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Tapping Pension Funds

A CRITICAL VOTE next Wednesday by the Department of Water and Power’s Retirement Board could reduce the DWP’s contribution to its pension fund and threaten long-term retirement benefits.

The board’s two elected members were surprised to learn of the proposal last week, and how the DWP is dealing with a drain on resources caused by payouts to management-level employees and financial assistance to Mayor Jim Hahn’s administration to help pay off the city’s debt.

A decades-old policy affects how much the DWP pays into the pension fund, which is valued at around $6 billion. The proposal to lower that contribution was triggered by the recent sale of older stocks, which raised the value of employees’ pension benefits. If the DWP were to meet its obligation to contribute amounts equal to such benefits, it would have to increase its contribution by 24 percent. A fund consultant advises the board to vote against contributing more this year.

Pension funds everywhere got hurt in 2002 and 2003. The DWP’s pension fund lost $140 million in short-term investments, during a time when it was investing with little internal oversight, according to pension-fund staff members. The fund lost a total of $600 million, leading to a sale of older stocks last year to gain back some ground. That prompted Paul Angelo, vice president of San Francisco actuarial firm the Segal Company, to visit the DWP’s pension-fund board last Tuesday.

Angelo informed the board that since 1937, when determining the DWP’s contribution to the pension fund, the policy has been to “set investment amounts aside in good years to help cover shortfalls in bad years,” a process known as “smoothing.” If the DWP were to set aside its investment amounts this year, Angelo said, it would have to increase its pension-fund contribution by $104 million. Angelo acknowledged that his firm approved this policy just last year. Sticking with it now in light of such a high turnover in stocks “set off alarm bells,” said Angelo, urging the board to change its direction.

The board’s elected members wanted to know why they were being confronted so suddenly with a dramatic shift. “It seems like we are the only ones who do not know about this,” said board president Javier Romero. “Staff should have talked to us,” vice president Lilly Calvache said. The board’s appointed members — the DWP’s acting general manager, Henry Martinez; chief financial officer Ronald Vazquez; and Water and Power commissioner Gerald McCallum — remained virtually silent. Acting plan manager Robert Rozanski, who also is the DWP’s assistant chief financial officer, said he had discussed the shift with Angelo. The proposal “has a comfort-zone feel,” Rozanski said.

Two factors distinguish the DWP’s pension fund from most others: It was among the last in the state to become “actively managed,” that is, to seek professional advice in its investment strategy; and the DWP, as a revenue-generating agency, feeds the city’s coffers, both in good times and bad. The city has become increasingly reliant on the DWP, hence the 11 percent rate hike in 2004.

Former pension board members say the role of DWP managers in overseeing the pension fund is worth watching too. They point to a recent retroactive pay raise for superintendents that will provide generously for people who have not paid into the fund. “It’s a golden parachute,” a former board member says. “The DWP has promised to pay money out, and is now trying to lower its contribution to the fund.”

Last Tuesday, after Angelo spoke, Brainard Simpson, of the accounting firm Simpson & Simpson, gave a tutorial on the Sarbanes-Oxley Act of 2002, which targeted fraud by publicly traded companies in the wake of Enron. A major step for the DWP pension fund would be to create a committee to interface with independent auditors, Simpson said. “There needs to be a person responsible who is not close to management,” he said.

 

THE DWP HAS FALLEN SHORT of modern standards for running a pension fund. Management calls all the shots. In 2001, following a report from the Boston Company that pointed to hundreds of millions of dollars in lost investment opportunities, the DWP hired Duamel Vellon, a former pension-fund manager with the city of Phoenix, Arizona. No investment officer oversaw the day-to-day investments of the DWP’s pension fund from October 2001 to October 2003, however. Vellon went on administrative leave earlier this year for reasons the DWP will not disclose. Vellon would not comment for this story.

The DWP filled the void on the pension fund with Adriana Rubalcava, a contract employee who was executive assistant to Frank Salas, the DWP’s former chief administrative officer and acting general manager who announced his retirement recently, after stepping down in the wake of the Fleishman Hillard public relations scandal. Rozanski, the DWP’s assistant chief financial officer, later took over as pension-fund manager, in 2004. As a DWP officer, he reports to Vazquez, the DWP’s chief financial officer and an appointee to the pension-fund board.

Employees have yet to receive a report for the 2004 fiscal year, which ended June 30. Next Wednesday, they will have just two elected members speaking for them on whether to allow the DWP to lower its contribution to the pension fund. Meanwhile, Martinez, Vazquez and McCallum will be wearing two hats: their management hat and their pension-fund board member hat.

And 8,000 DWP employees, particularly those who can see retirement on the horizon, may want to consider whether their interests are getting lost in the confusion.