Thank you. Thanks. You're always straight with us. That's what I appreciate.
You're welcome. Are there any other questions from members of the committee? (No response.)
Thank you. Seeing none, the committee will stand in recess until 1:30 at which time we will hear from the Board of Pensions and Retirement, and then the Procurement Department. Thank you. (Public hearing recessed at 12:25 p.m.) (Public hearing reconvened at 2:15 p.m.)
Good afternoon, everyone. Welcome. 531 Operating Budget - 3/9/05 I do apologize for the delay. At this time I will ask Mr. McPherson to announce the next group. MR. McPHERSON: Board of Pensions and Retirement.
Good afternoon. Please identify yourself for the record and proceed with your testimony.
Good afternoon, President Verna and members of City Council. My name is Gwendolyn Bell. I'm the Executive Director of the Board of Pensions and Retirement. And with me today is Anthony Johnson, our Chief Investment Officer.
The Board of Pensions and Retirement is requesting for fiscal year 2006 $7,728,000. Part of the budget amount includes contractual increases for the unions that just went through, as well as the fringe benefit cost. 532 Operating Budget - 3/9/05 We have 77 positions in our office. We've added a counselor and a clerk typist to reduce the number of weeks that it took for retirement -- post-retirement interviews. We were approximately eight weeks out from a separation to give an interview, and we're now down to four. Once the counselors are trained, we do anticipate that there will be a reduction in the overtime. We've had extensive overtime because of catching up with the checking of the DROP payments for these people that entered DROP initially. During the fiscal year 2005, we had an additional 416 people leaving DROP, and we anticipate that 680 more will leave as a result of DROP next -- this coming year. We're in the middle of a very large project with our technology unit. Actually, we transferred our technology unit to MOIS, incorporated them into MOIS. And we recently replaced our tech consultant because we had a very aggressive program that we wanted to complete to 533 Operating Budget - 3/9/05 automate our system. So, we worked in conjunction with MOIS, and we hired Information Consulting Services last year. We have about 60 projects on a list of things that we need to do or would like to do in Pensions, to make the system work more effectively and to automate those things, like we're just recently began using E-Works, and we're using an automated separation paper. We have expanded the number of retirement workshops that we have by two a year. We can accommodate an additional 250 persons. We have a larger seminar room, and we are filling those sessions each week. There's also an additional 12 sessions offered by the Deferred Comp area, and those are well attended as well. Association We've increased the number of people that are coming in for pre-retirement, and we are asking that you favorably accept our budget proposal.
Thank you. You mention that there are 3400 employees enrolled in the DROP program.
If you can -- Not today; I would like it in writing -- I'd like you to give us a breakdown by fiscal year, by fund, and by department of the 3400 employees.
Thank you. 535 Operating Budget - 3/9/05 How many money managers does the Board of Pensions have?
The Board of Pensions currently employs a total number of 72 investment managers. That includes both those managers who are managing public securities, normal stocks and bonds, and also our private equity limited partnerships.
Can you tell us how the money managers are selected?
Can you tell us how the money managers are selected?
Sure. For the... For most of the managers -- and I'll describe the majority of the portfolio and then the opportunity fund second. For the main fund, a consultant would be hired to conduct a search through databases and through meetings, to consolidate a list of semi-finalists for the Board to review. The Board then looks at both qualitative and quantitative information, 536 Operating Budget - 3/9/05 issues a report. They will select the finalists who will come in and present to them. And based on those presentations, they will then select who will manage money for the Pension Fund.
If a manager under performs, can you tell us what actions are taken?
Every quarter the investment staff presents the results of the managers to the Board, along with the consultants. And every quarter the investment staff comes up with a rating for each manager. Our ratings: Are satisfactory is the best. Watch. There are two levels of watch. Two levels of probation, and then termination. Quarter we determine whether there has been an organizational change or a change in the process. We also evaluate how well they've done versus a standard benchmark and versus a universe of their peers. And based on those criteria, we will 537 Operating Budget - 3/9/05 then determine whether we should increase their ratings or decrease their ratings. And we do make termination recommendations to the Board.
