of the 7,437 cap participants, 473 or 6% of the cap service addresses matched the listed home address of at least one city employee and in some cases 53 accounts listed two or more city employees. total discounts provided to these cap accounts during the february-march 2012 billing period was 27,168 which annualizes to -- 193 of these city employees, 36% are in job classifications which average annual salaries greater than 52,800 k annually. an income level that would make a household of five persons, with no other income source ineligible for the program. if you remember the prior slides that showed the howsmed -- number of household members

compared to what their salary to be. >> supervisor elsbernd: just curious, the city employee breakdown was there any disproportionate amount that worked for the puc or were they spread ought over the city. >> it was all over the city. the average cap household size is 3.8%. five of the 90 accounts we selected for income verification match the home address of one or more city employees, 45% were found to be ineligible for cap and those selected for the review matched the address of one or more city employees and all three reported income lower than the amount of corresponding official salary for the city employees. for recommendations 10, 11, 12, and 13 related to addressing the 473 accounts matching the listed home address of at least one city employee by verifying

household income and size to demonstrate that their household qualifies forever cap removing accounts found ineligible and recovering to ineligible accounts and we asked puc would also work with department of human resources to pursue any disciplinary action found to have associated with providing fraudulent information for the cap discount. finding 4.1, sf puc's current outreach methods over low income areas in the program's jurisdiction and puc does conduct various cap outreach efforts but the department could do more to targetià outreach predominantly low income areas of san francisco. so recommendation 28 says that puc should explore cost effective outreach methods for cap tailored to reach customers residing in low income neighborhoods, including

coordinating outreach efforts with local community based organizations. and what we did, we examined the percentage of people living at or below 100% gç=t>iç the federl property level by san francisco zip code area. so as of march 2012, 54.2% of cap accounts resided in only three of sf zip codes. that was ingleside, excelsior, 54.2%, visitacion valley, sunnydale 15.7% of that 54.2% and sunset is 12.2%. what we found was there were neighborhoods with high levels of poverty that had relatively low cap enrollment. for instance bayview and hunter's point had similar levels of property as ingleside but only one-third as many cap participants inspect inner

mission and bernal heights has the second rate of poverty but only 2.4% of the cap account. and outer richmond and haight ashberry house, a combined total of 12.4% of the city's impoverished residents but 6% of the cap residents. so again by targeting outreach of san francisco neighborhoods where the majority of residents living below the federal poverty level reside, sf puc may be able to better serve and ensure that the cap discounts actually go to help residents -- in biggest need. >> supervisor elsbernd: isn't there a prosecute problem with that -- problem with that, tenants don't necessarily pay watered bills. they pay the bond but unless a multi-unit is separately metered -- so they're going to fall in this column percentage of residents in poverty but they don't have their own water

accounts so you're not going to be able to hit theam. >> that may be true but the point in case we're making is to do the outreach, to understand what those residents are, and as it relates to the single -- >> supervisor elsbernd: right. say south of market, 6.5% of residents in poverty which makes sense only .2% there needs to be more outreach but you're probably not going to hit 6.5%. >> correct. yes. so that is the conclusion of our report. thank you. >> supervisor elsbernd: thank you. is there any public comment on this report? is here. >> supervisor elsbernd: wait. i'm sorry, gentlemen. before we get to public comment, is the department here? does the department want to say anything? >> sure. good morning, supervisors.

and internal control at san francisco public utilities some of the progress since we've had this audit -- >> supervisor elsbernd: if i could actually, because we've gone going for a while if i bit. the recommendations that have been made, how many of those do you agree with? >> we agreed with all of them. >> supervisor elsbernd: and how far are we along in implementing all of thoam? >> in terms of policies and procedures, the customer services bureau has put a lot of effort into revamping and a more rigorous application and enrollment process through basic verification of dependence and income using federal income tax return forms, listing out individual house members and their individual incomes, along with the monitoring and renewal process there are a lot of other cap participants not involved in this audit. we are requiring, going forward,

a biannual renewal process where the program participants must provide the previous two years in the same format so basically nod of the head to the city service auditor are you satisfied with the steps the puc recommendation? so those who can't see we are getting a nod of approval, yes, you are satisfied. anything else you'd like to add to finish it off? >> yes. i wanted to add that we are pursuing reimbursement of discounts provided for ineligible participants in the program so for those -- i could at least speak to the 41 ineligible accounts, a sample of 90, after verification. we're collected 6.2,000 out of the 17,000 thus far with collections currently in progress. delinquenty is mitigated through service plan and/or liens on

