurate and timely benefits and ensure the Trust Fund’s safety, integrity, and growth. While there were many obstacles to overcome this past fiscal year, working together with our consultants, providers, and stakeholder groups, SDCERS successfully maintained a teleworking business plan and continued to deliver member services and monthly retirement benefit payments on time and in full. These accomplishments would not have been possible without the Board and staff’s commitment and leadership. Their dedication ensures our plan sponsors, members, and the citizens of San Diego are well-served. SDCERS looks forward to continuing its mission to deliver accurate and timely retirement benefits to its members based on a disciplined investment strategy in the coming year, and all the years thereafter. - 1 - In Fiscal Year 2021, SDCERS conducted a Risk Attribution Study to identify sources of risk in the portfolio. These risks can come from the investments themselves (the risk of investing in a stock or bond, for example), the asset allocation (how much is invested in riskier asset classes), and the differences between SDCERS’ portfolio and the benchmark. The study revealed that investment policy risk, which is the risk that comes from investing in any market (stocks, bonds, real estate, etc.), is the largest source of risk in the portfolio, accounting for more than 95% of total risk. The Risk Attribution Study laid the groundwork for the Risk Reduction Analysis, which was initiated in Fiscal Year 2021 but will be completed in Fiscal Year 2022. The purpose of the analysis is to evaluate conditions that may necessitate reducing risk in the portfolio. This was initially undertaken due to the fact that SDCERS was a closed pension plan, meaning that there would be a growing number of retirees and a declining number of active members in the plan. This shift could result in a reduced appetite for risk. SDCERS’ investment consultant, Aon, and its actuary, Cheiron, worked in conjunction with staff to evaluate when the plan might seek to reduce risk and what the de-risking process would look like. However, the decision to reopen the pension plan altered the makeup of the plan moving forward. The analysis is being updated to incorporate this change and it will culminate in the Asset/Liability Study, which will be presented in March 2022. Sincerely, Gregg Rademacher Chief Executive Officer Domestic Equity Strategies18.9% International Equity Strategies15.8 Global Equity Strategies9.1 Domestic Fixed Income Strategies19.3 Emerging Market Debt Strategies4.4 Real Estate Strategies9.3 Private Equity and Infrastructure Strategies14.2 Opportunity Fund Strategies6.4 Cash2.6 Total100.0% $9,000 $10,000 $11,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,0002012 2013 2014 2015 2016 2017 2018 2019 2020 MIL L I O N S 2021 INVESTMENTS PRESORTEDSTANDARDU.S. POSTAGEPAIDSAN DIEGO, CAPERMIT 134401 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’ Annual Comprehensive Financial Report (ACFR). The complete audited financial statements and pertinent notes to the financial statements can be found in SDCERS’ 2020 ACFR. SDCERS’ PAFR provides summary financial information and does not conform to Generally Accepted Accounting Principles (GAAP); the SDCERS’ ACFR conforms to GAAP and provides a comprehensive overview of the System’s financial and operating results. SDCERS’ ACFR is available for review at www.sdcers.org within the “Financials & Investments” section or at the SDCERS office. facebook.com/SanDiegoCity- EmployeesRetirementSystem linkedin.com/company/sdcers @SDCERS Remote Call Center & Webinars Due to the ongoing COVID-19 pandemic throughout the entirety of fiscal year 2021, SDCERS maintained an almost entirely remote workforce. Three of our four Call Center staff members worked from home every day, while one staff member would typically come into the office to perform on-site tasks such as scanning and mail duties. We were able to prioritize health and safety while still maintaining an open line of communication for our members by implementing a successful remote Call Center, where staff can both answer and initiate calls from home. We also continued remote member education and offered over 50 webinar opportunities during fiscal year 2021. Lastly, Board and Committee meetings continued to be held remotely, but the public was provided access to watch the meetings live and/or submit public comment ahead of time. SDCERS’ Awards The Public Pension Coordinating Council awarded SDCERS the 2021 Public Pension Standards Award for Funding and Administration. This is the fourth year in a row SDCERS has received this award, which was granted in part because our three plan sponsors pay their Annual Required Contributions in full and on time every year. SDCERS also received the Municipal Information System Association of California (MISAC) Quality Information Technology Practices Award for the fourth consecutive year. This award acknowledges SDCERS is following best practices in IT administration, audit, network, and security. Receiving the MISAC Quality IT Practices Award is an honor and tribute to the dedication and performance of SDCERS’ IT staff and contractors. Compliance Program In fiscal year 2020, SDCERS retained a consultant to help us develop best practices in compliance. In fiscal year 2021, SDCERS’ Legal Division implemented these best practices to develop a new compliance program. This compliance program included drafting a compliance program charter, presenting an annual compliance report to the Board, and adopting an employee code of conduct. By the Numbers SDCERS’ Call Center answered 22,753 calls, and members on average waited less than 90 seconds to speak to a helpful representative. On average, 9% of all calls to SDCERS were answered by the informative introductory message, which is