City and County of San Francisco Monday, November 19, 2012
muni, bart, caltran, L.A. Metro link. Other systems also are
struggling with the issue of the
cost of youth transit, both
monthly passes or individual fares. I raised two kids in the public school system. They took muni. If I hadn't been able to get a free pass for myself THROUGHnoJQhk the
muni access committee I would have had great financial difficulty. I think you need to stop and
look ATYkjy(What's been overlooked. Youth can't work. They don't get a job if you're 8 years old.
We heard the discussion that maybe seniors and disabled should get free passes.
You know, I'm part of that constituency, but seniors and people with disabilities can get
access to some money sources.
Maybe a social security pension,
maybe ssi, social security disability insurance. The fact is youth don't have that access to money.
We, who are seniors, or have a disability maybe we can work part time. so yo JPhgot to take into
account even though two mayors,
brown and newsom talked about
free muni for seniors they did
nothing to really push for it. The last page of the preparation
shows that only maybe 24% of the
allotment would go towards this youth support program. that's important to keep in mind.
The resolution doesn't say all for maintenance, it says prioritize. You could look at muni's plans and say they're consistent with the resolution.
But please don't push for all of it. Youth can't work and I'm going
to say also, too many elected officials at city hall don't
have kids, or don't have kids
that really need transit because
their family can drive them. We want to change the youth mind that they don't think about
needing to be driven to and from school. Thank you.
>> Supervisor Wiener: thank you.
Next speaker.
>> my name is francisco Decosta. first and foremost let me inform you that I've been following
muni for the last 40 years, and
I don't appreciate that while Mr. Risken was trying to explain something, again and again he was interrupted.
That's totally uncalled for.
Having said that, all city, the city and county of san francisco, needs to help our
youth, in whatever way they can.
And you guys, who try to take
that, you know, something, you all know practically nothing because you don't have a history of what muni did before.
For example, we had mayor frank jordan, who took all the money that was supposed to go for
buses, and he used it to buy brand new police cars. You have no idea how much money
was spent on the maintenance facility in the southeast sector.
And I can go on and on and on. What we need is, we have a
President Now, his name happens
to be barack hussein obama. And here in san francisco, we need to be progressive. We need to help our youth.
And you guys, who are detriment
to our youth, we are warning you.
If you continue to be dividing
the community, you will be recalled.
Not really on;ejpu9 this issue but on other issues. Let's be progressive.
This is a -- call to you, let us be progressive.
Do not come down on our youth.
We have too many families live in san francisco. How many families do you want to leave san francisco. Already 30,000/f families have left san francisco.
Why can't we give our youth free passes. Let's do the right thing.
Thank you very much.
>> Supervisor Wiener: next speaker.
>> >> Supervisor Elsbernd: respectfully I think everyone in
the room knows we don't applaud, we don't cheer. Let the meeting continue without those kinds of interruptions. >> eric woo, part of the youth commission and I've worked on this campaign for a year with
chinatown community development center.
I'm speaking in favor of the --
need for low income youth
program and I just want to highlight -- I just want to
point out that this program, we
are not investing either on
capital improvements for muni,
or the -- or on our young people. We're doing both with the funding we have -- from the
transit performance initiate source.
I also want to highlight that
the funding is a good fit for
our pilot program. 40,000 youth would benefit from
this program along with their families as well.
thank you for your consideration consideration.
>> Supervisor Wiener: next speaker.
>> herbert wiener.
As I prestled stated this month the difference be b$z the mta
and the fran giants is that muni management always strikes out. presently muni is a train wreck
that happened with less service and -- in addition bus stops
have been deleted and bus routes altered or discontinued on grounds of making the service run faster.
The transit effectiveness project attempts to speed up
service which hat not done to today. The additional funds should be
use to do restore, alter or discontinue funds and if
possible deleted bus stops. Of significance if the impact4 #cn of this project on the elderly,
handicapped and seriously ill,=`jpw
with the alteration and deletion
of bus runs and bus stops physically impaired people are expected to walk a quarter of a
mile to a bus stop which is unfair and cruel. In addition there is potential
of fatal -- resulting in
lawsuits that were -- cost the city. Managers who have formulated
this inequity have not batted an eyelash or eshtively responded
to this cnch concern.
The new bus stops-kja% that replace the old ones should be installed with new funds available. The board clearly has to bring
this agency to -- which facing
the holiday season has had the
worst service delivery since the
days of emilio cruz.
Please use these funds for effective service delivery.
Tep does not stand for transit effectiveness project but stands
for trashing elders, period.
>> Supervisor Wiener: next speaker.
>> hi.
[Speaking foreign language]
>> translator: good morning.
i'm a resident of chinatown. I currently have a son in middle school, and I'm here today to
ask you to support to get a free
muni pass for him and others. Our income currently is already
flexible and unpredictable. It's barely enough to make ends
meet for a family budget let
alone to plan to buy a muni bus
pass for my kid.
I hope that we can have a free muni past pass so that children like my son can be able to get
to school and after school
program and after school
activities. The story is true for not only
me but countless other low income families who depend on
the muni bus pass to get to school and I hope this is
something that can be
implemented. The real hardship is on the immigrant families like mine whose income is unpredictable
and having to make ends meet like rent and other expenses.
I hope that the muni bus pass
can be relieved.
I hope that supervisor -- you
can support muni for youth.
Thank you.
>> Supervisor Wiener: thank you very much.
Next speaker.
>> [Speaking foreign language]
>> translator: hi.
My name is Mrs. Zhao and I also
live in chinatown. My family income is not high and
i have two children and I hope
supervisors you can support free
muni.
I currently have to buy bus
passes for both my kids if I was
able to have muni for youth it
would decrease the burden on my
expenses. Supervisors I hope that you can
pass muni for youth so that our children can become happy and it
would be a great new year's resolution.
>> thank you very much.
>> Supervisor Wiener: thank you.
Next speaker.
>> hi, good morning. Everybody.
My name is j. Woo, I am a p
organizer for -- [Speaking
foreign language]
>> translator: everyone in the
audience if you're part of the sr -- we've been in the shuttle for over one year and this is an issue that is very important to
our members.
In this past one year of organizing around this issue we've gotten SUPPORTGr from
diverse pockets of san francisco including bayview hunters point,
mission district, chinatown, the
dloin -- tenderloin and others.
If we were to have free muni for youth it would build an
incentive and a habit for young
people to utilize muni as their
mode of transitjp
|.
With a free muni bus pass children from different families
can get to their after school
curricular activities, school, tutoring and it's something for
a healthy community.
this does build life long
ridership into young people's
lifestyles. Supervisors and mta I hope you will seriously consider getting free muni for youth because it
is something our community really needs. Thank you.
>> Supervisor Wiener: thank you.
Next speaker.
>> [Speaking spanish]
>> translator: good morning before making a decision today I
want to remind you of all the decisions you've made before
that impact riders and that one
of those decisions being to put
armed policemen on the buses. And by maki6jp)~ that decision you didn't consider the impact that
it would have to our communities, the brutal treatment of our young people on
the buses.
And you considered using funds
mr. Yep and any other member of the public who would like to testify please line up or this will be the last commenter.
>> douglas epi. Douglas yep.
I would like to thank the new
audit committee, in my opinion
the old audit committee had far too many cancellations and wasn't doing its duty.
I was glad to hear the findings in today's report.
It goes back to show when you do an audit you're always going to
find some sort of problem so we should encourage that department
to keep expanding and maybe we
should consider hiring some of
the city's youth, train them to
be auditors, and actually give
them an incentive to stay in the
city and go after all the rule-breakers. So I think what this shows is
that we need to keep this
function as expanding as
possible, and then maybe we will
find more problems along the way.
As usual, I'll put in a plug as to question why the department of public health has not had a
full audit in its complete
history and I got that from reading different sources.
so maybe we could have someone
volunteer the dph to do it, and let's see what we can find there. I'm sure there's plenty of money to fund everyone's pet project. Thank you.
>> Supervisor Elsbernd: thank you, Mr. Yep.
Any other speakers? Seeing none, public comment is closed. President Chiu without objection can we continue this to the call of the chair? Mr. Clerk, that will be the item. Can you please read items 5 and 6 together.
Thank you very much.
