By Mark Gutglueck
In the immediate aftermath of the pension fund system for San Bernardino County’s public employees posting a negative return on its investments for fiscal year 2015-16, the president of the system’s board and its official spokesman expressed confidence the system will remain solvent.
The San Bernardino County Employees Retirement Association, known by its acronym SBCERA, showed an investment return of negative 1.1 percent – a net loss – for the fiscal year ending June 30, 2016.
SBCERA has set for itself a perpetual annual earnings goal of 7.5 percent on its total portfolio.
Long considered one of the healthiest and best managed public employee pension systems in the State of California, the San Bernardino County Retirement Association yet appears to be in a position of strength, with fund assets pegged at $8.09 billion. But that represents a drawdown of $125.7 million from association’s fund balance a year ago.
And a troubling trend with regards to returns on SBCERA’s investments has emerged in recent years.
While the pension fund posted earnings of a whopping 15.05 percent in 2012-2013 and an impressive 11.51 percent in 2013-14, in 2014-15, the rate of return was 4.4 percent. With the system having lost money in 2015-16, many observers are skeptical about the prospect of the association achieving its 7.5 percent earnings goal in 2016-17 or in 2017-18.
Indeed, over the last decade the earnings picture for SBCERA has dimmed. In the three–year period ended June 30, 2016 the fund returned an even 5 percent. In the five-year period ended June 30, 2016 the fund returned 6.1 percent per year. In the ten-year period ended June 30, 2016 the fund returned 4.8 percent per year.
The downward trend is a problematic issue, with potentially far reaching consequences. Part of the problem is that those vested and dependent on the system, at least at present, are immune from the investment pool’s poor performance. Rather, it is the taxpayers – the vast majority of whom see no benefit from the system – who are most hurt when the earnings goal is missed.
The county’s elected leaders – the board of supervisors – have guaranteed county employees, through the financial vehicle of SBCERA, a defined benefit plan. One feature of defined benefit plans is that the employer, i.e., the county and the 16 other local governments and governmental agencies that are participants in SBCERA – bear the responsibility of offsetting shortfalls during years the fund fails to meet its actuarial assumed rate of return. Conversely, when SBCERA exceeds its 7.5 percent investment earning goal, the county and the other governmental entities contribute less in response to the greater fund earning.
In 2012-13, the county and the other 16 governmental entities contributed $303,080,000 to the association, the employees contributed $91,056,000 and the association earned $911,800,000 from its investments. In 2013-14, the county and the other 16 governmental entities contributed $330,330,000, the employees contributed $89,861,000 and the association earned $876,566,000 from its investments. In 2014-15, the county and the other 16 governmental entities contributed $315,240,000, the employees contributed $117,899,000 and the association earned $280,498,000 from its investments.
In recent years, county employees have been contributing more toward the pension fund than in year’s past as the county’s top administrator, Greg Devereaux, has pushed to decrease benefits to county workers as provided for in the county’s collective bargaining agreements with employee unions.
Nevertheless, if the San Bernardino County Employee Retirement Association’s investments continue to show lackluster earnings, county taxpayers will be called upon to pay more and more to sustain the pension system.
Questions have thus emerged about the soundness of the financial investment advice SBCERA has been receiving.
The association’s investments are highly diversified in short term cash investment funds, emerging market debt, U.S. government securities, corporate bonds, foreign bonds, domestic common and preferred stock, foreign common and preferred stock, real estate, foreign and domestic alternatives. SBCERA also engages in security lending.
Among its investment advisers and co-investors are American Realty Advisors, Ares Management, LLC, Ashmore Investment Management Limited, Bryanston Realty Partners LLC, GoldenTree Asset Management, LP, Gramercy Funds Management LLC, Mondrian Investment Partners, Ltd, Oaktree Capital Management LP, Russell Investment Group, State Street Bank and Trust Company, Zais Group, LLC, GAM USA Inc., Prudential Investment Management, Beacon Capital Partners LLC, Blackrock Realty, Bryanston Realty Partners LLC, CB Richard Ellis Investors LLC, Fillmore Capital Partners LLC, Fortress Investment Group LLC, Invesco (AIG) Asian Real Estate Partners II LLC, Invesco Real Estate, LaSalle Investment Management Inc., Morgan Stanley Real Estate Fund, RREEF America LLC, Square Mile Capital Management LLC, Starwood Capital Group Global LLC, Tricon Capital Group Inc., Walton Street Capital LLC, Angelo, Gordon & Co. LP, Apollo Management, Aurora Capital Group, Beach Point Capital Management, Birch Grove, Blue Tip Energy Management LLC, BNY Alcentra Group Holdings Inc., Catalyst Capital Group Inc., Clough Capital Partners LP, Corrum Capital, Declaration Management & Research LLC, Energy Spectrum Capital, Fortress Worldwide Transportation and Infrastructure Investors LP, Hancock Timber Resource Group Inc., Industry Ventures LLC, King Street Capital Management LLC, Lexington Partners, MacKay Shields LLC, MD Sass-Waterfall Asset Management LLC, NB Alternative Fund Management LLC, Passport Capital LLC, Pathway Capital Management LLC, PineBridge Investments, Pinnacle Asset Management LP, Select Equity Group Inc., Siguler Guff Advisers, LLC, Starwood Energy Partners, TCW Asset Management Company, Tennenbaum Capital Partners, LLC, Timbervest, LLC, Tricadia Capital Management, LLC, Waterfall Asset Management, LLC, BlueBay Asset Management Plc. BNY Alcentra Group Holdings Inc., Cairn Capital Limited Marathon Asset Management LP, Partners Group, Standard Life Investments Limited, and York Capital Management.