updated throughout the year as needed to provide immediate answers to common questions. SDCERS’ counselors conducted more than 1,500 individual counseling sessions, covering topics such as entering or exiting DROP, service retirement, purchase of service credit, termination, and disability retirements. In addition to counseling sessions, over 50 educational webinars were offered to expand SDCERS’ outreach and ensure members are properly informed. - 4 - SELECTED ACCOMPLISHMENTS Government Finance Officers Association Award for Outstanding Achievement in Popular Annual Financial Reporting Presented to San Diego City Employees Retirement System California For its Annual Financial Report for the Fiscal Year Ended June 30, 2020 Executive Director/CEO Today, Tomorrow, Together. POPULAR ANNUAL FINANCIAL REPORT FOR THE FISCAL YEAR ENDED JUNE 30, 2021 A defined benefit pension plan trust for employees of the City of San Diego, the San Diego Unified Port District and the San Diego County Regional Airport Authority. A fiduciary component unit of the City of San Diego, CA. SDCERS' MEMBERSHIP as of June 30, 2021 CITY OF SAN DIEGO Active & Inactive Members: 7,914 Retired Members & DROP Participants: 10,858 UNIFIED PORT DISTRICT Active & Inactive Members: 609 Retired Members & DROP Participants: 650 AIRPORT AUTHORITY Active & Inactive Members: 520 Retired Members & DROP Participants: 173 TOTAL SDCERS MEMBERSHIP 20,724 PRESORTEDSTANDARDU.S. POSTAGEPAIDSAN DIEGO, CAPERMIT 134401 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’ Annual Comprehensive Financial Report (ACFR). The complete audited financial statements and pertinent notes to the financial statements can be found in SDCERS’ 2021 ACFR. SDCERS’ PAFR provides summary financial information and does not conform to Generally Accepted Accounting Principles (GAAP); the SDCERS’ ACFR conforms to GAAP and provides a comprehensive overview of the System’s financial and operating results. SDCERS’ ACFR is available for review at www.sdcers.org within the “Financials & Investments” section or at the SDCERS office. facebook.com/SanDiegoCity- EmployeesRetirementSystem linkedin.com/company/sdcers @SDCERS Remote Call Center & Webinars Due to the ongoing COVID-19 pandemic throughout the entirety of fiscal year 2021, SDCERS maintained an almost entirely remote workforce. Three of our four Call Center staff members worked from home every day, while one staff member would typically come into the office to perform on-site tasks such as scanning and mail duties. We were able to prioritize health and safety while still maintaining an open line of communication for our members by implementing a successful remote Call Center, where staff can both answer and initiate calls from home. We also continued remote member education and offered over 50 webinar opportunities during fiscal year 2021. Lastly, Board and Committee meetings continued to be held remotely, but the public was provided access to watch the meetings live and/or submit public comment ahead of time. SDCERS’ Awards The Public Pension Coordinating Council awarded SDCERS the 2021 Public Pension Standards Award for Funding and Administration. This is the fourth year in a row SDCERS has received this award, which was granted in part because our three plan sponsors pay their Annual Required Contributions in full and on time every year. SDCERS also received the Municipal Information System Association of California (MISAC) Quality Information Technology Practices Award for the fourth consecutive year. This award acknowledges SDCERS is following best practices in IT administration, audit, network, and security. Receiving the MISAC Quality IT Practices Award is an honor and tribute to the dedication and performance of SDCERS’ IT staff and contractors. Compliance Program In fiscal year 2020, SDCERS retained a consultant to help us develop best practices in compliance. In fiscal year 2021, SDCERS’ Legal Division implemented these best practices to develop a new compliance program. This compliance program included drafting a compliance program charter, presenting an annual compliance report to the Board, and adopting an employee code of conduct. By the Numbers SDCERS’ Call Center answered 22,753 calls, and members on average waited less than 90 seconds to speak to a helpful representative. On average, 9% of all calls to SDCERS were answered by the informative introductory message, which is updated throughout the year as needed to provide immediate answers to common questions. SDCERS’ counselors conducted more than 1,500 individual counseling sessions, covering topics such as entering or exiting DROP, service retirement, purchase of service credit, termination, and disability retirements. In addition to counseling sessions, over 50 educational webinars were offered to expand SDCERS’ outreach and ensure members are properly informed. - 4 - SELECTED ACCOMPLISHMENTS Government Finance Officers Association Award for Outstanding Achievement in Popular Annual Financial Reporting Presented to San Diego City Employees Retirement System California For its Annual Financial Report for the Fiscal Year Ended June 30, 2020 Executive Director/CEO Today, Tomorrow, Together. POPULAR ANNUAL FINANCIAL REPORT FOR THE FISCAL YEAR ENDED JUNE 30, 2021 A defined benefit pension plan trust for employees of the City of San Diego, the San Diego Unified Port District and the San Diego County Regional Airport Authority. A fiduciary component unit of the City of San Diego, CA. SDCERS' MEMBERSHIP as of June 30, 2021 CITY OF SAN DIEGO Active & Inactive Members: 7,914 Retired Members & DROP Participants: 10,858 UNIFIED PORT DISTRICT Active & Inactive Members: 609 Retired Members & DROP Participants: 650 AIRPORT AUTHORITY Active & Inactive Members: 520 Retired Members & DROP Participants: 173 TOTAL SDCERS MEMBERSHIP 20,724