San Diego County Employees Retirement Association | Pension360

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 Fund Trustee May Have Breached Code of Ethics While Lobbying For CIO

The San Diego County Employees Retirement Association (SDCERA) board voted last week to retain its controversial chief investment officer, Lee Partridge, and his firm, Salient Partners.

The vote was 5 to 4, and trustees on both sides of the vote were adamant about their position.

But did one trustee go to0 far while lobbying to keep Partridge? Board Vice Chairman David Myers may have breached a code of ethics when he sent emails to his subordinates asking that they vouch for Partridge. From the San Diego Union Times:

Before the county pension board met last week and decided to keep its Texas consultant in charge of investments, Vice Chairman David Myers urged retired employees to email the agency to voice support for Lee Partridge and Salient Partners.

Myers’ request also was sent to current workers, including his own subordinates at the Sheriff’s Department. The communications raise the question of whether Myers put undue pressure on rank-and-file employees to send emails on a political matter.

Two weeks ago, when U-T Watchdog asked Myers whether it was appropriate for a senior commander to make such requests of subordinate employees, he declined to respond.

The San Diego County Employees Retirement Association responded on Myers’ behalf, saying he only contacted retirees — not the hundreds of deputies that serve beneath him.

But in emails since obtained under the California Public Records Act, Myers states that he included his own subordinates in his effort to retain Partridge’s services, sending them a three-page letter in support of Partridge’s contract and asking them to advocate for it.

“I sent to all law enforcement members, active and retired,” Myers wrote to pension system CEO Brian White on Sept. 24, adding that all 40 responses he received were positive. “I am asking them to also communicate that message via email to SDCERA.”

There may be further emails from Myers to employees on the subject. The county has delayed release of five additional emails pending input from the pension system.

Those actions could be in breach of the SDCERA Code of Ethics, according to U-T San Diego:

The SDCERA Code of Ethics says trustees must remain objective and says “misuse of influence” is unacceptable. The code does not specify what types of misused influence are at issue, and agency officials declined to discuss Myers’ actions.

Jan Caldwell, a spokeswoman for the Sheriff’s Department, said there is no issue with Myers’ communications with front-line staff.

“The San Diego County Sheriffs’ Department does not have a policy or procedure that would preclude an employee representative of the County’s Retirement Association from communicating to county employees on matters of interest to county employees relating to their retirement system,” she said.

Bruce Cain, a political-science professor at Stanford University, questioned the wisdom of a higher-up asking subordinates to become activists in any cause.

“Typically you don’t want senior people engaging in this kind of thing because it could be perceived as pressure,” Cain said.

Max Neiman, senior research fellow at the Institute of Governmental Studies at the University of California, Berkeley, agreed, saying, “I would find that unseemly, if not a violation of ethics or the law.”

SDCERA spokesmen have maintained that Myers didn’t violate any ethics codes.

San Diego Fund Votes 5-4 To Retain Controversial CIO

After a “tense” five-hour deliberation, the Board of the San Diego County Employees Retirement Association (SDCERA) voted 5-4 to retain its outsourced chief investment officer.

The pension fund and its CIO, Lee Partridge, have made headlines in recent months due to their high tolerance for risk and extensive use of leverage.

From Chief Investment Officer Magazine:

The board of the San Diego County Employees Retirement Association (SDCERA) declined to terminate its contract with outsourced-CIO Salient Partners at a meeting on Thursday.

As predicted by those close to the $10 billion fund, the vote came down to the wire. After nearly five hours of discussion, a motion brought by trustee Dianne Jacobs to fire Salient was blocked by five trustees, including Chairman Skip Murphy, and backed by four.

Several stakeholders presented formal recommendations about the action before the board’s vote. The majority of these representatives urged the fiduciaries not to reverse their course—a risk-parity oriented portfolio overseen and invested by Salient.

“We believe your board is at a serious juncture,” said Susan Mallett, president of the county’s retired employee association. “You are suddenly and unexpectedly considering a reversal from an investment strategy you had agreed on after years of considered discussion. As a representative of thousands of members who absolutely depend on their pensions, I have received as many worried letters about leverage as I have about the actions of this board.”

Though the majority of trustees opted not to vote for a firing, the minority was very vocal during the meeting. From 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.”

Dianne Jacob, chairwoman of the Board of Supervisors, made a motion to terminate the Salient contract early in the meeting.

“It’s time to steer things back to the basics of simplicity and common sense not because we have received criticism but because it’s the right thing to do for retirees and taxpayers,” Jacob said.

Jacob received the support of only three of her colleagues on the nine-member SDCERA board — Samantha Begovich, Mark Oemcke and McAllister. Five votes were required to terminate the contract.

Begovich, a prosecutor who recently joined the board, used the strongest language against the consulting firm, saying it has taken advantage of the pension system and has a stranglehold on more than $10 billion of public funds. She said supporters of the firm for years have presented one-sided information about the wisdom and soundness of its investment approach. She called the firm poisonous for San Diego County.

The Board did express the desire to gradually unwind its contract with the CIO and directed its staff to come up with some options for taking control out of the hands of Lee Partridge.

Those options will likely be presented at next month’s board meeting.

Photo by Keith Ivey via Flickr CC License

Controversial San Diego Fund Could Fire CIO Thursday, But Vote Will Be Close

The San Diego County Employees Retirement Association (SDCERA) has made headlines across the country for having maybe the highest risk tolerance of any pension fund in the country.

