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Call it Plan B.
San Diego County’s pension fund is considering creating a separate nonprofit to manage its investments, which would allow it to avoid county salary rules and perhaps legally outsource internal staff to a private consultant.
The San Diego County Employees Retirement Association’s investment staff salaries are capped at $209,372 annually, which CEO Brian White says crimps the available pool of talent.
The association avoided the salary limits last year by hiring consultant Lee Partridge as its chief investment officer, giving him a contract that pays a maximum $4.5 million over three years — millions more than a comparable county employee would’ve made. Public records show he’s been paid $672,000 in his first seven months on the job.
But the deal came with a hitch: Partridge isn’t allowed to oversee county employees. So earlier this year, the fund attempted to outsource its investment staff to Partridge’s one-man firm, Integrity Capital, a move that would’ve eliminated salary limits for 10 employees, made Partridge their boss and paid his firm $10.6 million annually.
That would’ve been illegal and was halted after we raised questions. Partridge helped develop the proposal, which would’ve financially benefited him and run afoul of state conflict-of-interest law.
The pension fund has since requested proposals from other investment companies to perform that outsourced work. Nine have submitted bids, which will be revealed Thursday.
The nonprofit idea, which will be discussed Thursday morning, represents another step in the fund’s almost year-long push to free its investment team from county salary caps. It’s a process, interviews with Partridge and White made clear, that the pension fund quietly intended to embark upon from the start when it hired Partridge.
“This was all conceived in advance,” Partridge said. “It was discussed as an option we wanted to explore once I was on board. It was never expressed as a done deal.”
The fund’s board doesn’t have to pick any of the nine firms that have submitted bids. As those have been received, its attorneys have been reviewing whether it could legally create a nonprofit to invest. White said the idea was still preliminary, but he envisioned the entity handling most investment functions.
Asked whether a nonprofit could completely replace the entire retirement association, he said the organization would still need to provide oversight.
“Whether that’s done through staff positions or hiring a consultant, those details would have to be worked out,” he said.
White noted at least two public pension funds in the country with nonprofit structures: the University of Texas and the Municipal Employees’ Retirement System of Michigan. The Texas nonprofit, Utimco, pays its CEO $1.6 million annually in salary and benefits. The fund’s president earns $1.7 million in salary and benefits.
Creating nonprofits to get around government restrictions is nothing new in San Diego.
The city of San Diego has several nonprofits that function on behalf of government. They have a mixed track record at best, as evidenced by the recent history of the Centre City Development Corp., Southeastern Economic Development Corp. and San Diego Data Processing Corp. The three have struggled in recent years with scandals enabled by the very independence — and lagging oversight — that came from being a separate nonprofit.
White said similar problems could be avoided with the pension fund’s investment staff.
“I would expect in our situation that the board of retirement would have a lot of interaction and would be watching very closely that our money was being managed properly,” he said. “I don’t see that as being an issue for this organization.”
The association is responsible for managing the $7.2 billion fund that pays county retirees’ monthly pension checks. Its investment staffers decide how to invest that money, manage risks and ensure the fund grows. County taxpayers, who contributed $314 million to the fund last year, are responsible if investments perform poorly.
Partridge was hired to avoid that scenario, to instead boost returns and cut risk.
Partridge said a nonprofit was a “very attractive option” for the pension fund to accomplish tasks he’s identified. If the association instead hired one of the nine private firms, Partridge said he could have more time to dedicate to other potential clients. But he said a decision to hire one of the nine firms wouldn’t be a catalyst for him to leave his consulting job.
“Once you bring in more resources, I can set the broad parameters of this fund and I have time to do other things as well that would be interesting,” he said. “It’s not an either or for me, that’s the beauty of it. I’m now dedicating 40 hours (a week). I don’t always have to do that.”
Please contact Rob Davis directly at firstname.lastname@example.org and follow him on Twitter: twitter.com/robwdavis.