>> item 5, hearing on the
recently published 2011-12 civil grand jury report entitled investment policies and practice of the san francisco employees retirement system.
item 6 resolution responding to the PRESIDINGrZc $ judge of the superior court on the findings and recommendations contained in
the 2011-12 civil GRANDUe b} jury report entitled investment policies and practices of the san francisco employees retirement system and urging the mayor to cause implementation of (Ld accepted findings and recommendations through his or her department heads and through the development of the annual budget.
>> Supervisor Elsbernd: thank you.
Grand jury, thank you for your
patience. Sometimes YOUFbjq z don't get immediate gratification and have to stick around and wait. Why don't we let you go. >> thank you very much. 2 pm.
i'm going to keep it short.
Mario choi, the foreperson pro tem of the civil grand jury.
Thank you for hearing this report, investment policies and practices of the san francisco employees retirement system.
On behalf of the grand jury, my
colleague, sharon gadbury, chair
of the investigative committee
as well as jean and helen will
be speaking on behalf of the grand jury. Thank you.
>> Supervisor Elsbernd: thank you. A quick question, is this our last one for the year?
>> yes, it is.
>> Supervisor Elsbernd: sorry. Go/9 ahead. >> well I wrote everything out
and I wrote good morning. Good afternoon.
My name's sharon gadbury, and I chaired the grand jury investigation of the investment
policies and practices of the san francisco employees retirement system, which we're
calling the pension fund.
i want to respectfully acknowledge the board of
supervisors audit and oversight committee who have read our report and are here today to consider adopting our findings and recommendations. I also want to acknowledge the
board and staff of the pension
fund, the san francisco controller's office and the mayor's office who responded to
our findings and recommendations recommendations. Just a note, the amount of money we're talking about here, and saw all of the problems we had
this morning over $6 million,r and s/ just u @&c"x% to say that this
pension fund is $15 billion, and this is one of the reasons that
the grand jury wanted to investigate the investments because they haven't ever been
investigated by a grand diswrir jury before. The 15 billion in the pension
fund is held in trust for city employees who contribute
deductions from their paycheckses and they are guaranteed benefits over their lifetime.
The taxpayers of the city of san francisco also contribute to
the fund through the city's employer contribution. The san francisco city charter
vests the board of the fund with
the responsibility of managing
the fund prudently, solely for the benefit of retirees and
their dependents.
The fund is required to be 100%
capable of meeting its liabilities for a minimum of 20 years. The primary objective of the pension fund as it is and should
be for any public fund, is to_
safeguard principle. The next most important
objective is to pay out benefits
to the fund's retirees.
The third objective, subordinate to the first two, is to achieve
a return or a yield on INVESTEDa.( ~ funds.
the jury has found that every as
aspect of our investigation
finds retaining higher returns
is the first priority of the^I 9 funds' boards and managers thus that he have reversed the priority of prudence for managing public funds.
San francisco's retirement board makes achieving high returns` p)K| on
investments a main priority and
all ignores the primary
objective of safeguarding principle.
The jury learned that after
losing approximately $6 billion
or nearly 40% of its principle principle -- principal in 2008-09 the board continues to this day with the same investment advisers, his
managers, the same bank, and the same high risk investment policies and practices as it had
before the losses.
We think that if the board, the consultants, and the managers
were truly concerned with preserving capital, they would
have seriously questioned and INVEl z # the decisions and
the advisors that led up to the losses. They would certainly have been interested in whether they could have done anything differently
to avoid the losses, and whether they need to do anything
differently in the future. The pension fund needs to take
the goal of preserving capital seriously, because the cost of
another catastrophic loss would be borne heavily by the city budget which is already
straining to repay the fund's
past losses.
one result of the 2008-09 losses is that the san francisco
pension fund is underfunded.
It is currently valued at
approximately 15 billion.
But actuaries estimate the funding level needs to be over
$18 billion to continue meeting
benefits for current and futureq a^ retirees. Assuming continuing investment
gains and no more investment
losses, the city, as employer,
needs to take at least $2
billion from its treasury, from
now until 2032 to make up for
the 2008-09 underfunding.
note from this chart, which I
don't know if the camera can get
that, but the actuarially projections presented to the
board showed that if investment
returns do not meet expected levels city payments will rise even more and continue to be
high, until the year 2032. They demonstrated1uj= that if there are more losses, the city would need to pay hundreds of millions
of dollars a year, and still
might not restore funding by 2032.
One of the immediate drivers of high risk policies and practices
is the assumed investment return. at this time, I'd like to introduce helen blum.
She will review the jury's findings on the assumed investment return.
She will also answer the responses that the fund board
and staff have made to the jury's findings and recommendation with respect to
the assumed investment return. Helen. >> hello. I'm helen bloom.
I am going to speak about the investment return assumption. The funding level for the fund
depends on a number of unknowable future events, one of
which is the estimate of the fund's future investment returns. Since according to the city
charter the fund must be fully funded an increase in the estimate of the future returns
can result in a corresponding decrease in the need for current city contributions. The reverse is also true. A decrease in the estimate of
the future returns can result in
the need of the city to increase its current contributions.
The assumed rate of return now
is 7.66% through 2013.
it will then go to 7.5%. The assumed rate of return is set by the RETIREMENTRmjb there is pressure on the board from the city to keep the assumed rate of return high so that the city does not have to put more money into the fund.
Money put into the fund by the city means less money available to pay for other city obligations. there is also pressure on the retirement board to keep the
assumed rate of return high from union officials so that employees are not required to
make more of a contribution. Thus the retirement board is under pressure to keep the assumed rate of return high for the short-term Zw benefit of3 city budget and its employees. But the flip side of this is that the long-term financial health of the fund would be better served.0 lower. Then the fund would be under less pressure to try to attain such high returns and could invest in less risky investments. In the long run the taxpayers will have to pay into the fund
if the volatile investment!:j`-~ decrease in value. The board relies on an investment consulting firm to
recommend the investment rate return rate assumption.
The consulting firm told the
jury that its formula is prient
proprietary and it will not divulge it to the board.
The board assumes the rate for actuaries USEnd estimating the funding level. 9 city sets the contribution
rate for the next fiscal year
which is based in part oft final
earnings from the preceding fiscal year which ends on June 30. The ending results have.Q v had major fluctuations.
In 2011 the five year returns
were 4.2%, 10 year were 6.It 2%,
5 year returns for 2012 were 1.02%. Given the current investment climate the jury does not think
that relying on a 7.5% return for the future is prudent.
That is why our recommendation no. 2 states adopt a realistic and consistent formula for
estimating the assumed expect investment return rate. we find the response by the
board and the executive director to not be persuasive. First we don't believe relying on statistics or investment
returns that start after the 2008 year is prudent.
There will also be economic downturns and it is not prudent to ignore those results. The jury also believes that
relying on a 20 year return rate
number is too long a window give the furpt INVESTMENTo\j\b~ conditions. The consulting actuary recommending reduction in the assumed investment return rate
and the board adopted the
smallest rate reduction that was presented. The jury believes that a further rate reduction would be prudent for the long-term economic health of the fund but it is politically unpopular to approve it because of the short-term hardship this would cause.
Our findings 5 and 6 support our recommendation no. 2, in finding
five we state the fund can artificially reduce the city's estimated liabilities by increasing its investment return assumptions for future years. This is merely a statement of fact.
this finding was -- had nothing
to do -- this finding had nothing to do with whether the
board or staff was unethical. Findings 6 states, the --
>> Supervisor Elsbernd: a
quick question on that finding. As you know I served on the
board, I'm one of the anonymous board members quoted. I don't remember any discussion whatsoever, any evidence in any public hearings ksz and you tell
me if you had it in any public discussions of the fund talking
about increasing its investment return number. We've talked about decreasing it
from 775 to 75. Was there any discussion about going higher?
>> no.
>> Supervisor Elsbernd: well you're saying -- you have a finding here that says the fund
can artificially reduce the city's estimated liabilities by increasing its investment return.
I agree, it could. But -- >> it says --
>> Supervisor Elsbernd: okay. But respectfully, I would suggest if you're going to put
in a hypothetical like this, maybe it should be grounded in some sort of fact. otherwise you could say things like, yeah, I mean I could come
up with all kinds of hypotheticals that have no fact.