So, at what point do you terminate a manager for poor performance?
Once we've examined the phenomena that's going on in the market, we understand the construction of the index, and what's happening inside the index against which they are compared, and then we compare their performance against those in the market and the index, we then will then downgrade them and then terminate them. If a manager has under performed for us, we look at either the magnitude of the loss within a short period of time or the accumulation of multiple periods of under performance over perhaps a two-year period or more. And then we will recommend termination, typically.
For the record, can you tell: How are the managers, 538 Operating Budget - 3/9/05 money managers, paid and what are their fees?
The money managers are paid out of the Pension Fund itself. There's a special account called the Operating Fund, in which we will hold cash, cash that is liquidated from the money managers themselves, in order to pay the fees. The total fee that we've paid in fiscal year 2004 for the money managers was approximately $8.8 million. Overall total fees paid out for the Pension Fund, including money managers and consultants equals approximately $11.55 million which represents about .22 percent of the total fund.
All right. I would like you to provide us with a listing of your money managers, the amount they manage, and the fees they have been paid for the last three years.
Thank you. I have other questions, but at this time the Chair recognizes Councilman Kenney. 539 Operating Budget - 3/9/05
Thank you, Madam President. Good afternoon. As you know, our pension responsibilities are probably one of the largest segments of our governmental outlay, so to speak. And the fact that the Pension Fund is underfunded, probably I would guess severely is a pretty fair assessment of its underfunded status, that it continues to cost the City through the General Fund a lot of money we could be using to provide other services. How do we analyze and review the investment strategies of the money managers? Do we sit -- Do we just go based on their performance or do we listen to what it is they feel the market is going to do in the short term, in the mid term, in the long term? And how do we analyze their opinions?
Both the consultant and staff will do independent research into the performance of the market. For example, we will find out what's 540 Operating Budget - 3/9/05 going on in the large company market, the mid company -- mid cap size, and small cap and international separately. Then we compare how the managers performed in those markets. We then interview those managers independently in our offices. And if there are major issues that come up, we will then bring them in to present to the Board to explain their under performance.
When we took that big hit, as everyone in the country took that big hit at the beginning of the decade, what have we... How have we planned to either take advantage of what some people believe will be an end of a decade run again in some of the high tech and bio tech areas? And how do we prepare to protect from that tech bubble bursting again? Because I understand that really did set us back tremendously in our fund's performance.
You're correct about setting us back pretty far, and you're also 541 Operating Budget - 3/9/05 correct that it affected not just us but other public and private pension plans. With our new consultant, we have approved a new asset allocation to both protect us from downside performance, and to hopefully enhance the return of the Pension Fund. Specifically, we are reintroducing the real estate portfolio to the Pension Fund. Up until 1999, that allocation had dwindled down to less than a percentage point. It is now -- has been approved to invest up to five percent. And that planning will take about three years to completely fund that. We've also increased our allocation to private equity. And as risky as that may sound, private equity offers a tremendous opportunity to offer higher returns for the Pension Fund over a long period of time. In addition to that, we've also introduced hedge funds, again, another controversial investment in the media, but 542 Operating Budget - 3/9/05 hedge funds have been shown, when diversified properly, to lower risk and to enhance return. And those are the three areas that we're hoping will add value and reduce return to the portfolio.
Some analysts are indicating that they believe that real estate will slow tremendously over the next three to five years, and that real estate generally doesn't... Its performance is not as expansive as some other areas of the economy. Why would we be moving towards a larger real estate portfolio at this point in time?
As we look to enhance the returns in our equity portfolio, and by increasing our private equity allocation, we need to take steps to reduce the risk in the portfolio. Real estate has been shown to offer a risk reduction in a portfolio. What we're doing within the real estate portfolio, we 543 Operating Budget - 3/9/05 hope, as we move forward is, one, poor assets, poor buildings are typically where you'll find where the market might be topping out; whereas there is opportunity in real estate are in the more opportunistic or what they call brown field investments, where you're building from the ground up, where there's a need in an area. Those are where you might find a little more risk but a lot more return than just moving and buying a building and taking over the management of that building.
