It’s a basic form of storytelling, used in countless books and movies: Two people, in similar circumstances, confronted by difficult choices. One does what is right, even if it seems like the harder choice. He fights through the many challenges, has moments of self-doubt and worry, before ultimately being rewarded. The other takes the easy way out. For a brief time, he appears to be ahead, before the shortcut is discovered, and ultimately receives the deserved comeuppance.

It’s a narrative technique as old as the Bible. It’s a staple of rom-coms, sci-fi flicks and adventure movies.

The investment version of this is playing out today in California in two different pension funds for public employees. There is little doubt how this movie is going to end.

The first is from investing behemoth California Public Employees’ Retirement System, or Calpers. As the Wall Street Journal reported this week:

The largest U.S. public pension plan is considering a dramatic retreat from some riskier investments, as it tries to simplify its $295 billion in holdings and better protect against losses during the next market downturn, according to people familiar with the matter.

California Public Employees’ Retirement System is weighing whether to exit or substantially reduce bets on commodities, actively managed company stocks and hedge funds, the people said.

The pension, which manages investments and benefits for 1.6 million current and retired teachers, firefighters and other public employees, is a bellwether for investment trends at other public plans. Any shift it makes will likely influence others because of its size and history as an early adopter of alternatives to stocks and bonds.

The antihero in this story are the gamblers who run the retirement portfolio for the San Diego County public-pension system. Why gamblers? Because of this, as reported by San Diego Union-Tribune:

In April, pension board members unanimously approved a new investment strategy that dramatically increases use of “leverage,” a form of borrowing…. The county’s remarkably transparent goal is to raise the risk of losses in hopes of lifting returns, because the government and its workers haven’t saved enough to fully fund checks promised to retirees in the future.

You might wonder where the county got the idea that leverage was its best bet. As it turns out, it comes from the county’s high-priced chief investment strategist. “We’re trying to bring up the risk, not keep the return and dial down the risk,” Lee Partridge of Salient Partners told the San Diego Union-Tribune. Leverage has increased from 35 percent to 100 percent of the assets in the pension fund.

Salient Partners is going to be paid $10 million a year in fees for helping to conceive and execute this strategy. San Diego County’s pension-fund returns ranked in the lowest quintile, at 84 out of 100, over the past three- and five-year periods, according to Wurts Associates.

What makes this approach so surprising is a simple comparison of San Diego County to the local competition, the City of San Diego (not to mention Calpers). The city pension board bars the use of leverage for pensions. Instead, it favors a low-risk asset allocation approach. The city’s fund is outperforming the county’s. Salient Partners has generated returns of 9.7 percent a year. Meanwhile, the city’s fund has earned 13.6 percent a year and at lower cost.

In 2013, San Diego County spent $103.7 million in investment and administrative fees. It is one of the highest-cost pension funds in the entire country.

To review: A pension plan is failing to save enough to meet its retirement obligations, and rather than save more, it ramps up leverage.

I am not fond of forecasts, so instead, I will offer one of two likely outcomes: Eventually, San Diego County’s pension fund blows up. The losses are spectacular, and the county’ taxpayers are saddled with billions in new tax obligations. Alternatively, the townsfolk figure out how much risk is being put on their shoulders, and fires everyone involved, from the pension board to the advisers to anyone who voted for these shenanigans.

I have seen this movie before. I know how it ends.

Published here: Doing the Right Thing 



Category: Investing, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

10 Responses to “The Idiots of San Diego County’s Pension Investment Committee”

  1. VennData says:

    Lemme guess, these proud, strong, alabaster white pillars of the community talk investments with their frat buddies on the links at Torrey Pines all the time and really know what’s what… And gosh dang it, what the heck else can you do when Obama wreck Ed the economy…


    ADMIN: Even worse . . .

  2. mpappa says:

    You have to wonder how gasb 35, the min mandatory contribution, and funded ratio are impacted by the leverage? It basically skews the target rate of return. Do you know what their return assumptions are? Would love to read the board minutes that I would predict are hollowed out. Great article.

  3. DeDude says:

    Maybe it will end like in Memphis where the police, firefighters and municipal workers paid there part of the pension fund contributions whereas the politicians kept “balancing” their budgets and fund tax cuts by deciding not to put their share of money into the pension funds. When (surprise) the fund got so far below future obligations that he state ordered a fix, they decided to take away health insurance from retired people (some who got disabled doing their work for the citizens). This is one reason I believe that public employees should demand to be in the social security system with a regular 401K as a supplement. The temptations for local governments to balance budget by robbing pension funds is way to big – and the employees end up holding the bag.

  4. couragesd says:

    Don’t forget that it was San Diego/Poway that brought you this gem

    High cost of school bond shocks Poway Unified

    Perhaps it is the high number of venture capitalists and entrepreneurs per capita in SD that makes everyone think that they are going to be a winner. Reviewing post ‘The 21st Century’. should be mandatory for local officials.

  5. Joe says:

    As an individual trader, I have no issue with leverage. You put it on and take it off. In a heartbeat if that’s the right thing to do. But for an institution with huge assets across myriad classes and individual issues of less liquid assets and a time horizon of a century or two? If they have a plan to lever up, what is their plan to bail when leverage works it’s magic in the other direction?

  6. Robert M says:

    To count the stars in the sky would not suffice to tell how many timesw we’ve seen this movie.

  7. Frwip says:

    Ah, SoCal, La Jolla, Newport Beach, Coronado, land of the never-ending sunsets … and of public financial disasters.

    Well, we’re back to 1994, twenty years later, and it looks like San Diego County is jealous of Orange County. No reason San Diego can’t get its own Chapter 9, warts and all, They can do it too and they will do it, Dog darn it !

  8. Iamthe50percent says:

    “In 2013, San Diego County spent $103.7 million in investment and administrative fees.”‘

    The real reason for not investing in low cost index funds/ETF’s.

  9. willid3 says:

    isnt this the standard procedure for any organization that has provided a pension? seems like almost all of them have mismanaged it. and considering that most companies that offer 401ks are working with the same folks who ‘helped’ them with their pensions, care to guess how that has turned out?

  10. Whammer says:

    Orange County — hard core Republican. San Diego County the same. Big fees paid to investment advisers? Just the free market at work.

    Obviously Obama’s fault.