By One Vote, San Diego to Keep OCIO Salient Partners

The board of the San Diego County Employees Retirement Association (SDCERA) declined to terminate its contract with outsourced-CIO Salient Partners at a meeting on Thursday.

As predicted by those close to the $10 billion fund, the vote came down to the wire. After nearly five hours of discussion, a motion brought by trustee Dianne Jacobs to fire Salient was blocked by five trustees, including Chairman Skip Murphy, and backed by four.“We don’t think you’re prepared to make major changes, and we urge you not to cancel the Salient contract…” Susan Mallett, Retired Employees of San Diego County

Several stakeholders presented formal recommendations about the action before the board’s vote. The majority of these representatives urged the fiduciaries not to reverse their course—a risk-parity oriented portfolio overseen and invested by Salient.

“We believe your board is at a serious juncture,” said Susan Mallett, president of the county’s retired employee association. “You are suddenly and unexpectedly considering a reversal from an investment strategy you had agreed on after years of considered discussion. As a representative of thousands of members who absolutely depend on their pensions, I have received as many worried letters about leverage as I have about the actions of this board.”

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Mallett, who opened the meeting, expressed a position later echoed by the fund’s chief legal counsel, primary consultant, and several other stakeholders. Speaking on behalf of retirees, she said: “We don’t think you’re prepared to make major changes, and we urge you not to cancel the Salient contract… Please return to cohesive, mutually respectful conversation. If you ultimately decide to cancel the contract, please direct your staff to come up with a well thought out plan for transitioning.”

The trustees in support of terminating Salient’s contract pushed back against the notion that firing the provider would be impulsive, and a break with the board’s legacy of measured decision making.

“Any characterization of what’s happening here—which is democracy at work—as knee-jerk reactions is inappropriate,” said Trustee Samantha Begovich, a recent addition to SDCERA’s board and vocal critic of its OCIO arrangement. “To say, ‘Samantha’s position is knee-jerk while mine is reasonable’ is, frankly, inappropriate.”

The board continues to have the capability to terminate Salient’s contact with a majority vote and 30 days’ notice.

The largest pension fund in the US has said a decision to let the city of Stockton walk away from its pension obligations—and the fund completely—is not legally binding.

The California Public Employees’ Retirement System (CalPERS) issued the statement yesterday evening, following the declaration by a bankruptcy judge that the city of Stockton had the right to reduce pension payments and even sever ties with the $300 billion fund.

“We disagree with the judge’s opinion on the issue of pension impairment,” CalPERS’ statement said. “This ruling is not legally binding on any of the parties in the Stockton case or as precedent in any other bankruptcy proceeding and is unnecessary to the decision on confirmation of the City of Stockton’s plan of adjustment.”

Stockton had argued that it must make its pension contributions for public employees before its creditors are paid the entire amount they are owned, local newspaper, the Sacremento Bee reported.

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However, the judge said: “California public employee retirement law… is simply invalid in the face of the supremacy clause of the United States Constitution.”

The verbal ruling came after more than two years of legal wrangling, during which time CalPERS submitted $147.5 million in unsecured claims to city assets, according to court documents. The pension fund holds the single largest claim to Stockton’s remaining assets and future cash flow.

A major player in the latest stages has been investment manager Franklin Templeton. The fund manager claimed it was owed $36 million from the city, but had been promised just $4 million in repayments, which amounts to 12 cents in the dollar, whereas other creditors had been offered up to 50 cents.

The Sacremento Bee reported the firm’s lawyer as defending his clients’ stance, saying CalPERS had been seeking “exalted status under California law”.

Franklin Templeton told CIO that it was pursuing a settlement that would “address all Stockton’s liabilities”.

“The evidence establishes that Stockton can pay substantial amounts to Franklin even if it leaves the pensions untouched,” the firm said. “Had Stockton chosen to do so, it could have emerged from bankruptcy long ago, avoiding the delay and expense of litigation. Instead, Stockton ignored that evidence and proposed just a small, one-time payment to us. As a result, we had no choice but to resist confirmation in order to stand up for the individuals who have entrusted us with their savings.”

The fund manager said it continued “to desire a cooperative partnership with Stockton” and was “hopeful that the Bankruptcy Court’s decision will prompt Stockton to offer a more realistic plan that provides a fair and equitable recovery for our stakeholders, as required by the Bankruptcy Code.”

The judge is to make a written statement at the end of the month.

In May, CalPERS waded into the Detroit bankruptcy hearing, saying the judgement could open the floodgates and allow municipalities all around the US to step back from their obligations or impair pension benefits.

The pension fund concluded its statement on the Stockton verdict: “CalPERS will reserve any further comment until such time as the court renders its final written decision. What’s important to keep in mind is what the City of Stockton stated in court today: that they can’t function as a city if their pensions are impaired.”