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Smart Voter
Alameda County, CA November 7, 2006 Election
Measure M
Police and Fire Retirement Board Investments
City of Oakland

Charter Amendment - Majority Approval Required

Pass: 59,105 / 68.7% Yes votes ...... 26,924 / 31.3% No votes

See Also: Index of all Measures

Results as of Dec 4 5:41pm, 100.0% of Precincts Reporting (273/273)
Information shown below: Fiscal Impact | Impartial Analysis | Arguments | Full Text

City of Oakland Charter Amendment Measure. Shall section 2601(e) of the Charter of the City of Oakland be amended to provide that the Police and Fire Retirement Board shall make investment decisions regarding common stocks and mutual funds in accordance with the prudent person standard as established by court decisions and as required by the California Constitution?

Fiscal Impact from Oakland City Auditor:
The Oakland Police and Fire Retirement System (PFRS) was established in 1951 to operate under local control with a Board of Directors. In 1976, the plan was closed to new participants while it was to continue to provide retirement benefits to sworn police and fire personnel remaining as members.

The PFRS Board continues to review and direct the plan investments relying on investment managers to invest PFRS funds in a diversified portfolio of investments in conjunction with oversight from financial advisors. Currently, the City Charter does not permit the PFRS Board to make investment decisions solely in accordance with the prudent person standard prescribed by the California Constitution. The PFRS Board cannot invest more than 50% of the PFRS fund in equities and is limited from investing in stocks that have not paid dividends in the last five years. The Board may override this prohibition on a case by case basis. Accordingly, many stock growth investments may not be utilized and these investment restrictions prevent the Board and its investment managers and advisors from investing in the mix of instruments determined to be most prudent to maximize investment returns.

The plan has not been able to meet the assumed actuarial rate of 8% which has a direct impact on the overall unfunded status. The unfunded liability of the plan has grown from $200 million to $268 million based on a valuation of the plan at July 1, 2002 through July 1, 2005. The City of Oakland is responsible for the unfunded liability. Investment in growth securities may, when successful, reduce this unfunded liability.

The prudent person rule required by the State Constitution will provide the PFRS Board with the authority to implement investment strategies relying on the expertise of its financial advisors and investment managers. The prudent person standard is nationally recognized as the measure for performance of fund managers.

s/Roland Smith
City Auditor

Impartial Analysis from Oakland City Attorney
This measure would amend Article XXVI of the Oakland City Charter to provide that the Police and Fire Retirement System ("PFRS") Board shall make investments regarding common stocks and mutual funds in conformity with the prudent person standard and remove current investment restrictions that (1) prohibit investment of more than fifty percent (50%) of the PFRS funds in equities (stock and mutual funds) and (2) prohibit investment in non-dividend paying stocks unless the Board approves such investment in advance on a case-by-case basis.

Article XXVI of the Charter created the PFRS to provide retirement benefits for sworn members of the Police and Fire Departments and established the PFRS Board and its duties. The California Constitution and the Charter grant the Board the exclusive control of the administration and investment of the PFRS funds. The PFRS retirement plan was closed to new members in 1976.

The proposed amendment is in accord with the requirements of the California Constitution and applicable law establishing the obligations of Boards and Board members of public pension systems. Article XVI 17 of the California Constitution, which requires that PFRS and other California public retirement boards comply with the prudent person standard in managing retirement funds, provides in pertinent part:

"3. Board members shall discharge their duties with the "care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with these matters would use in the conduct of an enterprise of a like character and with like aims . . ."

"4. The Board shall "diversify the investments of the system so as to minimize the risk of loss and maximize the rate of return, unless under the circumstances it is clearly not prudent to do so."

In selecting investment advisors, approving the purchase of common stocks and mutual funds and in determining the percentage of the PFRS funds that may be invested in common stocks and mutual funds, the prudent person standard requires that the Board make such inquiry and take such action as may be necessary and appropriate to determine that its investment decisions are sound.

The proposed amendment would grant the PFRS Board the discretion to authorize its investment advisors to purchase non-dividend paying common stocks without obtaining advance approval from the Board if the Board determines that it is prudent to do so. The proposed amendment also would grant the PFRS Board discretion to determine the percentage of PFRS Fund that may be invested in equities (common stock and mutual funds) based on the prudent person standard.

The Charter requires that the City insure that the PFRS funds are sufficient to pay the retirement benefits specified in the Charter. If the investment return on PFRS funds increases after passage of the proposed amendment, the City's obligation to insure payment of the retirement benefits specified in the Charter would be reduced; alternatively, if the investment return on the PFRS funds decreases after passage of the amendment, the City's obligation would be greater.

s/John Russo
City Attorney

  News and Analysis

Oakland Tribune

Berkeley Daily Planet The Montclarion
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Arguments For Measure M
This measure is proposed by the Board of Administration of the Oakland Police and Fire Retirement System (PFRS) and was approved for placement on the ballot by the City Council's Rules and Legislation Committee, City Council and City Administrator's Office.

