Bow-tie wearing hedge fund founder Paul Greenwood has pleaded guilty to defrauding San Diego County’s pension and other big institutional investors of at least $331 million.
Greenwood and partner, Stephen Walsh, ran WG Trading, which collapsed with $78 million of San Diego County retirees’ money.
In a little noticed report, two finance professors examined the true cost of state government pension underfunding.
Their findings are mind-boggling.
Robert Novy-Marx and Joshua Rauh found that collectively, the pensions of the 50 U.S. states are underfunded by $3.23 trillion. And that doesn’t even include local government pensions.
Most pensions calculate future obligations using a method that only an actuary could love: the “individual entry-age normal cost method.”
The exceedingly dull explanation of this is that a worker’s retirement benefits are funded over the course of his or her entire career.
But this measurement doesn’t show how much the pension owes right now.
Novy-Marx and Rauh ask how much would a pension plan owe if the entire workforce were laid off today.
They call this the “accumulated benefit obligation.” In San Diego, it’s known as the “present value of future benefits” They both refer to the same thing: the amount of money needed to pay off the entire plan if the workforce were laid off today:
For a pension plan to be considered fully funded, its assets should be at a minimum be equal to the accumulated benefit obligation.
The city of San Diego’s official unfunded liability stands at $2.1 billion using the entry-age normal method. The county’s is less than a billion.
When we look at what the plan would owe if it were terminated today, those figures rise considerably.
San Diego County’s pension fund just handed the county bill for more than $30 million a year yet no one seems to have noticed.
Every three years, San Diego County’s pension fund looks into its crystal ball and decides what it expects investments returns will be over the next 50 years.
It’s arguably the most important and difficult decision the board has to make. Even a small change can force the county to cough up millions of dollars each year.
Yesterday, the board of the San Diego County Employee Retirement Association lowered its assumed net rate of return from 8.25 percent to 8 percent effective July 1, 2011. (Watch the meeting online here.)
A quarter percent may not sound like much, but it’s a change that will force the county to pay 3 percent of payroll each year. Using last year’s payroll numbers, that works out to roughly $33.88 million.
The 8 percent assumed rate of return represents the pension’s best guess about how the fund will do in the future, so that the county can set aside money to ensure the plan is well funded.
The shift to an 8 percent assumed rate of return moves San Diego County’s pension more in line with other big state pension funds. CalPERS, the $200 billion retirement system, is reviewing its assumed 7.75 percent rate of return and will make a recommendation to the board whether to lower it later this year.
Three years ago, the pension’s actuarial consultant, Segal Group, recommended an assumed rate of return but the then chief investment officer, David Deutsch, promised that he could generate the additional 8.25 percent with his Alpha Engine.
Deutsch resigned under pressure shortly before the pension reported losses of $2.4 billion for the 2008-2009 fiscal year.
The assumed rate of return is perhaps the most important variable in calculating a key barometer of a pension’s health known as the funding ratio — the ratio of assets to liabilities. SDCERA’s funding ratio stands officially at 91.5 percent, but that’s only because of an accounting practice that defers losses over several years.
If last year’s $2.1 billion loss were to be recognized right away, San Diego County’s pension fund would only be 65 percent funded, according to a report by an independent consultant. That’s well below the 80 percent that pension experts regard as healthy.
Updated to note pension’s conclusion that publicity has not affected returns.
The board of the $7.3 billion San Diego County pension fund is slated to vote Thursday on a $50 million investment in billionaire Alec Gores’ latest private equity fund, Gores Capital Partners III.
In a memo to the board, SCDERA notes that Alec Gores carries some “headline risk” as he and his relatives have “attracted some media attention, possibly because of Mr. Gores’ being a successful businessman based in the Beverly Hills area.”
That’s a weak way of saying that Gores and his equally wealthy brother were involved in a love triangle that became embarrassingly public.
Even so, SDCERA found no evidence that media publicity affected investment performance of Gores’ funds.
Alec Gores is the older brother of Tom Gores, who owns the San Diego Union-Tribune through his separate private equity fund, Platinum Equity.
In December 2000, Alec Gores grew suspicious that his then wife, Lisa, was having an affair with brother Tom and hired Los Angeles detective Anthony Pellicano to find out.
The detective staked out a tryst at the Beverly Hills Hotel and wiretapped a nervous phone call between the two lovers, which was played for jurors at Pellicano’s 2008 trial. Here’s Allison Hope Weiner’s Huffington Post coverage of the trial.
Gores reports no known investments with major operations in San Diego County. That’s true, in so far it goes. Gores sold off his holdings in Aonix, a San Diego software firm, a few years ago.
But kudos to the fund for making this information public ahead of time. A refreshing change.
Lee Partridge, the investment consultant for the $7.2 billion San Diego County retirement fund, responded at yesterday’s board meeting to my story that appeared April 4 in the Voice of San Diego about the fund’s $2.5 billion bet on leveraged Treasuries.
Lee and I spoke this morning and he sent along the written response that he presented to the board, which appears below. You can also watch his presentation at yesterday’s board meeting by clicking here.