The San Jose (Calif.) City Council has approved a plan by Mayor Sam Liccardo for an independent review of why the city's two pension plans have produced two straight years of negative investment returns and a subpar five-year track record.
Agenda materials for the March 2 investment committee meeting of the $3.1 billion San Jose Police & Fire Department Retirement Plan show the City Council signed off on a letter by Mr. Liccardo for a review by the city auditor, or an independent third party chosen by the auditor, of the police and fire plan and the $2.1 billion Federated City Employees Retirement System.
“The plans' investment losses of the last two years, and the more dramatic failure to meet actuarial assumed rates of returns, have substantially added to both the plans' unfunded liabilities and the (city) general fund's burdens,” the mayor wrote.
The police and fire plan showed -a 0.6% investment return in the fiscal year ended June 30, following a -1% return the previous year. The federated plan had a -0.7% return in the latest fiscal year and a -1% return the previous fiscal year.
Over a five-year period, the police and fire plan returned an annualized 4.1%, while the federated plan gained 3.2%, lagging the plan's policy benchmarks and the median returns of MSCI's InvestorForce Plan Universes database of public plans with more than $1 billion in assets, the mayor said.
The retirement office, which oversees both plans, estimates the combined unfunded liabilities are scheduled to be $3.8 billion in the new budget year starting July 1, up $400 million from the current year. City contributions will increase by $36.5 million next fiscal year, an estimate by the mayor's office shows.
The mayor also wants the pension review to look at administrative costs for the plans, which he says in the letter have risen 151% from the 2005-2006 budget year.
Roberto Pena, director of retirement services for the city, said in an interview that four positions have been added to the retirement office since he took over four years ago.
Mr. Pena said he would “welcome” the review. He said the office has 39 full-time staffers and one part-time position and a budget of about $10 million.
Arn Andrews, chief investment officer of the San Jose Retirement Services Department, said in an interview that the underperformance over the five-year period wasn't surprising because the pension system's defensive portfolio has reduced equity portfolio exposure. “When equity markets continue to grind up, we lag our peers.”
The mayor acknowledges that the plans are derisking their portfolios, which he says he supports.
But Mr. Liccardo said in the letter that “given the deliberately risk-adverse structure, it seems worth knowing whether we are achieving the best results possible, within that framework.”
Mr. Liccardo also said both plans “appear to hold large amount of plan assets in cash” and wants those figures compared to other “similarly situated public plans.”
Mr. Andrews said the police and fire plan currently has 5.2% allocated to cash and the Federated plan, 9%.
He said the large cash positions are necessary while the plans await opportunities in private debt and private equity. He said 7.4% of the police and fire's plan assets are invested in private debt compared to an 11% target asset allocation, while 3.1% of the federated plan's assets are invested in private equity compared to a 9% target.
Mr. Liccardo noted in the letter that City Auditor Sharon Erickson is not intended to be a final arbiter for financial investment expertise” and he is seeking her input as to whether there might be third parties that could perform the review on investment performance.
Ms. Erickson said in an interview that analyzing the investment performance of the plans was not part of her expertise and that she would be analyzing who could perform that review. She said her office would look at the structure of the pension plans, including administrative costs.
The cost of pensions for city workers has been a big issue in San Jose. Voters in 2012 approved a measure to cut pension benefits for city workers. The measure, which resulted in mass resignations of police and fire officers in San Jose, was later stuck down by a California Superior Court judge. In November 2016, voters approved a compromise measure that reduces pension costs largely by reducing retiree health costs.