Investment Policies and Practices of the

Conclusions 1

• CL1
  The Jury finds that the San Francisco Employees’ Retirement System Fund is pursuing a high-risk investment model adopted over 28 years ago. The Fund continues to rely on the “Yale Model” even after the 2008-2009 losses left the Fund short. To make up for the losses, City contributions to the Fund have ballooned to $433 million in 2012. Those contributions will continue to rise until at least 2015. This expense will divert money from other essential City services. Continuing high-risk investments create the possibility of further losses which will require even higher City contributions. The Jury recommends the Fund investigate and formulate long- and short-term contingency plans to reduce exposure to future losses. The assumed investment return rate employed by the Fund is unrealistically high. Efforts to meet this high rate lead to high-risk investment policies and practices. The Jury recommends the Fund adopt a reality-based assumed investment return rate that accurately predicts the funding needed for guaranteed benefits of present and future retirees. Most importantly, the Jury recommends the Fund undertake a serious and thorough investigation of their investment policies and practices. High volatility investing is not desirable 12 San Francisco Employees’ Retirement System City and County of San Francisco Civil Grand Jury 2011-2012 for a public fund that exists to provide predictable, secure and safe funding levels for retirees far into the future. Current studies question the widely and long-held assumption that public funds must engage in high-risk investing to meet their funding needs. San Francisco Employees’ Retirement System 13 City and County of San Francisco Civil Grand Jury 2011-2012 ENDNOTES 1 City and County of San Francisco Charter, Article XII. 2 Constitution of the State of California, Article XVI, §17. 3 City and County of San Francisco Charter, Article XII, §12.100. 4 William Hallmark and Kenneth Kent, “Cheiron Presentation to the Retirement Board of SFERS,” January 2012. 5 San Francisco Employees’ Retirement System Annual Report for Fiscal Year Ended June 30, 2010. 6 San Francisco Employees’ Retirement System Annual Report for Fiscal Year Ended June 30, 2011. 7 CalPERS website, www.calpers.ca.gov. 8 City and County of San Francisco Charter, Article XII. 9 The Actuarial figures are as of June 30, 2011. Updated figures will not be available until January 2013. William Hallmark and Kenneth Kent, “Cheiron Presentation to the Retirement Board of SFERS,” January 2012. The actuarial value is lower to account for the contribution debt owed by the city amortized over time and for higher benefits in future. 10 Per interviews with SFERS Board members. 11 2012 Actuary Report to the San Francisco Employees’ Retirement System Board. 12 Joe Nation, “An Assessment of San Francisco’s Unfunded Pension and Retiree Health Care Liabilities,” Stanford Institute of Economic Research, March 15, 2011. 13 Ibid. 14 Mary Williams Walsh and Danny Hakim, “Public Pensions Faulted for Bets on Rosy Returns,” The New York Times, May 27, 2012. 15 Ben Moshinsky, “Pension, Insurance Firms Must Reduce Return Estimates, FSA Says,” Bloomberg Apr 10, 2012, http://www.bloomberg.com/news/2012-04-10/pension-insurance-firms-must-reduce-return-estimates-fsa- says.html. 16 Peter Smith, Former Head of Investments at the Financial Services Agency of the British Government as quoted by R A McCleod & Co., “Investment project rates must be set at a realistic level, says FSA,” April 2012. http://www.ramcleod.co.uk/site/news/801337367.html. 17 Rick Ferri, “The Curse of the Yale Model,” Forbes, April 2012 http://www.forbes.com/sites/rickferri/2012/04/16/the-curse-of-the-yale-model/. 18 Proposition 21 amended Section 17 of Article XVI of the California Constitution. 19 CalPensions, “Pension Crisis: Did Prop 21 Pave the Way?,” 2010, http://calpensions.com/2010/07/01/pension- crisis-did-prop-21-pave-the-way/. 20 Ibid. 21 Provided by SFERS staff per requested by the Jury (June 2012); unaudited from August 2011 to May 2012. 22 Howard Bornstein, Going for Broke: Reforming California’s Public Employee Pension, Stanford Institute for Economic Policy Research, April 2, 2010. 23 CalPers website. 14 San Francisco Employees’ Retirement System City and County of San Francisco Civil Grand Jury 2011-2012 24 Howard Bornstein, Going for Broke: Reforming California’s Public Employee Pension, Stanford Institute for Economic Policy Research, April 2, 2010. 25 Julie Creswell, “Pensions Find Riskier Funds Fail to Pay Off,” The New York Times, April 2012. 26 N. Mohan, and T. Zhang, “An analysis of risk-taking behavior for public defined benefit plans,” Upjohn Institute Working Paper 112-179, November 2011. 27 SBBI Classic Yearbook , www.corporate.morningstar.com/ib/asp/detail.aspx?xmlfile=1409.xml. SBBI stands for Stocks, Bonds, Bills, & Inflation. San Francisco Employees’ Retirement System 15 City and County of San Francisco Civil Grand Jury 2011-2012 RESPONSE MATRIX Pursuant to Penal Code § 933.05, the Civil Grand Jury requests responses as follows:

No Responses Found 2

Government entities assigned to respond to this report. No response documents have been linked in our database.