San Jose council moves toward overhaul of troubled pension boards Tuesday, June 23, 2009 By John Woolfork, Mercury News The San Jose City Council, wrapping up its work before its new budget year and summer break, took steps Tuesday toward restructuring the boards that oversee the city's two employee pension systems. With the funds posting steep losses in the market meltdown and with some pension trustees under fire for questionable travel costs, city officials hope to get more expertise on the boards and minimize losses that leave taxpayers on the hook. A consultant, Cortex Applied Research, found the existing governing boards lack expertise in financial management and are loaded with potential conflicts of interest. For example, city officials and employees on the boards have incentives to minimize city or worker contributions to the retirement funds. Active and retired employees also have incentives to take greater investment risks because high returns pay a supplemental bonus in good market years, while taxpayers — not the workers — must make up for any losses. "The current governance models of the city of San Jose retirement systems have numerous weaknesses," the Cortex report said. "They lack sufficient safeguards to assure the City that its interests will be adequately protected." High priority Oversight of the city's $3.2 billion in employee pension funds has become a high priority for city officials, since recent market losses of more than $1 billion are expected to add $52 million to next year's deficit, sapping funds from public services. The City Council Tuesday approved a recommendation from Mayor Chuck Reed and the four council members he has appointed to sit as trustees on the pension boards — Sam Liccardo, Rose Herrera, Pete Constant and Ash Kalra — to review the Cortex recommendations over the next 90 days. During that time, city staff will seek comment on the report from retirees, employees, business leaders and taxpayers. "Cortex has identified significant problems in the governance models that need to be addressed," the mayor and four council members said in a memo to the full council. The city maintains two separate pension systems: one serving police and firefighters, and the other for the rest of the city's workforce. Each is overseen by a seven-member board that includes two council members, two employees, a city retiree, a civil service commissioner and either a public representative or a city administrator. All are appointed by the council, but the employees and retirees recommend their representatives. Cortex recommended keeping the same number of trustees. Employees still would have two representatives on each board, and retirees would still have one. But the workers and retirees would have the ability to directly appoint their representative, rather than requiring council approval. The consultants said the change would give workers and retirees more effective representation that would be directly accountable to them. The council still would appoint a majority to the board, but its representatives would not be city employees. Instead, those appointees would be experts in asset management or finance. The consultants noted the change would come at a cost, pointing to public systems in Canada that pay trustees a $25,000 annual retainer and $1,500 per meeting. Skepticism urged Bob Brownstein, a former city budget director who now directs policy for labor think tank Working Partnerships USA, said the city should be skeptical about putting financial experts in charge of the pension funds. He noted the collective failure of experts in the recent market meltdown. But the consultants said the recommended structure is used by the better-performing pension systems, including private union systems and a highly regarded Yale University endowment fund. Contact John Woolfolk at jwoolfolk@mercurynews.com or 408-975-9346.