owner properties. the process right now for those findings are ongoing. >> supervisor elsbernd: thank you very much. >> thank you. >> supervisor elsbernd: gentlemen, sorry to delay you. go to public comment. mr. paulson, mr. yep, anybody else who would like to speak during public comment please come forward. >> good afternoon to the government audit and oversight. i want to say happy retirement quickly to mr. harrington, you've only begun, mr. harrington, to fly. ♪ so many roads to choose. ♪ you'll start out walking,fjpi" mr. harrington, and learn to run. ♪ and you've only begun, begun. mr. harrington. and i just know -- ♪ you can feel our water lies, and the budget won't take a dive, through flood -- a budget

million streams, with this motion. ♪ and you can fill our water live, and fill our water dreams, to flood a budget million dreams and streams and money of emotion, with this item 4 motion >> supervisor elsbernd: thank you, walter. mr. yep and any other member of the public who would like to testify please line up or this will be the last commenter. >> douglas epi. douglas yep. i would like to thank the new audit committee, in my opinion the old audit committee had far too many cancellations and wasn't doing its duty. i was glad to hear the findings in today's report. it goes back to show when you do

an audit you're always going to find some sort of problem so we should encourage that department to keep expanding and maybe we should consider hiring some of the city's youth, train them to be auditors, and actually give them an incentive to stay in the city and go after all the rule-breakers. so i think what this shows is that we need to keep this function as expanding as possible, and then maybe we will find more problems along the way. as usual, i'll put in a plug as to question why the department of public health has not had a full audit in its complete history and i got that from reading different sources. so maybe we could have someone volunteer the dph to do it, and let's see what we can find there. i'm sure there's plenty of money to fund everyone's pet project.

thank you. >> supervisor elsbernd: thank you, mr. yep. any other speakers? seeing none, public comment is closed. president chiu without objection can we continue this to the call of the chair? mr. clerk, that will be the item. can you please read items 5 and 6 together. thank you very much. >> item 5, hearing on the recently published 2011-12 civil grand jury report entitled investment policies and practice of the san francisco employees retirement system. item 6 resolution responding to superior court on the findings and recommendations contained in report entitled investment policies and practices of the san francisco employees retirement system and urging the accepted findings and recommendations through his or her department heads and through the development of the annual budget. >> supervisor elsbernd: thank you. grand jury, thank you for your

patience. sometimes youfbjq z don't get immediate gratification and have to stick around and wait. why don't we let you go. >> thank you very much. 2 pm. i'm going to keep it short. mario choi, the foreperson pro tem of the civil grand jury. thank you for hearing this report, investment policies and practices of the san francisco employees retirement system. on behalf of the grand jury, my colleague, sharon gadbury, chair of the investigative committee as well as jean and helen will be speaking on behalf of the grand jury. thank you. >> supervisor elsbernd: thank you. a quick question, is this our last one for the year? >> yes, it is. >> supervisor elsbernd: sorry. and i wrote good morning. good afternoon. my name's sharon gadbury, and i

chaired the grand jury investigation of the investment policies and practices of the san francisco employees retirement system, which we're calling the pension fund. i want to respectfully acknowledge the board of supervisors audit and oversight committee who have read our report and are here today to consider adopting our findings and recommendations. i also want to acknowledge the board and staff of the pension fund, the san francisco controller's office and the mayor's office who responded to our findings and recommendatio recommendations. just a note, the amount of money we're talking about here, and saw all of the problems we had to say that this pension fund is $15 billion, and this is one of the reasons that the grand jury wanted to investigate the investments because they haven't ever been

investigated by a grand diswriry before. the 15 billion in the pension fund is held in trust for city employees who contribute deductions from their paycheckses and they are guaranteed benefits over their lifetime. the taxpayers of the city of san francisco also contribute to the fund through the city's employer contribution. the san francisco city charter vests the board of the fund with the responsibility of managing the fund prudently, solely for the benefit of retirees and their dependents. the fund is required to be 100% capable of meeting its liabilities for a minimum of 20 years. the primary objective of the pension fund as it is and should safeguard principle. the next most important objective is to pay out benefits

