The headline comes from Chris Tobe, a former trustee of the corrupt and deeply underfunded Kentucky pension fund turned SEC whistleblower. Tobe deemed the defeat of an incumbent board member of the $21.2 billion San Francisco City & County Employees’ Retirement System, Herb Meiberger, to be the result of hedge funds successfully ousting a determined critic. While we don’t have a smoking gun, here’s why that assessment isn’t farfetched.

Meiberger was a particularly experienced and well-qualified board member. He had nearly 25 years of experience on the board and previously had been a securities analyst with the pension fund. That would seem to make him difficult to dislodge.

Meiberger became a fierce critic of hedge funds for their opaque fees, which should hardly be a controversial position. We pointed out from the very inception of this website nearly ten years ago that hedge funds were no longer delivering on their promise of delivering “alpha,” meaning manager outperformance, which was the rationale for their lofty fees. But when CalPERS decided to exit all its hedge funds in late 2014, it sent shock waves through the industry. By the beginning of 2016, hedge fund managers were acknowledging close to a crisis, with widespread doubts about continued underwhelming performance, rising redemptions, and more and more funds offering fee concessions.

Yet the sort of debate that at least the less captured public pension funds were having became a controversy in San Francisco. From Pensions & Investments:

Mr. Meiberger was not the only board members who has issues with Chief Investment Officer William Coaker Jr.’s hedge fund investment plan, which was formally unveiled in May 2014. Most board members were opposed to the proposed 15% allocation of the system’s assets. But Mr. Meiberger cast the sole dissenting vote when a scaled-down version of the plan was approved in February 2015 that called for investing 5% of system assets in hedge funds.

A retired San Francisco police lieutenant, who had also been on the board but retired in 2012, contested Meiberger’s seat. Again from Pensions & Investments:

Mr. Meiberger…had made his opposition to hedge funds a prime campaign theme, warning that they were too risky and could cause major financial losses. He maintained that the election of Mr. Casciato….would result in the retirement system expanding beyond its initial $1 billion commitment into hedge funds. Mr. Casciato insisted he was not for or against hedge funds but would judge each investment on its own merits. But Mr. Casciato’s political advertisements, which were run on Facebook and YouTube in social media savvy San Francisco, cast Mr. Meiberger as an “obstructionist” who was costing the retirement system millions of dollars in investment gains because of his “no” votes on potential investments. Mr. Meiberger….said the ads were false and that he was doing his job acting as a fiduciary in vetting investments. In his own YouTube video, Mr. Meiberger played up his opposition to hedge funds. “I have seen San Francisco shift from a community where people help each other into being a playground for the rich,” Mr. Meiberger said in the video. “Billionaire hedge fund managers are making money off your backs.”

Yves here. There are several points worth noting:

The “obstructionist” claim is the sort of thing you’d hear from the pension fund’s staff. The very use of that frame points to the same role reversal of trustees being deferential to the board that we’ve seen at CalPERS and other public pension funds.

Unions play a big role in public pension fund elections. The Pension & Investments focus on the social media campaigns seems off base. An almost certainly bigger factor is that a former cop could count on getting the votes of both police unions members and employees of the county sheriff’s department. It is not uncommon for unions, who have close if sometimes fractious relationships with public pension executives, to seek to oust troublesome board members at the behest of staff by backing candidates more friendly to staff or even recruiting opponents. And unions tell their members how they should vote in elections and press them to be sure to cast their ballot.

The results are not inconsistent with the police backing being decisive. While the margin of victory superficially looks too large for that to have taken place, with Casciato getting 62% of the vote to Meiberger’s 32%, policemen and sheriff’s department employees probably account for roughly 15% members of the pension system1. While this alone is far from enough to explain the results, an additional factor that would give the union more sway was that turnout in the election was low, with only 27% of the system’s members voting. Finally, other unions are likely to have fallen in line with the staff/police union pick.

So here again we see how good governance at public pension funds is stymied. A highly qualified board member with a long record of service is turfed out after he persists in crossing staff on what he regards as a questionable investment decision. This shows how little tolerance pension employees have for nominal supervisors they perceive to be making their life too difficult. And the fact that staff can so easily undermine a critic (and worse, have gotten board members and beneficiaries to internalize their world view) speaks volumes to why public pension funds are deeply corrupt and in desperate need for reform.

1 San Francisco County has 3,461 “peace officers” versus total employees for San Francisco of roughly 27,000. This list does not include members of the sheriff’s department, and it seems likely, given that the county presumably does not deliver much in the way of social services, that enforcement personnel would represent a higher proportion of total employees.