The association’s consultants are Kreischer Miller, Maples Finance and NEPC LLC.
The custodian of its funds is State Street Bank and Trust Company.
Legal counsel for the association is Foley & Lardner LLP
Adam Sands, the communications director for the San Bernardino County Employees Retirement Association, was philosophical about the losses the association sustained over the last fiscal year. “Our portfolio is not immune from global pressures,” he said. “The market was down in many sectors and flat in others. We lost 1.1 percent. Moving forward, we are confident in our long term investment strategy.”
Sands expressed faith “in the fund’s investment allocations, as approved by the board of retirement. Like most investors, we would have preferred that Fiscal Year 2015-2016 yield a higher return for the portfolio, but we also maintain a long-term view and hold firm in our approach of focusing on stable, income-generating investments. Regarding specific asset classes that underperformed, emerging market equity and credit investments came under notable pressure during the past fiscal year. This, of course, also presents attractive buying opportunities as the fund remains committed to the investment target ranges.”
Sands said, “Over the long run, approximately 70 percent of revenue comes from investment income, 25 percent from employer contributions and 5 percent from employee contributions. The exact revenue percentages from employer contributions, member contributions, and investment income vary each year depending on investment returns.”
SBCERA is not the only nor the largest public employee retirement system in California. The California Public Employee Retirement System is the largest such system in the state, overseeing the pension accommodations for state government employees and a vast number of municipal employees. Known by its acronym, CalPERS, its investment pool too has had lackluster performance over the last several years, requiring that the state and the cities plug the pension funding gap.
While many public employees are well aware and focused on public retirement systems, how they are set up and guaranteed by the taxpayers and how those systems’ investments fare yearly, the vast majority of average citizens are not. As more and more taxpayer money is being diverted from providing standard public services to covering pension debt, however, awareness of the circumstance is growing and resentment toward public employees within the general population is manifesting. That wellspring of resentment has yet to result in pressure on elected officials to discontinue what are increasingly perceived as overly generous benefits and pensions to government workers, though political observers have projected that such pressure will mount to the point where some level of adjustment is likely to occur within half a decade. Advocates for public employees maintain that the state’s various governments are contractually bound to honor the pension commitments made to public employees and that no degree of public resentment will endanger the pensions of current employees, though government employees in the future may see the benefits that were available to their older colleagues taken away from them.
Under public pension systems, the amount paid retirees is calculated on the basis of their highest salaries, such that many mid-level and higher public employees in retirement receive pensions that are well beyond the amount of money earned on a yearly basis by the vast majority of workers in the private sector. Several hundred retired public employees in San Bernardino County receive pensions of over $100,000 per year. Several dozen retired employees in San Bernardino County receive pensions of over $200,000 per year.
Sands told the Sentinel those pensions will never be taken away or reduced. “SBCERA members can continue to count on a consistent lifetime monthly pension benefit, with continuance options for beneficiaries, based on their age at retirement, years of service credit, benefit formula and final average compensation,” he said.
In addition to the County of San Bernardino, the Barstow Fire Protection District, the California Electronic Recording Transaction Network Authority, the California State Association of Counties, the City of Big Bear Lake, the City of Chino Hills, the Crestline Sanitation District, the Department of Water & Power of the City of Big Bear Lake, the Hesperia Recreation and Park District, the Inland Library System, the Law Library for San Bernardino County, the Local Agency Formation Commission, the Mojave Desert Air Quality Management District, San Bernardino Associated Governments, the South Coast Air Quality Management District, and the Superior Court of California, County of San Bernardino and all of their employees, as well as the employees of SBCERA itself are participants in the San Bernardino County Employees’ Retirement Association.
Brendan Brandt, an attorney and former Upland city councilman, is the president of the SBCERA Board of Retirement. He told the Sentinel that the association’s failure to reach its earnings goal in 2014-15 and its loss of investment capital last year was a consequence of general “pessimism” that had beset the financial markets in that time frame and was not a reflection of any inherent failure on the part of SBCERA, its management or financial advisers. He said the San Bernardino County Employees Retirement System’s “portfolio is incredibly diverse and extensive” and that it was being “prudently managed. We have a staff and independent advisers who make recommendations to the board. We are constantly looking at a whole host of classes and mixes of investments and securities. We are invested in stocks, bonds, real estate and debt.”
Brandt said that fluctuations in the market were par for the course, but that the association’s long term strategy was a patient and sound one. He said as the economy goes, so go the association’s assets. He said that temporary downturns were to be expected but “a retirement system is there for the long haul and the wisdom of the course you set and stick with isn’t something you can judge at a quick glance at any given time. It is something that becomes apparent over a number of years.”