to the fund's retirees. the third objective, subordinate to the first two, is to achieve a return or a yield on investedñ funds. the jury has found that every as aspect of our investigation finds retaining higher returns funds' boards and managers thus that he have reversed the priority of prudence for managing public funds. san francisco's retirement board investments a main priority and all ignores the primary objective of safeguarding principle. the jury learned that after losing approximately $6 billion or nearly 40% of its principle principle -- principal in 2008-09 the board continues to this day with the same investment advisers, his

managers, the same bank, and the same high risk investment policies and practices as it had before the losses. we think that if the board, the consultants, and the managers were truly concerned with preserving capital, they would have seriously questioned and the advisors that led up to the losses. they would certainly have been interested in whether they could have done anything differently to avoid the losses, and whether they need to do anything differently in the future. the pension fund needs to take the goal of preserving capital seriously, because the cost of another catastrophic loss would be borne heavily by the city budget which is already straining to repay the fund's past losses. one result of the 2008-09 losses is that the san francisco

pension fund is underfunded. it is currently valued at approximately 15 billion. but actuaries estimate the funding level needs to be over $18 billion to continue meeting retirees. assuming continuing investment gains and no more investment losses, the city, as employer, needs to take at least $2 billion from its treasury, from now until 2032 to make up for the 2008-09 underfunding. note from this chart, which i don't know if the camera can get that, but the actuarially projections presented to the board showed that if investment returns do not meet expected levels city payments will rise even more and continue to be high, until the year 2032.

are more losses, the city would need to pay hundreds of millions of dollars a year, and still might not restore funding by 2032. one of the immediate drivers of high risk policies and practices is the assumed investment return. at this time, i'd like to introduce helen blum. she will review the jury's findings on the assumed investment return. she will also answer the responses that the fund board and staff have made to the jury's findings and recommendation with respect to the assumed investment return. helen. >> hello. i'm helen bloom. i am going to speak about the investment return assumption. the funding level for the fund depends on a number of unknowable future events, one of which is the estimate of the fund's future investment returns. since according to the city charter the fund must be fully funded an increase in the

estimate of the future returns can result in a corresponding decrease in the need for current city contributions. the reverse is also true. a decrease in the estimate of the future returns can result in the need of the city to increase its current contributions. the assumed rate of return now is 7.66% through 2013. it will then go to 7.5%. the assumed rate of return is set by the retirementrmjb there is pressure on the board from the city to keep the assumed rate of return high so that the city does not have to put more money into the fund. money put into the fund by the city means less money available to pay for other city obligations. there is also pressure on the retirement board to keep the assumed rate of return high from union officials so that employees are not required to make more of a contribution. thus the retirement board is under pressure to keep the assumed rate of return high for city budget and its employees. but the flip side of this is that the long-term financial

health of the fund would be health of the fund would be better served.0 then the fund would be under less pressure to try to attain such high returns and could invest in less risky investments. in the long run the taxpayers will have to pay into the fund if the volatile investment!:jú-ñ decrease in value. the board relies on an investment consulting firm to recommend the investment rate return rate assumption. the consulting firm told the jury that its formula is prient proprietary and it will not divulge it to the board. the board assumes the rate for actuaries usend estimating the funding level. 9 city sets the contribution rate for the next fiscal year which is based in part oft final earnings from the preceding fiscal year which ends on june 30. major fluctuations. in 2011 the five year returns were 4.2%, 10 year were 6.it 2%,

5 year returns for 2012 were 1.02%. given the current investment climate the jury does not think that relying on a 7.5% return for the future is prudent. that is why our recommendation no. 2 states adopt a realistic and consistent formula for estimating the assumed expect investment return rate. we find the response by the board and the executive director to not be persuasive. first we don't believe relying on statistics or investment returns that start after the 2008 year is prudent. there will also be economic downturns and it is not prudent to ignore those results. the jury also believes that relying on a 20 year return rate number is too long a window give the furpt investmentoéjébñ cond. the consulting actuary recommending reduction in the assumed investment return rate and the board adopted the smallest rate reduction that was presented. the jury believes that a further rate reduction would be prudent

for the long-term economic health of the fund but it is politically unpopular to approve it because of the short-term hardship this would cause. our findings 5 and 6 support our recommendation no. 2, in finding five we state the fund can artificially reduce the city's estimated liabilities by increasing its investment return assumptions for future years. this is merely a statement of fact. this finding was -- had nothing to do -- this finding had nothing to do with whether the board or staff was unethical. findings 6 states, the -- >> supervisor elsbernd: a quick question on that finding. as you know i served on the board, i'm one of the anonymous board members quoted. i don't remember any discussion whatsoever, any evidence in any public hearings ksz and you tell me if you had it in any public discussions of the fund talking about increasing its investment return number. we've talked about decreasing it from 775 to 75. was there any discussion about going higher?

