San Francisco Employees Retirement Fund
Memorandum Of Investigation Of The 1996-1997 Civil Grand Jury
The San Francisco City and County Employees Retirement System (SFERS) is a defined benefit plan established to provide pension benefits to virtually all employees of the City and County of San Francisco and certain classified employees of the Community College and Unified School District. It provides basic service retirement, disability, and death benefits currently in excess of $300 million/year. The Retirement Fund is presently valued at approximately $7.87 billion.
There are three sources of income for SFERS:
1. Earnings on investment - one third of which is handled by in-house staff (stocks and bonds) and two thirds by outside investment firms (stocks, bonds, real estate, and alternative investments).
2. Yearly contributions from the City's General Fund as necessitated by actuarial projections.
3. A charter-mandated payroll tax of approximately 6½% of City employees' salaries. It should be noted that as a result of recent collective bargaining agreements, as of 1997 the City will assume responsibility for payment of the entire payroll tax for all employees with the exclusion of a small number of medical personnel. The estimated cost is $90 million for fiscal year 1996-1997.
The seven-member Retirement Board, Executive Director, and Chief Investment Officer have much of which to be proud:
1. As of June 30, 1996, SFERS had a one-year investment return of 16.79%, a 3-year return of 11.35% and a 5-year return 12.92%. All are well above an actuarial assumption of 8.25%, and compare quite well on average over ten years with other public pension funds.
2. The Retirement Fund now stands in excess of 115% of actuarial liability. As a result, the current City contribution (see #2, above) has been reduced to zero. This can be contrasted with payments from the City averaging $85 million in Fiscal Years 1993 through 1996.
3. The Retirement Board and staff have apparently been vigilant in protecting the Fund from inappropriate, questionably motivated investment proposals.
4. Fees paid to the outside investment firms, including those engaged in more complicated alternative investments, do not seem excessive and appear to represent good value for service rendered.
SFERS has been faulted for not participating more fully in the recent historic rise in the domestic equities market which saw the S&P 500 Index up 37.4% in 1995 and 22.9% in 1996. While it is easy in retrospect to be judgmental, some of the criticism may be justified.
There has been a reluctance to match other public pension funds (San Diego, Phoenix, Seattle, CALPERS) which have traditionally allotted approximately 50% of their assets to foreign and domestic stocks. In particular, SFERS appears to have been somewhat averse to U.S. equities. As an example, SFERS' commitment to domestic stocks was just 29.8% at the end of 1994 just prior to the run up. It has only recently exceeded 35%.
This SFERS tendency has been commented upon previously in a report by a Mayor's Fiscal Advisory Committee in 1992. The argument here is not for market "timing," but rather for a more prudent asset allocation mix which might better position SFERS to benefit to a greater degree from significant increases in the equities market when they occur.
There will undoubtedly be a correction in the U.S. stock market from present levels. Nevertheless, at this stage of its maturity, the SFERS January 1997 decision to adjust the asset allocation scheme to reflect 50% domestic and foreign equities is to be welcomed.