I mean no one even jokingly said we were going to do&p%( that.
So I just get very concerned
when a document goes out with
the grand jury stamp of approval
that has something that has zero basis in fact.
So be careful with that.
But go ahead.
>> finding six states the unreal ivenlgly high assumed investment
return rate of 7.66% is driven
by concern far the mandated
member with -- in conclusion the grand jury believes this to be true and we urge you to recommend our recommendations.
Thank you.
>> thank you, helen.
We did not mean to impugn the integrity of the board.
we said that they can decrease
the contribution by increasing the estimate. And --
>> Supervisor Elsbernd: I just -- >> disagree with that fact?
>> Supervisor Elsbernd: no. But I think a grand jury report, if it wants to be complete, would have had the sentence following that, however, there
has been no discussion of this happening. because members of the public are going to read this and have not had opportunity to go to meetings like you.
They might assume from reading this, because you did not complete your thought that that has been discussed.
All I'm asking is about six more words, would have made it a complete report.
>> we really didn't look at that aspect.
we looked at the aspect of what can happen with this
particular -- that this number can affect the city's contribution up or down by
hundreds of millions of dollars.
Even a half a percent is worth 50 million, right there. And that's what we were trying to convey --
>> Supervisor Elsbernd: I am not disagreeing with you. >> I'm sorry IFbyjg7 it sounded as if we were thinking you were considering raising it.
>> Supervisor Elsbernd: I'm not disagreeing with you. I don't think you've done a complete job.
>> we did not consider that.
One rationale that many pension funds, and their investment advisers have put forward for their high risk investment programs, is that they are
investing for the long-term.
And therefore can absorb more
risk and ill liquidity in their portfolios. This5JPMi rationale is not supported in research that actually compares the experience of public funds in high and low
risk investing over time.
Jean ni}os will answer the pension's funds responses to our findings and recommendations around the fund's investment policy. And I might mention here that
jean is reading the report of
mark biosay who is involved in
an emergency right now so she's reading his report. Thank you.
>> Supervisor Elsbernd: just so we can get a gauge of time how many other reports do we have left?
Just within your own -- how many more speakers do you have?
>> then I will end up. >> it will be short.
>> Supervisor Elsbernd: that's fine.
>> I'm weak from hunger already.
Excuse me.
Prior to 1984 the california public pension funds were
limited by law to invest in no
more than 25% in equity investments. And mainly those were to be in blue chips.
prop 21, which was passed in
1984, lifts this restriction thus allowing public pension
funds to invest in a wide
arrange of events as they see fit.
This is -- am I not talking into it? Well.
This became known as the yale model of investing. as yale university was one of
the first institutional invests to participate -- investors to
participate in high risk investing their method for beating the market became a model for many other pension funds. The san francisco pension fund
adopted the yale model in 1984,
after passage of prop 21, and started to diversify their investment allocations at that point. Besides public equities, the
fund now also invests in such alternative investments as
foreign equities, foreign bonds,
real estate limited partnerships, commodities, venture capital, private
equities, distressed debt, and
derivatives, such as collateralized mortgage backed securities to which we've heard
much about in this last --
credit swaps and securities loans. Once the pension board adopts
the investment return rate assumption, also known as the
assumed rate, it directs their
investment staff and investment `q yconsultants to recommend investments that will possibly
achieve this goal.
With the lowered assumed rate,
less risky investments are recommended. With the higher assumed rate,
more risky investments will be recommended. the government accounting
standards or the gasb, policy
for public pension funds, sets --
sets -- or they set the policy
for public pension funds and allows -- discount liebles by
using the expected rate of future investment returns.
this is unlike private plans,
and their peers in other countries which cannot use these expected rates of future returns
or what some are called
imaginary numbers, especially
when the pension funds are underfunded.
A first rule in investing is knowing that riskier investments
have a higher potential to make
or lose large amounts of money.
This includes loss of principal,
safer low risk investments seldom lose principal. A second rule of investment is
that the higher the risk factor
for the -- the more volatile the
fund becomes.
A third rule of investments is
that the older the beneficiaries, that means the
more retirees, as opposed to$ jp active giving or donating people
or contributing people, the less
risky the funds investments should be to preserve the principal.
These are not complicated rules of investments, and the jury was
able to find numerous industry
experts and research studies recommending these basic investment rules.
The jury found that prior to
1984, the%(J@ fund grew steadily, that's the san francisco fund,
grew steadily with minimal
volatility by taking advantage mostly of compound interest,
thus assuring and -- a secure
and predictable source of funds for retirees.
>> Supervisor Elsbernd: just curious, in that analysis what
was the funded status of the city's retirement system in
those years? >> we don't have that.
>> Supervisor Elsbernd: you didn't do the comparison? You're using the funded status today to point out what you
believe is a flaw in the CURRENTqKc v| investment process, but then you
go back in time, and you look at the investment style that you
think is appropriate, but you
did not do the other comparison
to show what the funded status was of the city's retirement
system in those years?
No audio: .
>> Supervisor Elsbernd: I'll let jay explain to us or perhaps
trustee driscoll -- or trustee myberg erwho has the history tell us what our fund status was when we had this kind of investment style. But go ahead, continue.
>> you want me to tell you no you?
>> Supervisor Elsbernd: we'll let them get to it when they make their presentationed.
>> the jury found prior to 1984
they invested in a more -- in a easy-going, low-risk.
After 1984, the fund started to
follow the yale model, investing
in more alternative riskier investments, causing the fund to
become more volatile, the return
to become more volatile, while showing no significant increase
in returns over the long-term.
And has been underfunded for the last three years.
Thus facing more contributions
by the city, and taxing our general fund.
>> Supervisor Elsbernd: just
as a side, jay, if you could
also prepare, tell us what the city's contributions was in
those years as a percent of payroll. >> and they're also facing a
higher retiree active ratio than they had previously.
For example, the fund since 1984
has the following -- volatility of fund loss significant value
in the dot-come crash of 2001 and as did most of us in our private funds.
We all know about the domcom.
It became over funded in the
2004 to 2007 when it was decided not to have employees or city contribute to the fund.
>> Supervisor Elsbernd: I'm just curious. When the city hit that overfunded status, did you do the breakdown of the various investment categories that we have, and determine what investment category it was that
led to that overfunding? I'll tease you. It was the alternative investments. But go ahead.
No audio: .
>> Supervisor Elsbernd: okay.
I missed that point in your report. I wasn't sure. Go ahead.
>> the fund then lost 36% of its
value in the 2008 to 2009 crash.
The city must now use general
funds until 2015 to make up the fund shortfall.
Given these findings the the
jury, with little efforts by
using mainly google did an
extensive search for the factual
evidence of the success of various pension investment policies.
The reports researched rather a low risk investment policy could
equal or exceed a high risk
investment policy.
and one of the reports found
that -- we researched found that the stanford institute for
reviews cal-pers investment
currency from 1984 to 2009, which was following the yale
model at the time, the results
are displayed on our chart. Do you have that chart there? I don't know if you can see. You can't see the chart, probably. You don't have that kind of eyes
that can look around the corner?
>> Supervisor Elsbernd: no.
>> it's on your report also.
I'm not sure what page.
Figure 3 in your REPORTws&jj}.
>> Supervisor Elsbernd: we have it. it's on page 9. What might be helpful for folks
at home if is you had a copy if you would put it on the projector as opposed to that, if you want members of the public
to see that.
I was saying a copy of the civil grand jury report that you can
stick on the projector. Our clerk will do it. Go ahead.
>> what the stanford institute compared was the cal-pers return
to hypothetical low risk portfolio pursued over the same
25 year time period, a
negligible -- the "new york times", in 2012 found that
pension funds investing in more alternative investments, not
only have the highest risk
levels, but contrary to expectations had poor returns
than those that remained in traditional low risk investments. they further found that funds
that did well with low risk
investment policies nevertheless
tended to switch to high risk model.
And the reason for that is the
upjohn institute in 2011 report titled an analysis of risk-taking behavior for public
pension plans of over 100 funds found pressure on fund managers to change from their conservative investment policy
to assume more risk, even if a
fund made a higher return with a
low risk portfolio. Economists referred to this
trend as the herd mentality. The jury can verify to the board
of supervisors that studies do
exist are easily found in our -- fromibt#n0v respected institutions showing that public pension
funds with low risk investment policies perform as well as
better than those with high risk policies as stated in our findings on page 7.
