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San Diego County Pension Weighs Major Governance Changes After Expert Recommendations

San Diego City Employees Retirement System is on the cusp of firing its controversial outsourced chief investment officer and bringing more investment management in-house. But that’s not the only change that could be coming for the fund.

The fund’s former CIO spoke to the board of trustees on Thursday and suggested major changes to its governance model. The trustees were extremely receptive to the suggested changes.

More details from the San Diego Union-Tribune:

David Wescoe, who stabilized the San Diego City Employees Retirement System after an underfunding crisis nearly bankrupted the city a decade ago, said the county should have a single person report to the board — not one for administration and one for investments, as it has now.

“I’m strongly for the linear model,” Wescoe told pension trustees during a two-day retreat that began Thursday. “The board should have one direct report.”

Under its current governance model, the San Diego County Employees Retirement Association has two people who report directly to the board: CEO Brian White and outsourced portfolio strategist Lee Partridge.

[…]

Wescoe also said the fund would be much better served by recruiting and hiring its own lawyer as well, rather than an outside contractor.

“It’s an absolute necessity for a very well functioning management team,” Wescoe said. “They can prevent little issues from becoming big issues.”

[…]

After Wescoe’s presentation, at least two trustees said they were ready to begin implementing his suggestions.

“I would love to see the board adopt the recommendations you put forward,” said Supervisor Dianne Jacob, who represents the county Board of Supervisors on the retirement panel. “We have an opportunity to bring the same kind of changes here for SDCERA, and I think we should take advantage of it.”

County Treasurer Dan McAllister, who also serves on the board as part of his elected duties, said he hopes trustees can schedule a debate on Wescoe’s recommendations as soon as next month.

“We owe it to ourselves to discuss those issues,” McAllister said.

Wescoe also addressed the potential hiring of a new CIO to internally manage investments. From the UT:

Wescoe, who oversaw the city pension fund from 2006 to 2009, said he knew many local investment professionals who would relish the chance to manage the $10 billion county portfolio for around $200,000 a year.

“It’s the professional opportunity of a lifetime,” he said.

Partridge and his company, Salient Partners of Houston, Texas, are paid more than $10 million a year.

His predecessor, an in-house chief investment officer, was paid $209,000 a year. The position was outsourced to allow for higher pay. Despite that, Salient’s investment returns have not kept pace with those of peer pension systems.

The pension fund is also missing its internal benchmark for earnings. For the 12 months ending Oct. 31, the most recent available, the agency’s benchmark was 9.1 percent and the fund earned 8.22 percent, according to a preliminary report by Salient.

Last month, the board of trustees informally voted to fire their outsourced CIO, Lee Partridge and his firm Salient Partners.

The vote was not official.

San Diego Pension Close to Firing Outsourced CIO, Bringing Investment Management In-House

The San Diego County Employees Retirement Association (SDCERA) is on the verge of firing its controversial outsourced CIO, Lee Partridge of Salient Partners.

Board members held a mock vote on the issue, and the firing was “approved” 7-0.

If Salient Partners is indeed fired, the SDCERA would move its investment management in-house.

More on the situation from the Union-Tribune:

The county retirement board has made an informal decision to end its five-year experiment with a Texas portfolio strategist and return oversight of the $10 billion pension fund to an in-house expert.

The vote came late Thursday toward the close of another marathon meeting of the San Diego County Employees Retirement Association board, which has been racked with discord in recent months over its leverage-heavy investment policy.

An hour into a late-afternoon discussion on governance models, Trustee Dick Vortmann suggested their time might be better spent if they knew whether the board majority still supported using an outsourced chief investment officer.

“Can we take a straw poll right now?” he asked. “For Christ’s sake, if it isn’t a close debate, why are we debating?”

Minutes later, all seven trustees in attendance raised their hand to show they are ready to hire an internal investment officer to manage the fund — a function that has been served by Salient Partners of Houston.

