Why is the San Francisco Public Employees’ (SFERS) Pension’s Performance so Hard to Ascertain?

Third of a three-part series on City employees withholding public information

There is a San Francisco proposition on next week’s ballot that has an add-on provision that would allow the San Francisco Employees Retirement System (SFERS) to exceed civil service pay limits when compensating the SFERS executive director.   The rationale being that the pension needs to pay more to attract an exceptional person to manage the public employees’ $30+ billion pension plan.  Because this proposition codifies greater issues, I am purposely not weighing my recommendation on either side.  I want to merely raise the issue of excessive SFERS’ salaries coupled with the withholding of the pension’s performance.

SFERS’ employees are the most well compensated (total pay) City employees:

For 2021, the five highest paid San Francisco public employees all worked at SFERS:

Kurt Braitberg                             $673,675

William Coaker (departed)          669,143

Anna Lang                                     644,521

Tatyana Kemp                               634,489

David Franci                                  630,189

Romano replaced Huish & Coaker:

In April of this year, Mayor London Breed consolidated the SFERS chief executive officer and chief investment officer positions into a single chief executive officer position.  Per Mayor Breed’s April 8, 2022 press release, Alison Romano was selected to replace the retiring Jay Huish and William Coaker.  The San Francisco Chronicle claims Alison Romano will become the highest paid city employee at $638,000 (base pay) per year.

Huish had been hired after he was disciplined in his employment at the UC Berkeley pension, which followed his hiring of a friend who had just been released from prison for defrauding the government.  Huish earned  $403,119 in his final full year with SFERS.

Oddly, though Mayor Breed’s press release claims Romano was selected from a nationwide search, Romano’s LinkedIn account indicates she possesses neither of the standard credentials for her position:

a)     passed the Charter Financial Analyst (CFA) exam, or

b)    earned a master’s degree.

If Romano, is just being modest on her resume, I apologize.   Still, it appears that tucked into a ballot proposition is the need to exceed the civil service salary cap for a person who lacks the standard credentials for the job.  This is similar to SFPD’s hiring of their previous chief financial officer, a civilian music major who never took Accounting 101, but was awarded a $200,000+ salary.  She was replaced by the subsequent chief financial officer, with a similar salary and neither an accounting degree nor a CPA credential—while at times, SFPD had as many as four officers that had passed the CPA exam, and were overlooked.

Why is it so difficult to ascertain SFERS pension’s performance?

For all the compensation taxpayers are shelling out for SFERS’s salaries, it wasn’t until late last week that SFERS released the first Retirement Board’s minutes since the June 9, 2022 meeting—radio silence for 4 ½ months.  Curiously, SFERS skipped releasing both July’s and October’s board minutes. 

One would expect that the July minutes would have included information on the performance of the public employees’ $30+ billion pension for the fiscal year ending June 30th.  To gather more information on the pension’s performance, one must watch the SFERS’ board meeting videos.  However, these Zoom-type Retirement Board meetings are full of performance information that is disseminated via slides to only the board participants.  That keeps the public unenlightened to the pension’s performance and also the reasons why Romano deserves such a high salary.

What was last year’s public employees’ pension performance?

Buried on page 14 of the September SFERS board minutes was the statement that the SFERS pension’s, “total returns net of fees for the trailing one-year (fiscal year) was -2.9%.”   That’s a pretty good performance considering the S&P 500 was down 12% in the same macro environment.

But without providing details, SFERS’ performance raises an important question:  Did SFERS beat the S&P 500 by 9 percentage points because of the outperformance of their investments, or was it because of the way those investments were accounted for?

Here is an example of SFERS’ accounting:  Assume on July 1, 2021, two individuals bought similar one million dollars homes next door to each other.   Exactly nine months later, Homeowner #1 claims he thinks his house is worth $1.24 million.  Homeowner #2 said he just sold his home for $990,000.  Which value is more realistic?  The self-appraisal by Homeowner #1 or Homeowner #2’s measurable transaction price?

Homeowner #1’s self-appraisal was conducted similar to the way SFERS, and SFERS’ outside vendors--hedge funds, private equity, and real estate funds—calculate their performances- via self-serving guesstimates.  The outside vendors are incentivized to inflate their guesstimates because they collect 2% on the self-appraised total value of SFERS’ investments plus an additional 20% cut on the year’s appreciation that they calculate.  Per the Chronicle, part of Romano’s compensation is also predicated on these guesstimated performances calculated by SFERS’ vendors.  The higher the guesstimated value, the greater the compensation the SFERS’ vendors and Romano earn.

Because SFERS is not making their recent year’s performance public, we can project CalPERS’ performance (California’s public employees’ pension) to SFERS’ performance.  This will demonstrate how using outside vendors’ guesstimates can juice performances. 

For the nine months ending March 31, 2022, CalPERS reported their real estate portfolio appreciated 24%.  (Again, SFERS’ performance has not been made public.)  What makes CalPERS’ performance even more remarkable is that it is net of vendors’ fees.  For CalPERS to net that 24% return, it means the fund vendors would have had to accomplish a gross guesstimated 32% return, the vendors would have retained 8-percentage points as compensation, and then remitted to CalPERS the net 24% return.

During that same nine-month period, three of the largest real estate investment trusts (REIT’s) of Vanguard, Schwab, and State Street were either down, or one was up just 1%.  These publicly traded REITS contain similar commercial real estate offerings and are appraised every minute of the day by millions of stock market investors like Homeowner #2’s sale.

While two houses, are generally similar, but not specifically the same, both CalPERS and SFERS’ staff will claim their real estate investments are different from publicly trade REIT’s.  This is true. But, while it’s not an apples-to-oranges comparison, it is a Gravenstein-to-Granny Smith comparison, with one farmer somehow achieving a 32-percentage point greater return on his apples.

CalPERS had a total of 28% of their portfolio allocated to real estate and private equity and suffered a preliminary loss of 6.1% in the fiscal year ending June 30, 2022.  Over the same period, SFERS had 43% of their portfolio allocated to real estate, hedge funds, and private equity- the funds that are all appraised by guesstimates.  SFERS suffered a smaller preliminary loss than CalPERS at -2.9%.   Which raises the question whether SFERS’ larger portfolio allocated to guesstimated returns accounted for their better performance. But we are only connecting the dots here, as SFERS has been less than forthright about the performance of the public employees’ pension.

All of this points to the benefit, in terms of appearance, by funding a pension with investments that are self-appraised, over selecting assets that are valued in real time.  And, where higher guesstimates translate to more compensation to vendors and SFERS’ new executive officer.

Taxpayers and public employees deserve more

At the September 15, 2022 (pg. 20) Retirement Board meeting, it was concluded that SFERS would continue to assume our economy will remain in a 2.5% inflationary environment.  Just further evidence of the disconnect between the real macro environment and SFERS’ economic outlook, SFERS staff’s compensation, and SFERS’ obligation to transparency.  San Francisco taxpayers deserve more for their money, and city employees deserve a hierarchy that is based on talent, not connections or an affinity to saying “yes.”          

Writer’s note:  My article was prepared this past weekend.  In yesterday’s print Wall Street Journal, there appeared an article comparing the similarly illiquid real estate products that are pitched to individual investors (like at Wells Fargo Bank), which are also unlikely outperforming publicly traded REITs by a wide disparity.  Let’s be careful out there!!