We do not understand why the
pension board, or its executive
director, can't confirm or deny
these reports exist. The jury recommends that a similar
zq study be done by our
fund to see if we couldn't go
back to investing in a low
risk -- we're in a position of trust.
Finally, I would like to repeat
a warning in the 1984 research report by the institute of industrial relations university
of california-berkeley about the
passage of hot prop 21.
Prop 21 May threaten the -- of employees in california than it
offers to protect them. Proposition 21 will be successful only if it sends a message to all public employees in california. The message is not only that
they need to exercise constant
vigilance to protect their pension funds,`@ k is also tha they are t entitled to much more information than they are now
getting on how their pension
fund savings are invested. On what the actual ratesa of
return are on these investments,I/j>n
and how their pension plans are funded. Thank you.
>> Supervisor Elsbernd: thank
you.
>> thanks, jean.
I wanted to answer some of the jury's findings and recommendations, and I wantedlc p to
answer, prior to the pension board's presentation, some of
their responses to our findings.
First of all, finding no. 1, the pension board does appear to
agree with the jury's finding
that the underfunding is over $2 billion, and just to remind you
the jury notes that the actual
underfunding is $3 billion, but
it is reduced by the fund's
estimate of its 7.66% future
investment returns.
Finding no. 2, the jury said that the retirement board did
not complete a failure analysis
after the 2008-09 MARKETvq downturn.
The pension board and staff responded that the losses were
the result of unprecedented
conditions in the financial market.
They say that the board did conduct an analysis because they
asked their advisers to make a
report on the reasons for THEe
Our answer is THEybjp | 2008-09 crash was not unprecedented.
It was preceded by several severe loss events that are
recognized by most economists as
an inevitable part of the boom and BUSTv cf stock market cycle which is expected to continue into_
@:k the future.
Notably, 1929, 1932.
In the 1932 loss, which was four
years after 1929, was when most
of the depression losses
occurred, not in 1929.
1973, 1987,
%(Y@~ and 2001.
The jury requested but was not given any extensive investigative reports into the failures of thenj
2008-09 downturn.
By the board's own description,
it merely asked its paid
consultants to explain the failures. The funds answer that they are not responsible for the losses because most other public funds
followed the same high risk investment policies and also
lost money is not acceptable.
The pension fund should not be
managed with a herd mentality. Policies and practices should follow the facts and not imitate
what others are doing. Retirement funds that were
invested mostly in bonds did not
suffer such catastrophic losses and they protected their assets.
Some would say that they were prudent.
It did not happen to everybody. Only to the majority, who were pursuing higher and higher
returns in a bubble market.
A failure analysis should have
been conducted, and is also warranted at the present time, to preserve the safety of the
fund from catastrophic losses.
The 2008-09 disaster was
man-made, but even in a natural disaster such as an earthquake
or a flood, public agencies
conduct thorough in-depth investigations to discover why
some structures were steroid and steroid and
why others -- destroyed and some survived.
Consultants say we followed the consultant and regularly review
our risk and allocations. Our answer is neither the fund's investment consultants, its
staff, nor its bank, warned the
the board about a possible loss
in 2008 on09. Nevertheless, the fund did not question their comp hennessy,
and to this day retains the same
advisers, bank and staff. Following the earthquake
analogy, it is inadvisable to
consult only the same engineers, architects and builders who designed and structured a
structure that was destroyed in order to determine what went
wrong or correct for the future
it's important to consult with independent third party who are not just interested in maintaining the business relationship. Regarding the risk analysis we were told by board members who
served in 2009 that there were
no substantive changes after the
2009 losses. The jury has reviewed the
reports of risk and allocations.
In those reports, risk is not addressed in terms of the safety
of the principal. Instead, risk is addressed as the degree of risk that needs to
be taken in order to attain a specific INVESTMENTGOjs return.
It is also addressed in terms of
hedging, on the assumption that you can entirely eliminate the
downside of volatility by betting on lower RETURNSc n~ or allocating in investments that usually go up when the economy
is down. Finding three, we're just on
finding three, almost there -- the jury said --
>> Supervisor Elsbernd: can I suggest, finding three, city must pay increasing
contributions to the fund due to underfunding. I don't think anybody disagrees with that.
>> I would rather not be rushed
through this, if you don't mind. i'm sorry. We've waited all day and I'd rather not be rushed.
>> Supervisor Elsbernd: is there anyone who disagrees with that fact?
>> I would like rather not to be rushed. Thank you.
>> Supervisor Elsbernd: I just have to state this.
I need to be at land use committee. >> can we -- I'd be happy to postpone, if you don't mind.
>> Supervisor Elsbernd: that's not going on work.
>> we're talking about 15 billion at stake.
And I would rather not have it
be rushed.
>> Supervisor Elsbernd: and I agree but I have a lot of questions that I'd like to 4/s ~ about on the points of disagreement. >> good.
>> Supervisor Elsbernd: I don't want to waste time on
points we all agree on.
>> I think that it was said, in
the pension fund response, that
after 2015 the payments May decrease. This was a statement they made
and we have an answer to that statement. Did you want to look through and see that?
Because we disagree with that. >> Supervisor Elsbernd: president chiu and I are going to be voting on this resolution. He and I agree with that finding appear we willm PEg} be veeth to agree with that finding. You can move on to finding 4
which is also a finding that I think we agree with.
>> I have to say I was concerned when you were the President Of this hearing, or the Chairman Of this hearing because I know you
are one of the people that we investigated. You were part of the board.
And I was hoping you would be
very impartial to this.
>> Supervisor Elsbernd: I'm agreeing with your finding, ma'am.
>> I understand that.
Finding 4, the jury says that the increases in pension contributions by the city are
growing at a faster rate than
expenditures on most city
services since 1999.
The fund says that they neither
confirm nor deny this. The jury answer is that the
controller agreed with this finding.
The jury believeses that since the city insures the fund against investment losses they
should play an active part in
influencing the investment risk.
It's common for an insured to
limit and penalize risk and even
to refuse to deal with matured
individuals who do not exercise sufficient care over their health or property nevertheless
we think the board and staff should show awareness of impact
of investment losses on the
health of the city budget. Recommendation 1 -- almost done, one more page -- ^ f the jury recommends that a high level task force meet and discuss
these issues.
the board says that this is not warranted because proposition c
took care of all the problems.
The jury answer is that the
board's actuary took into account the impact of proposition c when the future
city contribution was calculated.
Proposition c has to do with
benefit reform and not with the
fund's investment policies.
The board says that as fiduciaries we should not consult others on decisions.
Our answer is that we are
astonished and disappointed by this statement.
In essence it is refusal by the
board to be accountable to those
whose money it is to the conduct of its investment program.
As fiduciaries the board should solicit the advice and input OFld 9 all affected parties.
The board should conduct comparisons of investment strategies and consult with independent third party experts. The board should be transparent,
making sure that all these
parties are informed of the facts, the history and implications of decisions.
The board is already delegating
its authority by abdicating leadership power and
responsibility to outside hired consultants. It doesn't make sense that the pension fund believes it is okay
to follow the advice of its paid investment consultants but it is
not okay to read reports or consult with third party experts
in the field. We found that the board and
staff of the fund are comprising
the safety of the fund by
prioritizing investment returns
over principle. They're ignoring this current and future impact of their past and current risk-taking on the city budget.
They're refusing to read or acknowledge, let alone consider
and discuss low risk investment
policies which could meet the primary objective of preserving
capital and also aachieve
nearing the same arenas over time. The jury did not recommend the
board eliminate the legitimate goal of seeking return on investments.
The jury believes that the
elected representatives of this city should insist the board follows principles of prudence
for all public j agencies, and
make preserving capital a first priority.
Thank you.
>> Supervisor Elsbernd: nins
else from the grand jury? Great.
jay, you want to come forward? Is.
>> good afternoon, supervisors, jay -- executive director of the san francisco employees retirement system.