On the residential side, do you have an idea as to what the type of housing and the price range of the investments we're making?
I do not have an idea of the pricing, but we are focused on -- We will focus on apartments, multi-family units in that area. 544 Operating Budget - 3/9/05
Because, again, analysts are indicating that on the high end, more expensive homes, that they may be taking a major hit.
True. Those are the areas that we would likely avoid. We're looking at the single family loans. We're looking at multi-family complexes in areas that are growing, and really based on population demographics and economic growth in areas.
Does that also include the resort locations and summer residence type of investments?
That's a good question. That's probably a more detailed segment of the market that we specifically may or may not focus on. The funds in which we invest may have an allocation to those areas, but on the top level, an allocation level, we have not discussed exactly if we're going to move into that significantly.
Is the Pension 545 Operating Budget - 3/9/05 Fund precluded from any specific types of investments or is anything available, as long as it can be rationalized?
As long as it's rational, we will invest in most investments, as long as it's vetted out. Historically, we have avoided investing in short sales or futures and options. With the turn of the market and the introduction of hedge funds, that has changed, and we are introducing those securities into the portfolio.
Are you familiar with a book recently published called the next new -- the Next New Bubble? I think it's Harry Dent.
No? I would recommend it to you. There's apparently analysis that says, after the tech bubble burst, that there was a major shake-out or continuing a major shake-out of under performing companies, and that those that are remaining are poised to 546 Operating Budget - 3/9/05 really explode again in a positive direction towards the end of the decade. And then at the end of this decade, going into the next, we're going to experience a severe downturn in the stock market, and in the economy generally. I just recommend you take a look at it. It's an intriguing insight. Apparently he was -- he was quite correct in predicting the 2000, 2001 debacle. So, I would recommend that to you. Let me just go back to the issue of consultants. How many consultants do we have and how are they chosen?
I'll answer the second part first. The consultants are chosen in the same manner in which we hire our investment managers. We develop a list of candidates and present them to the Board, and the Board then selects who they want to consult on different asset classes. For the number of consultants, we have one for the General Fund. We have one for our private equity portfolio. We also 547 Operating Budget - 3/9/05 have one for our hedge fund portfolio. Again, trying to focus on those consultants who are expertise in the particular areas of interest. We also have two consultants, slash, manager -- managers who manage the Opportunity Fund, our emerging manager program.
I've been with the Pension Board for five years. I've been CIO since four -- almost four years.
During the course of that five years, have there been any termination of money managers?
I have the list. I just don't have it with me, but I will furnish that.
More than five. We 548 Operating Budget - 3/9/05 have terminated... I would be comfortable in guessing at least ten.
Okay. Have there ever been recommendations for termination that were not followed through? Have there ever been staff recommendations for termination that have not been carried out?
When I first started, there was a recommendation on the table that was delayed for some time, but it was prior to my appointment as CIO.
Okay. I'm sorry. The book's called The Next Great Bubble Boom. So, if you have some extra time, want to do some reading. Thank you, Madam President.
You're welcome. 549 Operating Budget - 3/9/05 You know, I'm just looking at -- You were mentioning about consultants. I'm looking at the testimony. Have two new consultants that have been hired to enhance the pre-retirement program which has been expanded to include an emphasis on psychology of aging. Can you explain that to me, please?
Those consultants are part of our pre-retirement sessions. We have two day sessions for groups of people that are about 40 people that come in. And we have speakers that come in from the Pension Board, from Social Security, from the I.R.S., and we have consultants that come in and spend an hour on the psychology of aging and retirement, as well as --
They range in all different price ranges. Some of them are a 550 Operating Budget - 3/9/05 couple of hundred dollars. I'll ask Dave Fagan to help me out here. 500 is the average.
$500 is average. I think the highest person we have that we pay on a monthly basis is about 850.
For one person, yes. But some of them are charging $300, some are five, and I think...
