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Court Tells San Francisco Pension System to Change its Strategy

A civil grand jury in San Francisco has told the city’s employee pension system to change its investment strategy, assumed rate of return, and transparency policies.

(August 17, 2012) - In reaction to weak returns and losses over the last five years--including the 2008 financial crisis--a civil grand jury has investigated the San Francisco Employees' Retirement System's (SFERS) investment strategy, and is not impressed. 

Investment Policies and Practices of the San Francisco Employees' Retirement Fund, the report detailing the results of the investigation, rails against SFERS for its "volatile and risky investment policies," "unrealistically high, assumed investment return rate of 7.66%," and for not undertaking a formal "'failure analysis" subsequent to the funding loss suffered in 2008-2009." 

The $16 billion public plan is 83.9% funded as of July 2011, with $3 billion in outstanding liabilities, but San Francisco's city charter requires that the public pension be fully funded. Contributions from the city have increased since the 2008 financial crisis, topping out at $433 million this year. However, from 2004 to 2007, city employees made no contributions to the overflowing fund.

The 19-member civil grand jury issued a list of six recommendations for the SFERS' investment team in its report: 

1. Address the $2 billion dollar underfunding of the San Francisco Employees' Retirement System Pension Fund by forming a high-level task force with city officials, a panel of experts, community groups, and the public to develop courses of action.

2. Adopt a realistic and consistent formula for estimating the assumed expected investment return rate. 

3. The San Francisco Employees' Retirement System Board undertake an in-depth investigation and "failure analysis" study of its investment policy and report its findings to its members and to the public. 

4. Investigate, quantify and address all the major risks in the portfolio and make this information public.

5. Investigate less volatile and risky investment policies that would attain sufficient returns for the San Francisco Employees' Retirement System Pension Fund.  

6. Replicate the Stanford, Upjohn, and The New York Times evidence-based comparison studies using San Francisco data, to apply their findings to the San Francisco Employees' Retirement System Pension Fund. 

SFERS sent aiCIO the following statement in response to the jury's report:

"Members of the SFERS Retirement Board and the executive director have received the San Francisco Civil Grand Jury Report on SFERS investment policies and practices. As pointed out in the report, by authority of the California Constitution and the City Charter, the Retirement Board has the plenary authority and fiduciary responsibility for the investment of the SFERS Trust. As it has over the past decades, through sometimes difficult financial markets, the SFERS Retirement Board and staff are singularly dedicated to securing, protecting and prudently investing the pension trust assets, administering mandated benefit programs, and providing promised benefits to SFERS members and beneficiaries. The SFERS Retirement Board and staff will provide responses to the Civil Grand Jury's findings and recommendations as required by law."

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