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Monday, Sept 25, 2006 | The San Diego County Employees’ Retirement Association, like all of its peers, sometimes sends representatives to these many conferences around the country where they learn the latest and greatest in the dull science of making pension systems work.

In the last few years, the county’s guys have gone to a lot of these things. I’ve heard from several people that when they go, they introduce themselves as being from that other retirement system in San Diego. They wanted it to be clear to their peers that they weren’t part of the city of San Diego’s disaster – they were much better.

Last week, the county’s pension system got some bad news of its own. It’s not the first piece of bad news the county has seen regarding its pension system. But it was dramatic and interesting.

As the overseers of that plan pointed out repeatedly at a meeting Thursday, even a drastic loss of up to $90 million of an original investment of $175 million isn’t going to kill the pension fund. It is a large trust that should be able to handle swings of that sort.

The news of the week wasn’t that the county pension had lost so much money in such a short time. It was how they lost the money that was interesting – and the details that came out opened a window into what was happening there that we hadn’t had the time or patience to learn about before.

The financial press is still doing daily coverage of the collapse of the hedge fund Amaranth Advisors. With every report, we learn more about the secretive unregulated sphere within which these hedge funds make their trades. Just Sunday, The New York Times’ Gretchen Morgenson had a long and very well-researched column about the so-called “Enron loophole” that the government had opened up in the world of over-the-counter trading of energy futures – the world where Amaranth thought it could bet the house.

What we discovered last week was that this was also the world where the county pension system hoped to make hundreds of millions of dollars.

The county’s retirement trust has one-fifth of its investment in the hands right now of hedge funds. Just more than 50 percent of that money – or roughly $750 million – is in the hands of secretive partnerships like Amaranth.

At Thursday’s meeting, county pension officials claimed to have had no idea that Amaranth was doing what it was doing with the county’s money. They claimed not only to not know, but reaffirmed several times that because these hedge funds are so secretive, it would be impossible to ensure that the other firms holding this $750 million aren’t doing the same kinds of things Amaranth did.

This is not OK. This is not just risky – it is risk that is unquantifiable. There simply is no way to check that they are being truthful or that they’re representing their operations accurately. And there’s no way to judge whether they have truly effective risk controls in place.

Rather than discuss these facts in an open and frank manner, the county’s pension officials decided to minimize the Amaranth debacle and spend hour after hour patting themselves on the back for their historical investment performance. Before the meeting, the pension system’s CEO sent out a memo to board members reminding them that if reporters contact them, they should keep in mind that there’s an official “communications policy” and they should abide by it.

Finally, rather than discuss many of the gory details of the Amaranth debacle in public, they decided to retire to a closed secret session of their own.

For a little while there last week, I could have sworn it was 2004.

I remember when board members of the city’s pension fund tried to muzzle whistleblower Diann Shipione and remind her of their own “communications policy.” They wouldn’t discuss any of the fund’s problems in public. They would go into closed session to talk frankly about the issues at hand. We all know how well that worked out for the city.

To be sure, the county’s pension board should go into closed session to talk about whether or not they should sue Amaranth and to discuss a cost-benefit analysis of that kind of legal action. But it was their investment advisors – not their legal counsel – who brought up the most concerns about topics drifting into areas they were uncomfortable discussing in front of the public.

They should be uncomfortable discussing them. They asked the county to put investment funds into the hands of people who did not talk about what they did with it. And now, one of them has lost a huge gamble.

The emphasis was clearly on how successful the pension fund has been in the past with its investments. But throughout the discussion, an indicator would arise pointing to one simple fact: the county pension holds one of the riskiest investment portfolios of its kind. And there is no way to know whether or not one of the other hedge funds will do the kind of thing Amaranth did. As Amaranth found out, in fact, its past successes with risk did nothing to ensure it wouldn’t get caught in a disastrous situation.

There was no substantive discussion about getting out of these hedge funds nor were there any frank questions about the overall merit of the county’s plan to pay for the guaranteed retirements of its many thousands of employees.

Everything was OK, was the message – actually, better than OK.

Is there nothing at all to be learned from the city’s experience with its retirement system’s troubles? Minimizing problems and stifling debate don’t do any good. Consistently covering up for government officials’ failure to identify funding for the vast pension benefits they promised employees does not do any good.

In fact, all of it makes the situation worse. Every time some news comes out that undercuts their assertions that everything is OK, another layer of doubt and skepticism will receive their future statements. It got to the point with the city, in 2004, where so much misleading spin and secretive posturing made people like me unwilling to accept even the most basic of facts city officials tried to distribute.

The county has proudly and sometimes arrogantly distanced itself from what happened at the city with its pension problem. This has painted county officials into a corner, however. They cannot find it in themselves to admit they may face a problem just as big and ugly as the city’s – one that they’re trying to avoid by making risky bets in secretive investments.

One county pension trustee, James Feeley, refused to worry about the Amaranth disaster.

“If you can’t stand the heat, get out of the kitchen,” he said indicating he saw no reason to change anything based on the experience with Amaranth.

I think he relayed a bit of valuable wisdom, however. The county owes it to the public to discuss openly and sincerely whether this kitchen really is too hot.

And they should open the door and let the public get out of it if they want.

Please contact Scott Lewis directly with your thoughts, ideas, personal stories or tips. Or send a letter to the editor.

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