February 8, 2017
1145 Market Street, San Francisco, CA.
Members of the Retirement Board:
Malia … It’s been a pleasure supporting you for VP and President. Delightful experience observing you in action and growing in the position.
Leona … delightful working with you … Fulfill the Warren Buffett big three …. Likes to work with people he likes, admires, and trusts. You have all three. You are genuine, conscientious, and a true public servant.
Wendy … Intellectually curious and learned a lot from you in serving on the Board. Excitement because the only Board member whose appointment was challenged by the B of S.
Victor Makras: I like, admire, and trust Victor. Superb leader, and has shown me what leadership is … bringing out the best in everyone. Greatest contribution is his work towards televising these meetings.
Brian … You’re the newest elected member of the Board. So, I will give you the advice given to me by my mentor, Peter Ashe …. There’s a good reason why God gave you two ears and one mouth.
Joe .. You’ve had a strong role in developing and expanding the private equity program. And let me congratulate you on the election, as this has been the outcome that you’ve wanted.
I want to talk about four topics:
- Public Service
- My Historic perspective, as this will be the last time I address you.
- RB Election
- My insights and recommendations
It has been a pleasure serving City employees and retirees over the last 25 years in overseeing their pension and deferred compensation plan. It is a virtue to serve the public, without compensation, and I encourage others to share their talents for the benefit of others.
I am proud of investing in private equity in its formative years and growing the commitments prudently over time. San Francisco has one of the best-funded pension plans in California, and its members and taxpayers should appreciate the hard work and collaborative efforts of the Board and staff.
In 1986, I was hired as a security analyst, managed the bond portfolio, and reported to the Board. One Board member snored through many of the meetings. I knew I could do a better job and decided to run for office. In 1992, only the 25,000 active members could vote. I was not a member of a union and had no endorsements. Only 8,000 cast ballots. I received 3,000 votes, and the incumbent received 159 votes.
In this last contest, I was endorsed by SEIU, representing the largest number of City employees. I was endorsed by SEIU Bay Area retirees and RECCSF. I campaigned actively, visited many work sites, and talked to many of the members. I received only 38% of the votes and my opponent received 62%, a difference of 24 points. When the results were known, I congratulated Al with the same message that Will Rogers congratulated Herbert Hoover in 1928. “Congratulations on your victory. I would rather be right than president.”
People ask how I feel?
It reminds me of Winston Churchill’s defeat on July 5, 1945. After the surrender of Germany in May, and the height of his popularity, Churchill lost the race for prime minister by a vote of 48 to 36.
On March 5, 1946, Churchill delivered his famous speech at Fulton, Missouri.
“From Stettin in the Baltic to Trieste in the Adriatic, an iron curtain has descended across the Continent.”
From the beginning of our CIO’s tenure, an iron curtain of secrecy has descended over this Retirement System. For the first time, the Board began approving investments behind closed doors in executive session. The Board has approved the investment of $1 billion in private equity limited partnerships that drill for oil in the Permian Basin in Texas and OK. At the same time, the Board has publicly divested $100 million to fund a “Fossil Free” Index.
This move towards secrecy is pervasive. For the first time, in Item 18, staff is not disclosing the names of the managers they have met. Just because staff meets with a manager, it doesn’t mean they will invest with them.
The secrecy issue will be a cultural issue for this Board to deal with in the future.
The results of this election are historic. All three elected members of this Board are from the safety ranks. Safety members represent only 15% of the members yet monopolize all three seats. This is not permitted in any other public pension plan in California.
This race has been publicized in several newspapers. Staff provided an article from P&I “Contenders turning up the heat for the spot on SF Fund board.” My response, dated on Monday, Feb 6 was not distributed, so let me share some points.
P&I’s article stated: “Herb Meiberger … has opposed hedge funds and other alternative investments.” That isn’t accurate. Since my tenure began in 1992, I’ve strongly supported alternative investments in private equity, infrastructure, and real assets.
1) Private equity: I have continuously advocated increasing the San Francisco Employees Retirement System’s allocation to private equity. These are typically 10-year partnerships with 15% targeted rates of return. General partners invest in portfolio companies where they typically have control. Private equity has been our best performing asset class, earning 11.9% per year for the 10-year period ended Sept. 30, 2016. Those high returns are responsible for SFERS’ superb funding.
2) Infrastructure and real assets: These investments have the greatest diversifying effect for securities portfolios, and offer the best protection in bear markets. They’re good substitutes for fixed income to enhance returns.
I don’t group hedge funds in the same category. Although they typically have the same general 2/20-fee structure, the similarity ends there. Hedge fund managers trade pieces of paper, often with high turnover. Managers don’t have control and don’t serve on the companies’ boards. And hedge funds have much lower expected returns.
If “city unions (are) upset with dysfunction on the retirement system board,” as P&I reported Captain Casciato as saying, then the only solution is to convert San Francisco’s pension system to a 1937 Act county.
In the 1930s and 1940s, individual counties in California established their retirement systems by adopting ordinances. Eventually, 20 California counties adopted such ordinances. Those counties then formed the State Association of County Retirement Systems, adopting provisions of the County Employees Retirement Law of 1937.
That law requires that management of each of the 20 county retirement systems must consist of at least nine board members — stipulating election of two “general” (“miscellaneous”), one “public safety” (active police or fire), and one retiree. The relevant constituencies elect each respective board member. The county board of supervisors appoints four members and the county treasurer serves as an “ex officio.” All members serve three-year terms. In addition, there are provisions for “alternate” members, providing for succession planning.
The City and County of San Francisco was ahead of its time when it established our employees’ pension system in 1932. The governing body comprises three elected and four appointed board members. The mayor appoints three members, and a member of the Board of Supervisors serves ex officio. In San Francisco, there are no designated seats for active miscellaneous, active safety, or retired members. Active and retired employees jointly vote for all three elected board members.
P&I’s article cited “frequent disputes between Mr. Meiberger … and fellow board members and investment staff are a key reason why the pension fund hired Funston Advisory Services LLC to evaluate the board’s governance procedures.” The best use of resources would be to study conversion to become a 1937 Act county. Board members should be elected by their respective constituencies, and one group should not dominate or monopolize the governing body, conforming to best-practice policies of all democratic forms of government.
San Francisco was ahead of its time establishing its pension fund. Now, San Franciscans must adapt and convert its pension governance structure as a 1937 Act county, and conform to best practices of other California public pension systems.
In summary, I would like to thank the members for giving me this privilege to serve you. Many of you have graciously thanked me, and I want to acknowledge those kind wishes publicly. Thank you, and best wishes to all of you!