Section 2601(e) of the City Charter currently prohibits the PFRS Board from investing more than fifty percent (50%) of the PFRS fund in equities (stock and mutual funds) and requires that the Board invest only in stocks that have paid dividends for the past five years unless the Board, on a case-by-case basis, approves investment in each nondividend- paying stock in advance of purchase. These restrictions tend to limit earnings potential on the plan's portfolio, which results in the need for a greater contribution of City funds to pay for retirement benefits.

The proposed Charter Amendment will replace Section 2601(e) with the Prudent Person Standard as defined by the California Constitution. This investment standard is widely used throughout the public pension industry and is observed by systems such as the City and County of San Francisco Employees Retirement System (SFERS) and the Los Angeles County Employees Retirement Association (LACERA). Approving this amendment will expand the Police and Fire Board's opportunities to potentially increase its investment returns within prudent levels of risk and allow the Board and its investment managers to invest in the mix of instruments they determine to be most prudent to maximize risk-adjusted investment return based on changes in economic and market conditions. Improved investment returns would result in reduced employer contributions on the part of the City. These funds would then be freed for other uses.

s/Robert P. Crawford
President, PFRS Board
s/William J. Hubartt
PFRS Board Member
Oakland Resident

(No arguments against Measure M were submitted)

Full Text of Measure M
"MEASURE AMENDING CITY CHARTER SECTION 2601 (E) TO PROVIDE THAT THE POLICE AND FIRE RETIREMENT BOARD SHALLMAKE INVESTMENTS IN ACCORDANCE WITH THE PRUDENT PERSON STANDARD AS REQUIRED BY THE CALIFORNIA CONSTITUTION", Which Will Remove Investment Restrictions That Currently (1) Prohibit The Board From Investing More Than Fifty Percent of the Retirement Fund in Equities (Stock and Mutual Funds) And (2) Prohibit Investment In Non-Dividend Paying Stocks Unless The Board Approves Such Investment in Advance On A Case-By- Case Basis


WHEREAS, Article XXVI of the Oakland City Charter established the Police and Fire Retirement System ("PFRS") to provide retirement benefits for Police and Fire Department sworn employees and created the Police and Fire Retirement Board to exclusively control the administration and investment of the funds of the system (the "Police and Fire Retirement Fund"); and


WHEREAS, Oakland City Charter section 2601 (e) provides that the total amount of retirement system funds invested in common stocks and mutual funds "shall not exceed fifty (50) percent of the book value of all invested funds of the retirement system."; and provides further that the Police and Fire Retirement Fund may be invested only in common stocks that "at the time of purchase, have paid cash dividends for not less than five years next preceding the date of investment or prior to the purchase of such stocks, the Board shall expressly approve purchase of same by motion adopted with not less than five (5) Board members voting in favor of such purchase"; and


WHEREAS, the California Constitution requires that the PFRS Board and other California public pension boards discharge their duties and exercise their powers in accordance with the prudent person standard and "diversify the investments of the system so as to minimize the risk of loss and maximize the rate of return, unless under the circumstances it is clearly not prudent to so; and


WHEREAS, the prudent person standard is well established by court decisions and is consistent with the standard that the Employment Retirement Income Security Act ("ERISA") has established for private pension systems; and


WHEREAS, based on a survey of other city and county retirement systems' investment guidelines and the recommendation of the Police and Fire Retirement Board's investment advisors, allowing the Board to make investments solely in accordance with investment return and maintain a prudent investment position; and


WHEREAS, for the foregoing reasons, the City Council and the City of Oakland Police and Fire Retirement Board desire to amend City Charter section 2601 (e) to permit the Police and Fire Retirement Board to invest the PFRS retirement fund assets in accordance with the prudent person standard, thereby removing the aforesaid investment restrictions; and be it OAK-3


FURTHER RESOLVED: That the proposed Charter Amendment text shall be as follows:


Article XXVI of the Charter of the City of Oakland is amended at section 2601 (e) to read:
(e)The Board shall possess power to make all necessary rules and regulations for its guidance and shall have exclusive control of the administration and investment of the fund established for the maintenance and operation of the system, subject to the terms, conditions, limitations and restrictions hereinafter set forth. All funds received by the Board not required for current disbursements shall be invested in, but not limited to: . . .

(3) Common Stocks provided that:
a. The Board shall make investment decisions regarding total of such investments together with the total of all holdings of shares of diversified management investment companies (Mutual funds) (4 next below) shall not exceed fifty (50) percent of the book value of all invested funds of the retirement system in accordance with the prudent person standard as defined by applicable court decisions and as required by the California Constitution. . . .
c. Such stocks shall, at the time of purchase, have paid cash dividends for not less than five years next preceding the date of investment or prior to the purchase of such stocks, the Board shall expressly approve purchase of same by motion adopted with not less than five (5) Board members voting in favor of such purchase. . . .

(4) Shares of diversified management investment companies (Mutual Funds) provided that:

a. The Board shall make investment decisions regarding total of such investments together with the total of all holdings of shares of common stocks (3 next above) shall not exceed fifty (50) percent of the book value of all invested funds of the retirement system in accordance with the prudent person standard as defined by applicable court decisions and as required by the California Constitution. . . .


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