I have some very brief prepared
remarks that I would like to go through. On behalf of the retirement board we thank the civil grand jury for their service, however
that being said, we are very disappointed that their report
ignores long-standing policies
and public decision-making practices of the retirement board and staff. These have been in place for decades. Most of the recommendations from
the civil grand jury have been implemented, as we've indicated
in our response, and as part of its regular annual process the retirement board, its investment
and actuarially consultants,
staff, conduct ongoing comp comprehensive review and analysis of both the trust investment performance as well
as the funding status of the plan. I can go through ONuePf| the
investment side the process, but these are -- j t's well developed long-standing process. staff obviously is monitoring the performance of the plan on a daily basis. The chief investment officer
reports to the board on a monthly basis the status of the plan. There are quarterly reports
prepared by our custodial bank
ond our investment consultant that are going to at a public meeting presented and discussed. Those quarterly reports were
done before, throughout, and after the financial markets or
the downturn that we saw in 2008-09. Also every three years, the
board engages and the investment consultant engages in an activity very similar to what they're describing of these studies, an asset liability modeling project, where they go
through and consider alternative
composition of the portfolio and
they're measured and it's
reported on a every three year basis.
The last one was done in 2011. I assume the civil grand jury had access to that report. The details of that report again were presented in a public meeting with public discussion. Everyone was welcome to attend
and provide their input.
On the actuarially side --
>> Supervisor Elsbernd: could
you also talk -- our watch list, what our investment advisers are
telling us, we get down to the granular detail of these investments. Can you talk about that too. >> sure.
quarterly reports are at a quarterly level against benchmarks approved by the retirement boards.
They're at a total trust level and down to a manager level. Any manager for either personnel issues or performance issues that don't meet benchmarks are put on watch lists. They are discussed -- they're considered at least no less than every quarter.
>> Supervisor Elsbernd: to put1opi ~ it in perspective we're talking
about a $15 million fund, these are managers that manage how much of our money? They could have accounts asvi small zf as -- >> a couple hundred million.
>> Supervisor Elsbernd: and going down to that kind of detail. >> absolutely.
on the actuarially side the practice is well established in the industry. There is requirement that there
be a valuation done annually.
Part of that valuation is the
consulting actuary firm that is
hired by the retirement system
brings forward their analysis on
the economics of the current situation, in preparation for preparing the economic evaluation. Not just the investment return
but also the wage assumptions
and cpi assumptions are considered and discussed and approved by the retirement board. Part of their report indicates that it's the investment consultant that brings forth the recommendation for the investment return assumption. That is not correct.
It's the actuarially consulting firm that brings forth recommendation for the assumed investment return, as they do
for all of the assumptions that
will be used in the actual evaluation.
>> Supervisor Elsbernd: so to
be very specific, tie ron is the actuary who puts forward the recommendation on THEnkj, investment return.
How many of our investments do they advise us on? >>uc ~ no inves >> Supervisor Elsbernd: tments. None. Nothing to do with our investments, purely on the actuarially side of it. >> absolutely.
>> Supervisor Elsbernd: okay. >> hold on, jay.
If you're going to keep waving at me --
>> if I could comment.
>> Supervisor Elsbernd: go ahead. >> as I indicated each year that the valuation is performed it's
a snapshot of a given time.
Our plan year is June 30.
It could very well be the end of
a calendar year but in our case
it's always June 30. Typically what it will be is the measurement will be on the
investment performance as of a given year. However the retirement board has adopted a five year smoothing policy which basically says that
in order to avoid abrupt changes
to employer contributions, typical in the industry, some
plans have adopted them for even
longer durations, we only
recognize losses and gains over a five year period.
So if -- that there wouldn't be
dramatic or disruptive types of fluctuationses in the employer
contribution rate.
All of these long-standing investment actuarially policies more than satisfy the majority of the recommendations recommendations related to the board's consideration of the long-term investment assumption, the comprehensive and ongoing analysis of its investment policy and performance risk management and actuarially funding.
Each year the plan's performance
returns, the actual experience analyses and evaluations are reported extensively through a
public process at which all are
welcome to participate.
The civil grand jury report
focuseses on the difficult
financial markets in 2008-09 and
resulting loss in value in the sf -- trust and corresponding
increase in unfunded actuarially liabilities.
I will point out we realized no losses.
These were unrealized losses losses as a result of the downturn in the markets. Challenges associated with the increased LIABILITIESy1f I( following 2008-09 are well known and have been the focus of both the board -- well of0mc the board, the mayor, the board of supervisors,
plan beneficiaries, and electorate over the past three years.
Let's look at what the city and
retirement board have done since 2009.
First, stakeholder groups were
brought together in 2010 and pension reform propositions that address the increasing lients of
the plan and will save the city significantly in the future. The collaboration of stakeholder led by the board of supervisors
and the mayor's office in 2010
and 11 included extensive public discussion of numerous
approaches to closing the sf -- funding gap.
second, in December 2011, the
retirement board approved the actuarially's recommendation to phase in a decrease of the plan's long-term investment
return assumption from 7 3/4 to
7 1/2 over two years.
from 2011 to 2013, next year,
July 1, 2013, the return
assumption will BEn=j3p 7 1/2%.
The decision of the retirement
board keeps sf -- ahead of the curve. Pension investment newspaper and
industry recognized industry
newspaper recently reported that among the top 100 pension funds
in the united states the average actuarially assumed rate of
return for 2011 was 7.84%.
Ours was 7.66%.
Millman also brought out a
report and published ITZcd= in pension investments saying that
for -- in October, that for
2011, the mean contribution or
assumed return rate for the top 100 was 8%.
We were well below that. Third, let's look at what's happened with the investment policy, andg q practice of the
retirement board since twoand
2009.
The trust has returned on an
annualized basis 11.17% in each
of the three years. The unrealized loss in market
value was not a failure of the board's investment policy or
their practices. But rather a result of extraordinarily difficult financial markets.
The great depression was mentioned. We paid benefits through the great depression.
We paid benefits through the`t(X+
2008-09 financial markets. The rierm
retirement board focuses on very long term.
Over 20 years periods -- the 20
year period through June of this
year, our return was 8.17%. Our -- the retirement board's actions during that same 20 year
period show that,x %(6w at one point,
they increased the assumed rate
up TOua decreasing it to recognize that
in fact their consulting and
that the board understand how to
prudently manage THEd2(W< system.
we never said, in our responses,
that we would not take or
consider other people's ideas or approaches.
And I'm sad to hear that she's representing that that was part of our response. What we've said is, xjag v the california constitution, and the charter of san francisco, the
retirement board has plenary authority to make these decisions, that they can't
delegate that to a task force or
to a group or to anyone else, but as far as the public nature
of all of these discussions surrounding both what happened,
what failed, what succeeded,
they're all done in a public arena, everyone is invited to participate.
The decisions that they make on the actuarial assumptions are
made in a public arena, and that over the decades, I think the bottom line is the retirement
board has shown, through very difficult -- sometimes difficult
financial markets, that they are singularly dedicated to
preserving and prudently investing the trust assets,
paying the benefits, and administering the mandated benefit programs.
You ask me, just sort of
comment, on what the employer contribution rate looked like over the years. I don't have the chart in front
of me but there were times when the employer contribution rate exceeded 100% of pay. And as late as inRRr the 1980's it
was in the 60 to 70%. I will also say therea [ is on
>> Supervisor Elsbernd: as an e -- aside I raised that point because those were years when we do not do alternative investments so the notion that
is some sort of panacea to fix
the city contribution is just bunk. >> also the report indicates
that from 2004 to 2007 there were no contributions made to the plan.
In fact, from 1998 through 2004, because of the funded nature of
the plan, there were no required employer contributions, however employee contributions were made. Either by the employees themselves or on behalf of the
employees in every year of the existence of this plan. So to characterize that there
was ays(0% period of time when there
were no employee contributions
made is a misrepresentation.
>> Supervisor Elsbernd: and while we cannot go back add correct the past that will never happen in the future as a result of proposition c. >> right. You were one of the primary authors of proposition c.
I mean there's an underlying
roughly 10% to 11% obligation of
an employer to properly fund the pension.
and you, through proposition c, actually provided that in the event -- and the event could
very well happen, where the employer contributions required from the plan went lower than
that 10 or 11% level, that that
money was again sent over to the retiree health trust in order to
retire the obligation for retiree health.
