Has Yaki Got a Deal for You

It's one of those maxims as immutable as the law of gravity -- nothing can stand between politicians and a pot of money. Especially if that pot holds about $9 billion, just sitting there, begging to be exploited.

Like the city and county employees' pension fund.
For the past three months, retirement fund officials, prodded by Supervisor Michael Yaki, have begun very quietly examining ways to use some of the fund's $9 billion-plus in assets to back housing development projects in the city.

Apparently aware that tinkering with the pension fund is a sure-fire way to foment revolution among city retirees, Yaki and fund officials are downplaying their interest, insisting that the effort is only hypothetical at this point. "Right now this is purely in the exploratory phase," says Yaki.

But the exploration is proceeding full speed ahead, and the fund's staff is expected to report back to the Retirement Board within the next few weeks on the prospects of venturing into the potentially risky real estate development game. "There's an analysis going on but there's no target date," says Clare Murphy, the fund's executive director. "This is one of many investment opportunities that from time to time the board instructs staff to investigate."

As stewards of the money members are counting on for their golden years, pension funds tend to be cautious, investing conservatively and with the least possible risk. That usually means staying away from real estate deals, which can make millions or come crashing down depending on the whims of the market.

San Francisco's fund has fared well in recent years. It is currently overfunded, meaning it has more than enough money in the bank to pay out all the benefits to which members are entitled. About 16,000 retired workers or their survivors draw checks from the fund now, and about 26,000 current employees are contributing to the plan and may turn to it someday.

The fund's bountiful cash, of course, tempts politicians to devise ways of putting the money to creative uses. For Yaki, who sits on the retirement fund's seven-member board, creativity means backing housing development.

At his suggestion, the fund is exploring ways it might make money by guaranteeing financing for developers to build new housing. The fund wouldn't invest any actual cash in the developments. Instead, the fund would let banks and developers use its assets and pristine credit rating as collateral for bonds.

The fund would guarantee as much as $450 million in bonds, which would be sold and the money lent to developers for their projects. As long as the developers pay

back the money, the fund will suffer no losses. But if the developers default, the pension fund will be on the hook to pay off the bondholders.

In return, the pension fund would be paid as much as $1.5 million a year for providing the service.

The idea makes good sense in theory, Yaki says. Because the pension fund is so healthy, its backing would likely guarantee any bonds issued the highest possible credit rating. A good credit rating means the bonds could be sold with a low interest rate, and presumably developers could then borrow the money at slightly lower interest rates than standard bank loans.

But as Yaki acknowledges, the devil is in the details. The greatest risk to the fund is that a development company could default on its loans, leaving the fund to cough up cash to pay off the bonds.

Clearly, picking which projects to back will largely determine the fund's risk. Most likely, a private bank will actually administer the program. That bank's lending decisions may well decide if the cash is funneled to moneymaking projects, or money losers.

In order to protect itself from bad lending decisions, the fund will have to maintain close scrutiny on the program, Yaki says. "I would look at this with a very careful eye," he adds. "The bottom line is what is the return to the fund, and what is the risk?"

Murphy says the fund's experts are still researching the idea, so many of the details have not been fleshed out. "Right now there is no program," she says. She and Yaki expect that if the idea flies, the program would be closely modeled on one already run by the $65 billion California State Teachers Retirement System.

Bill Rogers, a CALSTRS spokesman, declined to provide information on the teachers' fund's administration, but it appears similar to what San Francisco is contemplating.

Last November, for instance, CALSTRS guaranteed $1 million in bonds for a loan to a metal plating company to build a manufacturing plant in Oxnard. Because of the CALSTRS backing, the bonds received the highest ratings.

San Francisco's program isn't a done deal, and Yaki says he will back off if the fund's staff decides it's too risky. Richard Piket, the fund's portfolio manager, has already expressed some qualms about the notion.

In an Oct. 22 memo to the Retirement Board, Piket noted that the program "would appear to be complex and costly to administer and would expose the Retirement System to a new long-term credit risk that would require careful internal consideration."