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City, County Pension Funds Performing Well Above Targeted Goals

The pension funds of the city and county of San Diego both carry huge deficits, but when it comes to the recent performance of their investment portfolios, few have done better.

For the year ended June 30, both the city’s and county’s employee retirement funds reported returns of greater than 16 percent, well above targeted performance goals.

“We had total earnings of about $1.2 billion for the last fiscal year compared to about $960,000 for the year before,” said Brian White, chief executive officer of the San Diego County Employees Retirement Association. “For the past three years, our returns have put us in the top 5 percent of all large public pension funds, and for the last five to 10 years, we’re in the top 1 percent.”


Follows Losses

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The county’s performance was all the more remarkable because it followed losses of some $95 million as a result of an investment into Amaranth Advisors, a Connecticut hedge fund that was forced to liquidate after losing billions in highly leveraged energy trading. Amaranth returned $80 million of the total $175 million invested by the county, which has filed suit to obtain all its money.

The county fund now totals $8.4 billion and continues to invest in hedge funds, which are largely unregulated entities that sometimes pursue arcane and complex investment strategies, and usually cannot be cashed out quickly or easily if something goes awry.

The city fund, called the San Diego City Employees’ Retirement System, also posted high returns for the year ended June 30, with 16.22 percent, beating the prior fiscal year’s performance of 15.6 percent.

For the last three years, the SDCERS fund has posted an average annual return of 13.22 percent, and for the last 10 years it’s 9.94 percent. That gain placed SDCERS in the top 2 percent of large pension funds.

Doug McCalla, SDCERS chief investment officer, said while above average returns are always desired, the fund’s managers have maintained a fairly conservative strategy that does not include investing in hedge funds, and limits exposure to more volatile equity funds.

“We did it by being smaller,” McCalla said. “We have less equity exposure, but we manage that exposure better.”

Indeed, the SDCERS fund held only 4 percent in international equities and 40 percent in domestic equities at the end of June.

Recently, City Attorney Michael Aguirre charged that the fund’s managers were investing in hedge funds, but McCalla said that was simply not true. The funds in question are registered with the Securities and Exchange Commission, are fully backed by cash, can be liquidated at any time, and the city has title to the funds.

In addition, unlike some hedge funds that charge excessive fees, the funds in question carried management fees of 0.58 percent, McCalla said.


Below Actuarial Funding

Both the city’s and county’s employee pension funds are below full actuarial funding, meaning the total amount of future payments owed to all members, both retired and active, is more than the present value of the funds’ assets.

The county pension fund of $8.4 billion has 33,000 members, 12,000 of whom are retired. The city fund of $4.9 billion has 19,000 members, more than 4,100 of whom are retired.

In the case of the city, the higher returns plus additional contributions made by the city caused the unfunded liability to decrease to $1 billion as of June 30, 2006, down from $1.4 billion as of June 30, 2005. The numbers concerning unfunded liabilities were the most recent available by either SDCERS or SDCERA.

That boosted the funded ratio of the SDCERS fund to 79.9 percent, compared with 68.2 percent for the prior year, according to SDCERS reports.

As for the county’s fund, as of June 30, 2006, the unfunded liability was $1.2 billion, compared with $1.4 billion on June 30, 2005. That increased the funded ratio from 80.3 percent to 83.6 percent at that time, according to county fund reports.

The city fund took a major fall earlier in the decade caused from heavy investment losses in the stock market, but also from years of deliberately not contributing to the pension fund. The decisions made in 1996 and 2002 by past city officials and pension board members are still being litigated in several courts.

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