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 older the beneficiaries, that means the more retirees, as opposed to$ jp active giving or donating people or contributing people, the less risky the funds investments should be to preserve the principal. these are not complicated rules of investments, and the jury was able to find numerous industry experts and research studies recommending these basic investment rules. the jury found that prior to 1984, the%( j@ fund grew stead, that's the san francisco fund, grew steadily with minimal volatility by taking advantage mostly of compound interest, thus assuring and -- a secure and predictable source of funds for retirees. >> supervisor elsbernd: just curious, in that analysis what

was the funded status of the city's retirement system in those years? >> we don't have that. >> supervisor elsbernd: you didn't do the comparison? you're using the funded status today to point out what you investment process, but then you go back in time, and you look at the investment style that you think is appropriate, but you did not do the other comparison to show what the funded status was of the city's retirement system in those years? >> (no audio). >> supervisor elsbernd: i'll trustee driscoll -- or trustee myberg erwho has the history tell us what our fund status was when we had this kind of investment style. but go ahead, continue. >> you want me to tell you no you? >> supervisor elsbernd: we'll let them get to it when they make their presentationed. >> the jury found prior to 1984

they invested in a more -- in a easy-going, low-risk. after 1984, the fund started to follow the yale model, investing in more alternative riskier investments, causing the fund to become more volatile, the return to become more volatile, while showing no significant increase in returns over the long-term. and has been underfunded for the last three years. thus facing more contributions by the city, and taxing our general fund. >> supervisor elsbernd: just as a side, jay, if you could also prepare, tell us what the city's contributions was in those years as a percent of payroll. >> and they're also facing a higher retiree active ratio than they had previously. for example, the fund since 1984 has the following -- volatility

of fund loss significant value in the dot-come crash of 2001 and as did most of us in our private funds. we all know about the domcom. it became over funded in the 2004 to 2007 when it was decided not to have employees or city contribute to the fund. >> supervisor elsbernd: i'm just curious. when the city hit that overfunded status, did you do the breakdown of the various investment categories that we have, and determine what investment category it was that led to that overfunding? i'll tease you. it was the alternative investments. but go ahead. >> (no audio). >> supervisor elsbernd: okay. i missed that point in your report. i wasn't sure. go ahead. >> the fund then lost 36% of its value in the 2008 to 2009 crash. the city must now use general

funds until 2015 to make up the fund shortfall. given these findings the the jury, with little efforts by using mainly google did an extensive search for the factual evidence of the success of various pension investment policies. the reports researched rather a low risk investment policy could equal or exceed a high risk investment policy. and one of the reports found that -- we researched found that the stanford institute for