The Morning Report
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The San Diego County pension agency is on the defensive.
Pension fund managers have come under fire over a new, riskier investment strategy, and Thursday’s meeting was designed to address the negative headlines, even if it wasn’t explicitly branded that way.
During the meeting, several board members peppered Brian White, CEO of the San Diego County Employees Retirement Association and the agency’s top investment consultant, Lee Partridge, with questions about how aggressive and risky the strategy actually is.
At the core of many questions: If the new strategy means SDCERA could have a market exposure of $20 billion while having only $10 billion in the bank, what happens if something goes wrong? And what protections are in place to prevent outright disaster?
White, Partridge and other investment advisers dug their heels in: Risky or not, they said, the strategy is the best move for the agency.
White even recited headlines during the meeting, including “County bets all-in at pension casino,” from the U-T.
“None of these headlines are true except for the … risk caused by the media’s misunderstanding,” White said.
Board members were wary.
SDCERA board member Samantha Begovich said she was afraid of what was happening and hoped the agency would put the brakes on the new strategy.
“The point is smart people do dumb things all the time,” Begovich said. “Just because the train has left the station doesn’t mean we can’t come back and revisit this.”
And so after much discussion, that’s what the board decided to do.
So, nothing was really finalized Thursday, but the explosive meeting unearthed some important takeaways about how the board operates and what’s next in the discussion over the new investment strategy.
The strategy isn’t the only controversy – so is the cost.
Thursday’s meeting started off with uproar not over the strategy itself but over a proposed amendment to its contract with Partridge and his investment firm.
SDCERA framed part of the amendment as a “reduction of the CIO fee” but many board members understood the move as a $750,000 bonus to Partridge and Integrity Capital for the first six months of the contract.
The amendment stipulated that Partridge and his firm would start out at roughly $11.5 million per year for the first six months, then drop to about $10 million a year. That translates to an extra $750,000 for the first six months. White insinuated that the extra money would cover some startup costs Partridge and the firm would incur.
Several board members said they felt blindsided by the amendment and refused to vote for it. It was eventually sent back for reworking.
Board member David Myers, said he “did not recall any discussion about startup costs.”
“This is the first I’ve heard of” the extra money, Myers said. “I don’t think that’s reasonable.”
The board seems willing to temper some of the exotic strategies.
It’s clear that the media spotlight is getting to many board members.
Investment advisers reminded the board that they had not yet put a cap – and could do so – on the amount of leverage used by investors in making their bets.
This will be a really interesting discussion to watch. Some board members are not happy with having so much market exposure.
White also said he was discussing with investors ways to potentially contain the leveraged investments (generally considered riskier investment tools) to one area that would not affect the rest of the fund if all goes bust. But the details on such an arrangement were not clear.
Some board members want more oversight of SDCERA’s investors.
For better or worse, Partridge and SDCERA’s investment advisers are absolutely confident in their strategy.
“Under the current strategy, we’ll enjoy the success of the strategy or we’ll be fired,” Partridge said.
But several board members said they wanted better performance metrics and oversight built into Partridge’s contract so that he is incentivized to be careful with taxpayer dollars.
Right now, Partridge’s contract lets him win – i.e., get paid millions – even if the county ends up losing.
Newcomer Begovich is an emerging voice.
Two critical votes involving the investment strategy and contract occurred in April and June, just before Samantha Begovich was sworn in to the board in July.
That didn’t stop her from speaking up.
“You’ve already read all the coverage,” Begovich said to Partridge. “Do you have any sense that we’re operating under this sort of blindness of denial … I haven’t found anybody who said this is an amazing plan other than us. Why is it that all the noise I hear is negative … Are we sure we are not operating in denial?”
Begovich is a prosecutor, and her exacting questions may force SDCERA and its investment advisers to explain themselves clearly – or get caught in their overly complicated explanations.
We’re talking about a pension board meeting here – it can get dull. A few people were nodding off in the audience during long-winded investment explanations, and I sneaked a shot:
Begovich brings some much-needed fire to the discussion.