Be happy to answer any other questions. Like I said, I was focusing on
the recommendations, and I think
that our policies and our
practices that we can clearly demonstrate and DOCUMENTZs z*o in
public meetings, more than satisfy the recommendations or the intent of the recommendations as we read them
and the mayor's office and the
controller's office have also supported the retirement system
and the board's position on -- in responding to these.
to compare the results of the san francisco system, and put those into those studies. One of them is the cal-pers
study that I have before me, and
I think he kind of verbally did that. It doesn't take a lot to do that.
It won't take tons of staff time, and I hope that you would
do that.
>> first of all we're very familiar with joe nation who
basically is the one who --
>> Supervisor Elsbernd: yes.
>> as an advocate for pension
reform, compiles these types of comparison studies.
what I was trying to imply and actually stated, every three years the board goes through this exact process.
They use actual positions in the current portfolio and they go forward and model those to try
and find out obviously weighing return for risk, what would be
the best and most prudent way to sort of change the composition of the portfolio.
>> Supervisor Elsbernd: I'm sorry, jay. I'll get back to you because you mentioned one other thing I
forgot to ask when he spoke. Risk. We've gone through a big process
over the last few years, by our
former cao over risk analysis. Can you put on the record with a
quee are doing at the retirement system.
>> as far back as seven years
ago there were business plan initiatives that the board adopted.
The main noaks was to learn how to measure risk. The progress we've made is we've
purchased software, we've pnch purchased systems in order to measure risk and once we can do
that we can monitor risk and the board will have more information under which to make --
>> Supervisor Elsbernd: not
just the board but the public. All of this will be done through
the public board and there will be a quantity final number.
>> the cao every month, where part of his report is a risk
report that shows not only the risk tarkt that has been established and what changes in
our portfolio either hiring or
firing a manager, changing the composition of the portfolio
what impact that has on our risk.
Right now to date, the risk analysis application has only been implemented across 50% of
the portfolio, which is the stocks portfolio.
We are -- to get it into the fixed income portfolio and it will be more difficult because
of the nature of alternative investments in real estate to implement it but that's the goal to get this analysis tool implemented across the entire
portfolio to provide like you said information to the board as well ASpj(5| to the public. >> Supervisor Elsbernd: thanks, jay. Sorry.
>> am I taking that as a no or that you've already --
>> Supervisor Elsbernd: you're taking it that it's already been done. >> I have never seen a
comparison using this model.
>> Supervisor Elsbernd: I
understand you disagree with jay's -- >> no. i think he's saying they do their own version of what they call a risk analysis.
>> Supervisor Elsbernd: that's correct.
>> so they)2wgXz refused to address
any of the outside studies that
do research on pension funds.
They only want to do their inside studies.
>> Supervisor Elsbernd: that's
not done by inside but go ahead. >> they're inside studies. the other is the investment return assumption and that's
actually a factual -- a fact
that we found that the -- yes,
the actuary did recommend the
7.66 and 7.50. They recommended it on the basis
of a formula that was given to
them by the investment --
outside investment consultant.
The formula was given to them by
the outside investment
consultant1u::Tn.
>> I'm not familiar with what she might be referring to.
Part of the information that the consulting
consulting actuarial firm is
obviously their own research regarding the economic information and financial markets. However I mention this asset
liability modeling study, this asset liability modeling study comes up with a recommendation
after modeling different types of compositions as to what they
would recommend as the preferred model.
Based on that, the investment side of the house calculates
what they think the long-term
return would be, stripped out without any kind of excess
return, just sort of barebone conservative.
The actuary has access to that
report, but the responsibility
under the board policy to bring forward, for funding purposes --
because again the actuaries are the experts in properly funding a pension.
They are not the experts in how to report investment gains and loss. the board's policy is vm very clear.
The consulting actuary recommends the -- all the assumptions. There's the
board in the same way that the retirement board relies on the-nj;5~
consulting actuary to calculate
and determine employer contributions.
>> Supervisor Elsbernd: I had
just a couple of higher level questions.
Seems to me that one of the big
assumptions that underpinning this executive summary has to do with drop of the bear market
from 2007 to 2009 when THEUPj
assets shrank from 17.4 billion to 11.1 billion.
The question I had, just doing a little research here on the computer, it seems that the overall markets dropped by about
20% during that time period, and
our fund dropped well beyond that.
And I wanted to just get your
sense of is that acceptable, typically when folks think about their own investments you want to at least track the markets if not do better than them, seeing
that we did worse than what the overall markets did I want to get your perspective on that and the suggestion there hadn't been
a failure analysis and what kind
of analyze you've done since 2009 to make sure we're not in that situation again.
>> again, as I indicated
earlier, we measure once a year,
it's a snapshot as of June 30.
From the June 30, 2008 to --
from July 1, 2008 to June 30,
2009, our loss was 21%.
But we didn't go from 17 billion.
We were not at 17 billion as of
July 1, 2008.
We were at 17 billion in september of 2007.
So the measurement of how far we
dropped was from -- not a period at the end.
Now that being said, we lost
roughly 3 1/2 billion.
That PJug impacted the valuation and decisions regarding the funding of the plan --
>> Supervisor Elsbernd: just so I understand, did we lose more than what the markets lost
or that's during the comparable
time period if you're comparing apples to apples.
>> 21% markets lost, during that discreet period of time we were probably very comparable to what the markets lost.
I mean they were not excessive loss2TPId4. Comparatively speaking this doesn't help because everyone
lost but we were above the
median in public pension plans that have more than a billion
dollars and assets which is our
measurement for the rierm
retirement performance measures.
We still lost 27 million.
We recovered back to the 15.8
billion -- today we're back to 15.8 billion. Not sure what the market did this morning. But we recovered the growth that
was lost on those assets.
Obviously as what impacts the
actuarial value of assets, the
actuarial value of assets, if we're investing exactly what they ( think we have as far Jl3 as thev7r^~ actuarial value so they're assuming we're investing 16 billion when in fact we're only investing 15 billion.
>> Supervisor Elsbernd: and your perspective on the
suggestion of the finding that
public funds with low risk investment policies perform as
well or better than high risk policies. I know there avagueness in what that means.
>> we can show them studies that
show in fact the opposite is true. Absolutely the opposite is true.
And I think we have a history of being sort of restricted to those types of investments, and
I think we have -- the retirement board has always
acted as prudently as possible. They have concerns ABOUTwa(U*
preserving obviously the trust. Their focus is very, very long-term. I mean it's long-term to the point of we are planning on
paying benefits for the person
hired today, and all of their continuance.
And so contrary to how we handle
our own, I don't have an 80 year horizon. I don't have a 100 year horizon to plan ONc c
but we have I think -- looking back long-term is more
significant than looking back at a three or five or 10 year, because it's shown that in fact
you can track the actions of the retirement board over that same 20 year period and show that
they were acting priewnelly and
that this -- prudently and that
this retirement board, twice, since 2008, have undertaken to
lower what they call an
artificially high assumed return
rate, which in fact cost the city, and now employees xcx with proposition, with the new
proposition, cost the city and employees additional money to
make sure that/9::|~ we can maintain the health of the plan.
>> Supervisor Elsbernd: thank you.
>> thank you.
>> Supervisor Elsbernd: any
other concluding comments? Okay.
I'd like to invite up either
trustee driscoll, trustee -- any
comments you'd like to make? >> good afternoon, supervisors. It's a pleasure being here. As you May know I serve as an elected member of the san francisco retirement board. I'm not serving in that capacity
and not speaking for the board here.
I'm speaking solely of my own j= comments, the freedom of speech which we have so observed
earlier in this meeting. First of all, I want to talk about risk.
I attend the bicker shir halfway meetings, warren buster is one of my heroes. He told a story if you would
have invested when columbus came
to the new world, if you could
have bought treasury bills and reinvested those at the yields
they are now, your dollar would
have grown to $1.71 in 520 years.
And all of our jaws dropped. I got my calculator and verified that number. Warren was right. the short answer is we have to take risk.
The grand jury report talks about lower risk. Treasury bills is the lowest risk you can get. We have to take prudent risk and I would echo the comments of our executive director. We have a long-term horizon.