Lee Partridge, the fund’s outsourced Chief Investment Officer, is permitted to use up to 500 percent leverage on portions of the portfolio.

But the fund will vote Thursday on whether to fire Partridge after retirees have said they fear for their pensions under the risky strategy. According to insiders who spoke to Chief Investment Officer Magazine, the vote is too close to call:

The nine trustees of the San Diego County Employees Retirement Association (SDCERA) are set to vote on Thursday whether to terminate its outsourcing contract with Lee Partridge’s Salient Partners—a deal they passed eight to one in June.

The outcome is too close to call, according to several sources familiar with the matter. Three trustees have consistently backed and defended the arrangement, including David Myers and David Moore, while three others adamantly oppose it. A September 18 motion by Dianne Jacob initiated the vote, seconded by new member Samantha Begovich. In June, Dan McAllister alone came out against the contract. The positions of the final three trustees remain unclear.

In the event of a majority vote to dismiss Salient, the board is expected to nominate consultant Wurts & Associates as interim portfolio manager. A partner from recruiting firm Korn/Ferry is also slated to present about its recent search for an internal CIO for the California Public Employees’ Retirement System. According to the agenda, the board may then vote on whether to solicit proposals from recruitment firms to undertake their own search.

One trustee who will likely vote to fire the CIO, Samantha Begovich, said this at a board meeting earlier this month:

“It is well documented that we’re paying exorbitant, outlier-type fees with no incentives except to grow the fund…a contract with no ties to performance is something that I cannot support. And so I will be voting ‘no’ on that when the time comes.”

Another trustee who supports the current CIO said he was “flabbergasted” that the board is considering firing Partridge. From Chief Investment Officer:

“All of our board members were fully aware of the investment portfolio structure and how it would perform in an equity bull market,” wrote Trustee Myers, a Salient supporter, in response to the conflict. Likewise, “all understood, or at least I thought they understood, that it is the long term sustainability and performance of the retirement fund is what matters.”

Myers continued to say he was “flabbergasted” at the proposal to fire Salient and exit its investment strategy “without thinking through all of the implications and any form of a backup plan or approach. There are many terms to describe such proposals, but I would not describe them as ‘measured,’ ‘well thought out’ or even ‘analytical.’”

The vote will be held on Thursday, October 2.

San Diego Pension Board Sues For Control Over Pay Raises

The San Diego County Employees Retirement Association (SDCERA) is suing the county for full control over how much it pays its employees. Currently, the salaries of pension fund employees are capped by local government regulations. Reported by the San Diego Union-Tribune:

The seven-page lawsuit asks a judge to award sole discretion for compensation to the Board of Retirement, a nine-member group of current and former county employees and public officials. That duty now rests with the five elected members of the Board of Supervisors.

“The Board of Retirement cannot effectively administer the system and perform its fiduciary duties without this authority,” the complaint states.

Under county regulations, pension-fund employees are subject to a salary ordinance that limits what every position in county government may pay.

The pension fund has in the past publicly complained that salary limitations make it hard to hire and retain top talent. From the San Diego Union-Tribune:

Several times in recent years, the county refused to approve raises or bonuses to pension CEO Brian White, who is at the top of his salary range. White earned just over $250,000 in base pay and $125,000 in benefits last year.

If the pension board prevails in court, trustees would be free to pay their 80 or so employees whatever the retirement board thinks is fair.

[…]

The county salary cap was a problem for trustees when they sought to replace former chief investment officer David Deutsch in 2009.

After months of searching, they offered the position to Lee Partridge, who was then a top investment officer at the Teachers Retirement System of Texas.

Partridge turned down the job, in part due to salary limitations. He was subsequently hired as a consultant earning about $1.4 million a year. Deutsch was paid $209,000 annually.

The SDCERA made headlines this summer for it’s risk-heavy investment strategy, which involves heavy use of leverage and derivatives.

Trustees Express Fears About San Diego Fund’s Risky Strategy

The San Diego County Employees Retirement Association (SDCERA) made headlines this summer with its decision to embrace a high-risk investment strategy including extensive use of leverage and derivatives.

But members of the fund’s board expressed concern at a meeting Thursday over potential losses the fund could experience if the risky strategy goes awry. Reported by UT San Diego:

At a contentious meeting Thursday, the pension fund’s board directed managers to fence in potential losses without reducing expected investment returns.

Under a revised investment strategy that took effect July 1, managers can use derivatives to put $20 billion or more at risk in financial markets, using the fund’s $10 billion in assets as collateral.

“Frankly, it scares the heck out of me,” said Dianne Jacob, a county supervisor and appointed member of the pension board, said Thursday.

The fund’s chief investment strategist, Lee Partridge of Salient Partners, said the probability of total losses was exceedingly low. The view was echoed by the fund’s chief executive and a consultant charged with risk management oversight.

Board members approved the new strategy in April, by a unanimous vote that included Jacob.

“The draft IPS does not include appropriate limits and board approval processes in the areas of asset allocation, leverage and portfolio risk monitoring,” said county Treasurer and board member Dan McAllister, in a letter given Thursday to the fund’s chief executive, Brian White.

The point was driven home by Samantha Begovich, a county prosecutor who joined the board in July.

Holding up a dollar bill, then adding a second dollar bill, Begovich asked directly whether the fund could lose its entire balance — and still owe $10 billion.

Fund officials maintained that the probability of a total loss of assets as a result of the strategy was close to zero.

Photo by dktrpepr via Flickr CC

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