>> no. >> supervisor elsbernd: well you're saying -- you have a finding here that says the fund can artificially reduce the city's estimated liabilities by increasing its investment return. i agree, it could. but -- >> it says -- >> supervisor elsbernd: okay. but respectfully, i would suggest if you're going to put in a hypothetical like this, maybe it should be grounded in some sort of fact. otherwise you could say things like, yeah, i mean i could come up with all kinds of hypotheticals that have no fact. i mean no one even jokingly said so i just get very concerned when a document goes out with the grand jury stamp of approval that has something that has zero basis in fact. so be careful with that. but go ahead. >> finding six states the unreal ivenlgly high assumed investment return rate of 7.66% is driven

by concern far the mandated member with -- in conclusion the grand jury believes this to be true and we urge you to recommend our recommendations. thank you. >> thank you, helen. we did not mean to impugn the integrity of the board. we said that they can decrease the contribution by increasing the estimate. and -- >> supervisor elsbernd: i just -- >> disagree with that fact? >> supervisor elsbernd: no. but i think a grand jury report, if it wants to be complete, would have had the sentence following that, however, there has been no discussion of this happening. because members of the public are going to read this and have not had opportunity to go to meetings like you. they might assume from reading this, because you did not complete your thought that that has been discussed. all i'm asking is about six more

words, would have made it a complete report. >> we really didn't look at that aspect. we looked at the aspect of what can happen with this particular -- that this number can affect the city's contribution up or down by hundreds of millions of dollars. even a half a percent is worth 50 million, right there. and that's what we were trying to convey -- >> supervisor elsbernd: i am not disagreeing with you. >> i'm sorry ifbyjg7 it soundedf we were thinking you were considering raising it. >> supervisor elsbernd: i'm not disagreeing with you. i don't think you've done a complete job. >> we did not consider that. one rationale that many pension funds, and their investment advisers have put forward for their high risk investment programs, is that they are investing for the long-term. and therefore can absorb more risk and ill liquidity in their portfolios. this5jpmi rationale is not suppd

in research that actually compares the experience of public funds in high and low risk investing over time. jean niños will answer the pension's funds responses to our findings and recommendations around the fund's investment policy. and i might mention here that jean is reading the report of mark biosay who is involved in an emergency right now so she's reading his report. thank you. >> supervisor elsbernd: just so we can get a gauge of time how many other reports do we have left? just within your own -- how many more speakers do you have? >> then i will end up. >> it will be short. >> supervisor elsbernd: that's fine. >> i'm weak from hunger already. excuse me. prior to 1984 the california public pension funds were limited by law to invest in no

more than 25% in equity investments. and mainly those were to be in blue chips. prop 21, which was passed in 1984, lifts this restriction thus allowing public pension funds to invest in a wide arrange of events as they see fit. this is -- am i not talking into it? well. this became known as the yale model of investing. as yale university was one of the first institutional invests to participate -- investors to participate in high risk investing their method for beating the market became a model for many other pension funds. the san francisco pension fund adopted the yale model in 1984, after passage of prop 21, and started to diversify their investment allocations at that point. besides public equities, the fund now also invests in such alternative investments as foreign equities, foreign bonds,

real estate limited partnerships, commodities, venture capital, private equities, distressed debt, and derivatives, such as collateralized mortgage backed securities to which we've heard much about in this last -- credit swaps and securities loans. once the pension board adopts the investment return rate assumption, also known as the assumed rate, it directs their investments that will possibly achieve this goal. with the lowered assumed rate, less risky investments are recommended. with the higher assumed rate, more risky investments will be recommended. the government accounting standards or the gasb, policy for public pension funds, sets -sets -- or they set the py

for public pension funds and allows -- discount liebles by using the expected rate of future investment returns. this is unlike private plans, and their peers in other countries which cannot use these expected rates of future returns or what some are called imaginary numbers, especially when the pension funds are underfunded. a first rule in investing is knowing that riskier investments have a higher potential to make or lose large amounts of money. this includes loss of principal, safer low risk investments seldom lose principal. a second rule of investment is that the higher the risk factor for the -- the more volatile the fund becomes. a third rule of investments is that the