And we must take prudent risk. The earlier in terms of the
stock market you asked 2008, I
believe the stocks were down 38%. Our fund was less because we were diversified.
We had other asset classes in
addition to common stocks.
Private equity has been one of the investments of the fund in the middle 80's.
You asked about the funding. It was much less funded in the
early 80's and still we took a much riskier approach. And the returns have been shown
opinion forget analysis and studies. One of the best performing asset classes of your pension fund has
been the private equity portfolio. It's about a maximum of 15% of the assets. We constrain it.
But we must take prudent risk and the returns have been there plp we have a long-term horizon.
We don't need the ligdity.
We get the liquidity in other ways. Another thing about risk that was not discussed but mentioned by the executive director in
terms of we come up with
different risk and return
numbers for different asset classes.
The civil grand jury report led
me to emleev that it was proprietary information, we wouldn't disclose that. These are disclosed in public meetings in terms of what is the expected return on stocks, on fixed income, et cetera, and private equity, and emerging markets, those kind of assets classes::t1z and all that goes into it.
Risk is -- means many different things to different people. To the way we manage people and
virtually all over public funds
manage money, it's based on two numbers,?E::~t} expected return and standard deviation.
And if you want to talk about failure analysis I'll talk about
that briefly but the underlying assumption is that the markets
are normally distributed.
2008 will happen once every 100 or so years. We have to understand that and that is the price of risk that that would take.
But I assure you it's prudent risk.
I want to address one other issue. The phrase failure analysis because it's used throughout the report, I searched it and the definition is this. Failure absences is a process of
selecting and analyzing data to determine the cause of a failure.
It is an important discipline in
many branches of manufacturing industries such as the electronics industry, where
there's a valid tool, et cetera. Doesn't mention investments. There has been no failure.
One out of 100 times we'll have markets like that. it's just the way it is.
And it could happen again if ben
ben ak iruns off with paris hilton. You don't know what will happen
but I want to assure you that
the fund is managed with taking prudent risk over the long-term
and we do care very much about earning returns and protecting the principal. thank you for your attention.
>> Supervisor Elsbernd: thank
you. Joe. >>
.Hold on just a second. Trustee driscoll and then we'll go to public comment.
We'll do that after public comment. >> good afternoon. J)P driscoll also with the
retirement board and city of@ san francisco. The a grand jury report suffered so much ground, so many points
it took quite a while to get past some of their misstatements, misrepresentations to get to their findings.
My problem is if the basis was incorrect,it takes a while to follow their reasoning. They were nice enough to put in their notes and their attachments all these wonderful
articles by groups such as the
upjohn people that they use some of that explanation about what they think we should do.
So many points but one I want to
focus on and followed up on what the commissioner just said we do not follow preservation of capital adequately enough as a number one priority. Maybe we don't say it every meeting but we talk about that all the time. That's one. Two, in terms of the investment
rate of return, there's assumption that the actuaries
make and an assumption the board makes for investment returns. One of the PAPERSxii(Sq I think
in the upjohn one as said by the grand jury member they expect us to make a realistic rate of return assumption. I agree.
Very much I agree.
Part of this -- I won't call it dichotomy conflict the realistic
rate of assumptions that make sure that we're not undercharging or overcharging the citizens or the employees.
but there's also a reific ad
realistic assumption whether we invest, don't chart
start chaizing returns. It's got to be an attainable return therefore we go through
all the steps, what asset classes what subasset classes we're going into. This comes back to generate a@x#n contribution rate that the city and } the employees must pay. That's two rates of return. They're basically the same thing but both are required to be realistic and that's what the
board spends a great deal of
time on and discuss it non-stop. This board has been very realistic. We've had temptations to make
more money and have not done it.
Today if you want a guaranteed preservation of principal as a goal I can tell you exactly what that rate of return will be, something in the neighborhoods of 2%.
There are corporations now under incredible stress and strain, not from the economy of how to make their rates of return or their normal profits, but their pension funds are also how are they going to do it with very safe pension funds that are returning 2% of funds.
There's a lot of economic pressure on pension funds and trustees and corporations and government officials all over the country.
It's our rate of return 7.6 right now realistic yes it is. it's going down and we will review it again and again and again. With that I'll stop.
>> Supervisor Elsbernd: thank you. Public comment now.
Each member of the public will have two minutes. Thank you for your patience.
>> it was not as bad as waiting
for the muni bus. anyway, I have a statement here and the statements are always my
own and don't represent anyx&( H organization. Prop c was passed last year in the midst of the economic downturn. Today there are signs of
recovery with the J.P. Morgan stating to maria -- thatr #t there are green lights for all section
of the economy, jeremy see gull
of the wharton business school thaig"
^ will reach 17,000 and
nile ferguson writing in the
November 19 issue noted the U.S. Growth in the next four years will be higher than any of the
major developed=c97 economies with unemployment coming down faster. Clearly the signs of recovery
are written loud and clear with corresponding benefit to the city and its revenues.
This -- is not unlike previous
business cycles with slumps and
booms, peaks and values except
the -- but never in any previous
recession have pensioned been attacked. The opportunity for pension attack occurred in this
recession is part of a long-term
agenda to severely reduce if not destroy these benefits.
The upshot of prop c as if workers are going to wake up
with a back had eye because
they're going to get less
benefits and as a result of it
they'll have diminishing purchasing power of goods to THEa> I mutual -- >o'(+ to the -- of goods and
services causing an economic
contraction and for the sake of all pensions have to be preserved and even restored to
the previous level for there is an economic safety net for the
business and economy without the
goods and services worse recession could occur and possibly depression.
So the grand jury is constricted
in my point of view and they
should start addressing downtown business interests.
>> Supervisor Elsbernd: next
card I have is jean thomas actually the only other card I have and then anyone else who
would like to comment follow Mr. Yep and line up on the side. >> thank you.
Jean thomas, I'm a retired city employee.
I have the honor and privilege
of being the chair of the committee with the retired employees of the scointd city and county of san francisco. I'm not speaking on their behalf
but I do follow these what goes
on at the retirement board consistently and write it up. And I have to concentrate or
otherwise when you put something
in writing if you don't do it right you look real stupid. I wonder what kind of world I
live in when I read this report.
And particularly I was struck by
recommendation 5 as the lower
risk of recommendation for investment. IFj
? We had invested in t-bills we
wouldn't be able to pay anybody's lunch.
So I really feel that the grand
jury -- I'm sure they're experiencing great pain today,
but in the future, if they go
into something like this, they should include, in their group
of people with whom they talk
and discuss, people who
understand some basic ideas ofd:(:v risk and of particularly risk and have a professional background in it. Thank you very much.
>> Supervisor Elsbernd: thank you.
Not yet. Mr. Yep. And any other members of the
public who would like to comment
otherwise Mr. Yep is our final speaker. >> good afternoon. Douglas yep. The first thing I would like to mention isdc
committee was serious about this
item, this item -- or really items 5 and 6 should have been heard at the beginning of the meeting rather than items 1, 2, and 3.
By holding it last you've
actually done a big disservice because everybody's either left
or else people have turned off the tv to go shopping.
So by holding it last you've, in
my opinion, done a great disservice. Let's put it this way.
Item no. 3 was a special interest item, in my opinion.
And I am one -- items 1I p`! and 2 should have been held after these two items. Since we're dealing with the subject of trust I'd like to put
on the record x, x --
ex-governor core sign of new jersey. Let's not forget what happened
to all that money and it still hasn't been found. And whatever happened to the investigation of that. Also, if we're dealing with
trust, let's not forget the
famous athlete lance armstrong. So many people trusted him and
now he May become the most disgraced athlete depending on who you want to believe but
looks like plenty of obstruction of justice so where we will never get to the bottom of this. I think in order to summarize we should have more hearings on this subject in front of this
committee so this committee is serious about audit and oversight, you ought to have
more meetings on this very topic, and the last thing I
would like to say is that civil
grand jury, in my opinion, is
one of the few things keeping
corruption to some sort of a
manageable level in any city.
And if you ask me, the only reason why there is so much corruption is because there's
not enough crime-fighters to catch everyone.
So I guess -- feel like it's okay to get away with it. Thank you.