Yes. They come in once a month. They're part of our pre-retirement program, which is a two-day workshop. The average length of time that they speak is approximately an hour, some two hours. So we've added two new people to the 551 Operating Budget - 3/9/05 roster of the pre-retirement sessions. We're trying to cover all aspects of retirement. We do the financial planning session. We do the Social Security part. We do our pension. And we have a special session just for DROP that we do in-house. So, we try to bring in a different variety of people to speak on some of the things people have to think of just prior to retirement, you know, what they're going to do. A lot of people come in for their pre-retirement interviews, and they have no 14 idea of what they're going to receive. They have no idea of what they're going to do at retirement. So, we're trying to encompass all of those things into our pre-retirement sessions.
Do you send out annually what an employee is eligible for at retirement?
We send out annual reports. Fortunately, the annual reports, we're trying to... Part of the new 552 Operating Budget - 3/9/05 assignment with the new tech consultants is to incorporate purchase of previous time because that's currently not in what we do. But most of the more than 30,000 booklets that are sent out are pretty accurate. We have... We have to be able to include military service and prior purchase of pension service. So, we're working on that.
I know that on a yearly basis employees get notified by mail how much their pension would be.
That's based on present salary. So, the pre-retirement sessions are geared to people that are eligible for retirement at this point. And when they come in they get individualized calculations that show them if they were to retire now, what they would --
Would it 553 Operating Budget - 3/9/05 would be?
Yes. So there's a difference in what we project in those annual reports because it's based on current salaries. So, if a person's not eligible to retire for ten years, it's based on his current salary. The pre-retirement sessions are... We invite in people that are currently eligible for retirement.
Understood. Thank you. The Chair recognizes Councilwoman Blackwell.
Thank you, Madam President. I understand that the Board of Pensions makes the investment decisions that really affect our whole Pension Board. Am I correct?
So, you are in charge of the investment decisions which 554 Operating Budget - 3/9/05 are some of the most important decisions that govern our City. The five-year plan shows that pension costs are $800 million higher. The five-year plan says that the fund has failed to meet its nine percent goal the past four years, losing six percent in '01 and another 5.2 percent in '02. What is being done to assure that the pension plan meets its nine percent goal? In other words, what is your investment strategy?
For the years 2001 and 2002, the City of Philadelphia, like many other pension plans, did suffer when the tech bubble burst, which consequently affected our funding ratio. In subsequent calendar years and in subsequent fiscal years, we have recovered a lot of those investment losses as the market has recovered. Going forward, we have moved our allocation to... tilted a little bit more towards public equities, which equities 555 Operating Budget - 3/9/05 should hopefully do much better in the coming years. We've also introduced new asset classes to the Pension Fund, three of which are real estate, which is supposed to act as a risk reducer but also return enhancement. We've introduced a new strategy called portable alpha, which I can explain if you want to hear the explanation for that.
I didn't hear you. What was the second one you said?
Portable alpha. Would you like to hear explanation of portable alpha?
Portable alpha allows to us buy an index fund like the S & P 500, which are the top 500 stocks in America, at a very cheap price. Let's say, for example, you have a hundred dollars to invest. You'll take five dollars and buy the S & P 500 futures market. You take the rest of the money and you buy 556 Operating Budget - 3/9/05 other types of securities. In our case, we're looking to buy currencies. We're trading currencies, foreign currencies. The enhancement to this is that, one, you receive the return of the index; and on top of that, you receive an additional return for us, if we're looking for an additional three percentage points above the index, to enhance the return of our equity portfolio. We are also introducing or increasing our allocation to private equity as well. We have moved from five percent three years ago to seven and a half percent two years ago, and now we are rejecting projecting about 11 percent in private equity going forward.
You're welcome. The Chair recognizes Councilman Nutter. 557 Operating Budget - 3/9/05
Thank you, Madam Chair. Good afternoon, Miss Bell and Mr. Johnson. Mr. Johnson, I want to go back to an area, I think, based on some questions that the Council President asked. The money manager fees -- And I may have missed the beginning of this. How many money managers do we have?
We have 72 money managers in the Pension Fund. That includes those managers that are in the Opportunity Fund, and it also includes the private equity limited partnerships.