The 7-0 vote isn’t as clear cut as it sounds.

The vote wasn’t official – and it didn’t include all the trustees. Two trustees had left the meeting before the vote was held. At least one of those trustees, David Myers, is likely to vote to retain Salient Partners. From the Union-Tribune:

The nonbinding vote excluded board members David Myers, who was absent, and Mark Oemcke, who left the meeting earlier in the day. Myers has been a staunch supporter of Salient and its main representative in San Diego, Lee Partridge. Oemcke has not.

Three of the seven board members to vote — Vortmann, Kristina Maxwell and E.F. “Skip” Murphy — said they were raising “half a hand” to reflect concern over finding the right candidate for the job.

“It’s qualified on the assumption that we can find the requisite skills to match our desired level of sophistication on our investment philosophy,” Vortmann said.

No one from Salient was at the meeting.

While not yet formalized, the decision to abandon the outsourced CIO model prompted trustees to begin the process of recruiting an in-house investment expert.

They plan to hire an executive search firm in two weeks, when the board convenes a special two-day retreat. Installing a chief investment officer is expected to take between four and six months.

SDCERA pays Salient $10 million a year to perform CIO duties.

A consultant told the SDCERA board that they could likely hire a new, qualified CIO for less than $250,000.

San Diego Pension Trustees React To Retainment of Controversial CIO

The San Diego County Employees Retirement System (SDCERS) voted 5-4 last week to retain its controversial CIO, Lee Partridge.

The vote was close, and nearly every trustee had something to say about the decision. From Bloomberg:

“All the sudden we found out we have $22 billion in exposure,” [trustee Dianne] Jacob said by telephone prior to the vote. “That should have never happened. The process is flawed. The hiring of Partridge in the beginning was flawed. Let’s get back to basics.”

[…]

“This is an exorbitant amount of taxpayer dollars being spent and is unprecedented in any other county in California,” [County Treasurer and trustee] McAllister said by e-mail before the vote. “I have strongly opposed the adoption of an outsourced government structure.”

McAllister went on, according to the San Diego Union-Tribune:

“The CEO, Brian White, has put SDCERA in the spotlight for all the wrong reasons,” said County Treasurer Dan McAllister, who serves on the pension board as part of his elected duties. “This is not the behavior we should expect from the CEO of one of the largest public pensions in the state.”

Those trustees were echoing the sentiment of city employees, many of whom had shown up to previous board meetings or written the trustees to express their insecurity with the pension fund’s investment strategy. From the San Diego Union-Tribune:

“You have a responsibility to represent hard-working San Diego County employees,” county employee Tracey Carter, a member of Service Employees International Union 221, told the board prior to the vote. “We have done our due diligence. We have separated headlines from facts. It is time to change direction with the management of the fund.”

But the majority of trustees voted not to fire Partridge. From the San Diego Union-Tribune:

“For those who continue the fear-mongering, shame on you,” said [trustee and board vice-chairman David] Myers.

More of Myers’ reaction from Bloomberg:

“Going forward with the contract is in the best interest of this organization and its members — it saves money,” David Myers, the board’s vice chairman, said at a Sept. 18 meeting. “The dysfunctionality of what is going on right now is, in my opinion, a breach of our responsibility to this organization.”

Salient Partners LP, the firm that employs Partridge, released this statement to Bloomberg:

“ [We] delivered $4.4 billion to SDCERA plan members at a lower cost and with less risk than 80 percent of similarly sized pension plans,” said Chris Moon Ashraf, a spokeswoman for the company at Jennifer Connelly Public Relations. “The average SDCERA plan beneficiary realized more than $111,000 in gains under Mr. Partridge’s stewardship for a total fee over five years of $414.”

The fund’s investment strategy was controversial because the CIO was allowed to use up to 500 percent leverage on certain parts of its portfolio, without seeking approval from the board or the fund’s director.

SDCERS returned just over 13 percent in 2014.