>> Supervisor Elsbernd: any other members of the public wish to comment? Seeing none, public comment is closed.
You look like you're itching to have one final word. Come on up. >> okay.
Thanks for my final word.
i'm hungry too.
I just wanted to clarify that
nowhere in our report did we
ever recommend that the pension
fund invest in t-bills. Never.
We did not recommend any specific investments for the
pension fund.
we merely recommended that you
investigate the last 20 years of
records of other alternative investments.
The one that was used by -- to
compare cal-pers was bond funds, which made 4%. I think it was mentioned that
they only made 1.2% in treasury bills this year.
And what was the return of the
pension fund this year.
Do you remember do you remember, supervisor elsbernd?
>> Supervisor Elsbernd: don't remember. >> I have it here.
>> Supervisor Elsbernd: okay. I think you were about to
illustrate the point. please do.
I want you to do this. Show me.
>> 1.67% thisxn'(
Just saying, we did not recommend that kind of investment, nor any specific investment program.
>> Supervisor Elsbernd: okay. >> we did want -- we still would like to know what the specific
formula is for the assumed investment return. We would like to see that formula. Thank you.
>> Supervisor Elsbernd: thank you.
With that, we'll close the
public hearing.
Why don't we table item 5 and do that without objection. Table item*y)
A: 5.
We'll move to item 6.
and so let me begin by -- you
know, kind of thanking the grand jury. I appreciate you going after this, but I remember the two of you coming into my office a year
ago, right around this time,
maybe short of a year -- no, front two, to talk about this. And I remember suggesting to you if you're going to get into this, you've got to get all the way down into the detail because
if we end up with a report that is just kind of on the surface, it's going to end up really kind
of exploding, causing a lot of controversy when we don't get all the facts. And respectfully,JMr"*t investment policy of the retirement system
is not something that -- this isn't meant to particularly go
to you, but that anybody could
truly understand, in 15 pages. I mean this is something that
has taken me years on the retirement system to come to understand, and hundreds and hundreds and hundreds of pages
of reading. so I was very concerned when you started asking me questions because I had some sense of where you were going. And while I think you got some
of it, there's a lot of the kind of underbelly that takes a lot
of research, a lot of evidence,
that just can't be answered by a
couple of reports that have been
produced by a couple pension reformo advocates. That'Sz&(*& p it. Going through the>f n resolution, our job now is to say what we
agree with and what we disagree with. President Chiu, if we could run
through these findings and recommendation here are my thoughts, I'm curious for yours, and just run them down in7c page y 2, I9~
finding one, san francisco employee pension
fund is current underfunded by more than 2 billion.
I would agree, I think -- suggests that.
Madam Clerk, are you following
us as we did through in finding
one we disagree with.
Finding 2, the retirement board did not complete a failure absences subsequent to the
funding loss in 2008-09. I mean there's kind of two ways you could go here. If you buy into the grand jury's concept of what a failure analysis is, sure you could agree with that. But having served on the board, I thinkq:
t the board did a lot of analysis of what happened.
did it meet your definition of failure analysis? Maybe not because you seem to be caught into one specific definition of what a failure analysis is but I believe the
board did a very there are row job of analyzing how the portfolio went down so I would
disagree with this finding.
>> Supervisor Chiu: I could go
either way on that one. again, I think supervisor elsbernd has laid out the perspectives that there was a
lot of analysis but not exactly
as the civil grand jury suggested. I think I would agree with them there was a bit of analysis done
so I would probably disagree as well. >> Supervisor Elsbernd:
finding three city must pay increasing contributions to the
fund due to underfunding. I think we all agree with that fact.
>> Supervisor Chiu: yes. >> Supervisor Elsbernd:
finding four, the increase in pension contribution by the city are growing at a faster rate
than exeand turs on most other
city services since 1989.
Leo, a nod of the head.
we will agree with that finding.
Finding 5, the fund can artificially reduce the city's
estimate liabilities by increasing investment return assumptions by increasing years
a finding with which I cannot disagree but for the record and anybody who May be watching and we heard it from the grand jury there is no evidence whatsoever that there retirement system ever considered raising the investment assumption solely to
save the city money and I would hate for anybody to think that
was going on but yes I would suggest we disagree with that finding.
Finding 6 unrealistically high assumed investment return rate
of}IHqj 7.66% is driv by concern for mandate of city contributions with little regard for prudent management. This is a finding I would have
to wholeheartedly disagree with. If you went through j r the three months of hearings that we had
at the retirement board on an analyzing our investment return
to suggest that it was done with jts regard for prudent management I think you would have had to be in that room with
a blindfold on and ear plugs in.
We had significant discussion about what it mentd for our pension fund.
And quite frankly had very
little discussion about what it meant for city contribution and I felt that was appropriate because we are trustees to the retirement system not to the city's general fund. And our job at the pension system as I always understood it
as a trustee was to focus as a fiduciary to our beneficiaries, not as a fiduciary to the city's general fund.
So I would strongly disagree with no. 6.
>> Supervisor Chiu: I would disagree:&Jqkbu well. >> Supervisor Elsbernd:
finding 7, again this is like no. 5, studies show that public
funds with low risk investment policies performed as well or
better than those with risk studies. There are studies that will say 079 that. Other studies say the opposite but yes this statement is factually correct.
>> Supervisor Chiu: I would disagree with that statement. I think the suggestion of that
statement is that we should be
looking at low risk investment
policies and I'm not sure if I'm comfortable with saying that.
>> Supervisor Elsbernd: fair enough. I appreciate it.
We will disagree with that finding. All right move to the recommendations. recommendation no. 1, san francisco employees retirement system board addresses the 2 billion underfunding in the san francisco employees retirement system pension fund
by forming a high level task
force a panel of experts and community groups to develop courses of action. This is a very specific finding and one I would disagree. I think the city has been proactive on this as evidenced
by a number of measures passed
by the electorate without such a
task force, you have an elected board of supervisors, mayor's office, I don't think we need an additional layer to address this.
>> Supervisor Chiu: I agree. Last year with proposition c we
formed groups of city officials
and experts and community groups
of public to figure out how to move forward. That is appropriate when trying to come up with a proposal but I
think an ongoing continuous task force, we have an awful lot of task forces in the city so I would agree that's not something I would support at this time. >> Supervisor Elsbernd:
recommendation no. 2, adopt a realistic and consistent formula
for estimating assumed expected return rate.
I would actually agree with this and frankly I think we already do that.
So I don't have an objection to this.
>> Supervisor Chiu: neither do I.
>> Supervisor Elsbernd: no. 3, san francisco employees undertake investigation and
failure analysis study of
investment policy report and
rcht to the members of the public. I think we're already doing this and I'm more than happy to agree to it because it's been done and will continue to be done.
>> Supervisor Chiu: has been implemented.
>> Supervisor Elsbernd: okay. Recommendation no. 4, investigate quantify and address all major risks in the portfolio and make this information public. Same response I agree because I think this is being done, has been done and will continue to be done.
>> Supervisor Chiu: correct. >> Supervisor Elsbernd: recommendation no. 5, investigate less volatile and risky investment policies that would attain sufficient returns
to the san francisco retirement pension fund. once again, I think we are always looking to minimize our
risk if we can achieve the
returns that we need to achieve. So I'm happy to agree with that.
We are always looking for less volatile and less risky funds that achieve that return.
>> Supervisor Chiu: agreed.
>> Supervisor Elsbernd: then
the last one, religious no. 6, replicate upjohn comparison studies using san francisco data
to apply findings to the san francisco pension fund.
With this one I would disagree. I think we are doing more than enough with our? Z additional analysis and I don't think we
need to plug our numbers into a
formula put together by some other people. I think we do more than enough analysis and I would disagree with this recommendation.
>> Supervisor Chiu: and for
the same reason that I disagreed
with finding 7 I would disagree with this as well.
>> Supervisor Elsbernd: Madam Clerk, I think that fills in the blanksykj)
On lines 15 and line 17. Budget analyst have we responded appropriately? Okay. with those changes if we could
send this item=jpy forward with recommendation, that would be
the order.
Any other items in front of the committee?
>> Alisa Miller: no, no further matters.
>> Supervisor Elsbernd: thank you everyone for your patience. We arei%(U^* *y