Correct. We have 45 public market money managers. We have 45 private equity partnerships. 558 Operating Budget - 3/9/05
90 investment fund. I apologize. There are 72 money managers. We have multiple products with single managers. I apologize.
I... I don't have the total number of money managers broken out that way, but I will provide it for you. But in total we have 72 money managers. But I will break that out for you.
By public equity market managers and by private equity, limited partnerships.
Okay. And I'm going to assume that the Council President asked you for a list of all the money managers?
She asked for a list of the money managers and the fees paid to 559 Operating Budget - 3/9/05 those money managers.
If I could enhance that request, if you could provide that information for the past five years.
Okay. And how many money managers did we have last year?
We have increased the number of money managers in the Pension Fund. 560 Operating Budget - 3/9/05
I'll have to get you that number. That number I don't have offhand.
We've added new asset classes to the fund, and we are constantly searching for private equity limited partnerships. It will be a natural increase, at least of the private equity portfolio. But in the public equity side or public market side, we added two additional asset classes in which we've increased the number of managers in the fund.
Do you know what the amount of fees that we paid last year were?
I do. Fiscal year 2003 we paid money management fees totaling approximately $6.8 million.
So in FY'03 it 561 Operating Budget - 3/9/05 was 6.8, and FY'04 it was 8.8.
It was approximately 7.9. We had just completed a round of some terminations. We were in between manager selections and increasing the number of asset classes in the Pension Fund.
Okay. Do you have any performance data that is comparative between the Philadelphia Pension Fund and other large cities, as well as states, from a performance standpoint?
I do. Yes, I do. I have it going back for... until 1996, comparing our fund to other public pension funds of over a billion dollars.
Fiscal year '04, we ranked 45th in that universe. Fiscal year '03...
45th percentile, the first percentile being the highest, the hundredth percentile being the lowest. We were 45th.
Correct. It was a universe of 29. It's a different universe used. 563 Operating Budget - 3/9/05
Well, how can you be 87th if there are only 29 people in the universe?
87th percentile among 29. If you ranked them one to a hundred in percentile ranking, we were 87th percentile.
I have our returns, but I... Oh, no, I don't have the number of observations but I do have our ranks within the universe. For FY'02 we were ranked 42nd, 42nd percentile.
I don't have that on my list, but I can try to get that data for you.
Okay. Do you have a sense of why we are... I mean, FY'03 seems to be a bit of an anomaly, but for the other two years we seem to be, you know, 564 Operating Budget - 3/9/05 somewhat consistently in the low to mid 40s. Do you have a sense of why that is?
I know in the early -- or in the later '90s, our allocation to equities was a little bit lower than the allocation to equities to other public pension plans. Put us a little below them. When the market started to suffer, you would have expected us to do a little bit better. We didn't. We still were around the average, at 51 percentile for '01, 42nd percentile for '02. I couldn't exactly say why, without interviewing the other public plans, to figure out what their allocations were, what types of asset classes they had included in their funds that were different than ours.
Well, I mean, does it concern you, as the Chief Investment Officer, that we find ourselves somewhat consistently in this position?
If you look at universe comparisons... typically are only relevant when you're looking at pension funds 565 Operating Budget - 3/9/05 that have a very similar allocation to us. But broadly speaking, if you look at our allocation versus other pension funds and how well they do, it then tells you the success of the allocation that we've set up. The allocations that we have established are designed to help us meet that nine percent actuarial target. Whether we've met it or not is another matter, but it's designed based on the consultants forecasting of the equity markets and the fixed income markets, and the amount of risk that we're willing to take in the markets to try to achieve that return. Some pension plans are a little bit more aggressive, and some are more conservative.
Well, I understand that you would necessarily want to compare your -- We'd want to compare ourselves to other entities that are similarly situated. But I would, only for discussion purposes, suggest that rather than solely 566 Operating Budget - 3/9/05 looking at where we are and possibly trying to justify that existence, maybe we would actually like to explore where other people are, and figure out if we should be doing something different.
Oh, I agree. And we do... We do those exercises often. We attend conferences. I have just -- I have talked to other CIO's to discuss where they are investing, what their consultants are thinking, to come up with a plan of action going forward. And I think the plan of action we have today will help us do much better in the future.
Okay. You have a report that you'd be able to share or forward to the Council President, from which you were reading in the percentiles and everything?
Okay. And do you have other data somewhere else that shows 567 Operating Budget - 3/9/05 what cities were in these different pools?
I will do my best to get information. It's from an outside source. And I'll see if they can pull that information out of their universe database.
Has there been a comprehensive analysis of the Pension Fund, either over the past few years or the current situation, that would essentially ask the question: Given what our unfounded liability is, given what our performance return goal is, given what other cities or states are doing by way of their investments, is our asset allocation mix appropriate for the fair amount of ground that we need to catch up?
Every three years we have a formal review of our asset allocation policy. Typically, markets... you review your market outlook every three years formally. Every year informally we will take a look at the asset class assumptions, and figure out if we need to change our allocation at that time. 568 Operating Budget - 3/9/05 But more formally, it's every three years we make our projections out, where we think the markets are going to go.
Okay. I'll come back to that question another day. Give us some context for now 72 money managers. 72 sounds like it could be a big number. Maybe it's a small number. Maybe it's a huge number. Based on your either experience or discussions with your colleagues, other comparably sized funds or cities, do they have as many money managers as we do?
There are other funds, larger state funds, that have many more money managers who have... Well, they are larger than we are. The reason our number is so large at 72, if you break out the private equity partnerships -- and let's just focus on -- let's just assume it's 40 money managers in the public markets portfolio. We try to diversify every asset class with different styles of managers. For example, within large cap growth, we have two 569 Operating Budget - 3/9/05 managers who have varying styles, so they will complement each other different within different market cycles. You move that across to large cap growth, to large cap value, mid cap growth, mid cap value, small cap value, small cap value, the numbers tend to add up. But the effect is that we will have a much better diversified portfolio that will hopefully protect us when markets are shifting.
Well, is it at least equally possible that with so many different people running around doing so many different things, that we might actually miss out on some opportunities? Because, I mean, in essence it sounds like you have a bit of a push-pull effect by having people so... sounds like almost symmetrically matched up, that one entity is doing one style of management, another entity is doing another style of management. And the goal sounds like protection of value, as opposed to slightly more aggressive growth. 570 Operating Budget - 3/9/05 I mean, I guess the question is: Are we trying -- Is our primary goal to not lose money? Or is our goal to make money? I mean, are we on defense or are we on offense?
Our primary goal -- And to put it in a football analogy -- is to move ten yards at a time forward. We are looking to preserve the assets that we have as best we can, but at the same time we're looking to move forward in a very prudent manner. When you discuss the push and pull of two different styles, our goal is to beat a benchmark. Let's say for the equity portfolio the benchmark is the S & P 500. What we'll do is --
I will tell you. Hold on. The S & P was 10.9 percent for the year, 2004.
Oh, no. I was using it as an example, as a simplified example. There are no managers that we use compared to the S & P. I was using it starting off with a simplified example of how we pick our managers or how we try to beat a benchmark. For the large cap portfolio, our --
But now you're telling me that nobody is compared to the S & P.
Oh, it's one of the more well-known benchmarks. I thought I'd use it as a simplified answer -- explanation. But our benchmark for the --
Well, I at least want to assure you that I've heard of the S & P 500.
Oh, that's fine. Oh, that's why I used it. The Russell 1000 is our benchmark for the equity portfolio.
Okay. And what 572 Operating Budget - 3/9/05 was the Russell 1000 performance last year?
What I have in front of me does not give me that number, but I will furnish it to you.
All right. Well, why don't I ask this question: How did our managers perform against their respective indices?
Do you want to know the individual managers or as a group how well they performed?
Well, since we have 72 of them, I think I don't want to know them individually. You can send that to the Council President. I mean, I'd just like to get a sense... Are we performing at the market? Are we under the market? Are we over the market? Just give me a...
For fiscal year 2004, the total equity portfolio, which includes domestic and international managers, returned 24.7 percent versus a benchmark of 24.0 percent. 573 Operating Budget - 3/9/05