During the winter break of her freshman year at the
University of San Francisco in 1968, Clare Murphy took a
part-time job at the San Francisco Employees' Retirement
System. It wasn't a casual choice. Her father had worked for
the city as a data processor, and her grandfather had driven a
trolley on Geary Street: Murphy had civil service in her blood.
For $3.13 an hour the 19-year-old supervised seven other
college students in a six-week project to alphabetize some
30,000 member files that had been organized by number.
The following summer she returned and received a new
assignment. The task: Put the member files back in numerical
Despite that lesson in bureaucratic capriciousness, Murphy
decided to follow in the family footsteps and work for the
city. After earning her master's degree in 1973, she rejoined
the pension fund; since then she has worked nowhere else. Three
decades later Murphy is the executive director of the $12.7
billion San Francisco retirement system.
For Murphy, constancy has been well rewarded. Head of the
pension fund since 1985, she has helped transform a woefully
underfunded plan into one of the few public retirement systems
that is overfunded. A Wilshire Associates survey of 64 state
retirement systems found that just 16 percent, or ten plans,
were fully funded or overfunded on a market-value basis as of
June 30, 2004. The funding ratio of the San Francisco plan,
which provides retirement benefits to 51,000 police officers,
firefighters and city and county employees, stood at 109
percent on a market-value basis, far above the median ratio of
83 percent for state plans, according to Wilshire.
What accounts for the plan's success? Credit restrained
benefits, a savvy, hands-on board and a history of innovative
investment strategies that have enabled the fund to return an
average annual 10.27 percent for the ten years ended March 31,
2005. That compares with a 9.49 percent median for public funds
with assets greater than $1 billion according to Wilshire data,
placing SFERS in the top quartile of the Wilshire ranking. Over
the past three years, SFERS has done even better against its
peers, returning an average annual 8.45 percent, versus the
6.83 percent median.
"San Francisco has been near the top of the heap for a long
time," says Keith Brainard, research director of the National
Association of State Retirement Administrators.
Though a relatively small, low-profile player in the
universe of public plans, San Francisco has repeatedly led its
peers into new asset classes, jumping into real estate in 1978,
venture capital in 1987 and emerging-markets debt in 1996.
"We're receptive to innovative ideas," Murphy says.
"The executive director and the trustees of the San
Francisco plan have open minds," says Jerome Booth, head of
research at Ashmore Investment Management in London, a SFERS
money manager. "It's very refreshing."
A straight shooter who engages her opponents in spirited
debate, Murphy, 55, oversees all SFERS operations, including
investment strategy, benefits administration and personnel
matters. Leading a staff of 77, she works closely with David
Kushner, the deputy director of investments, who functions as
CIO. Murphy also represents the system before the San Francisco
city council, known as the board of supervisors, and reports to
the seven-person SFERS board, which has final authority over
asset allocation and investment strategies. The board
president, Joseph Driscoll, a lieutenant in the San Francisco
Fire Department who holds an MBA and a CFA, has been a driving
force behind the plan's investment innovations since he became
a trustee in 1986.
San Francisco's pension success has been helped by the
fund's rare governance structure. For the vast majority of
public plans, city councils or state legislatures determine
retiree benefits. Since 1889, when fines and pawnshop fees
funded benefits for policemen, the San Francisco plan charter
has stipulated that voters must approve retiree benefit levels.
Proposals to boost benefits for public employees must undergo a
lengthy and public process before getting the go-ahead. First,
San Francisco's 11-person board of supervisors must vet any
proposal, examining its costs as determined by the SFERS
actuary. Then the supervisors vote on whether to put the
measure before the public. The entire process usually takes six
to nine months.
Between 1976 and 1996 cautious voters kept benefit levels
frozen at levels roughly 10 percent lower than the California
median. On two occasions during that period, voters rejected
efforts by police officers and firefighters to boost benefits;
they also turned down two attempts to change the charter so
that plan provisions would be determined by collective
bargaining rather than at the ballot box. Later, with markets
soaring, voters loosened the purse strings a bit. In 1996, 1998
and 2000, they authorized hikes for firefighters, police
officers and general employees, respectively, that increased
benefits by some 20 percent on average. SFERS benefit levels
are now near the state average for firefighters and policemen
but remain about 10 to 15 percent below median levels in
California for general employees, who represent 87 percent of
all SFERS members.
Thanks to SFERS' strong funding ratio, the city of San
Francisco, whose budget is perennially in deficit, enjoyed a
contribution holiday from 1998 to mid-2004. For the fiscal year
ended June 30, 2005, the city's contribution rose to $94
million, or 4.48 percent of payroll; it increased to about $138
million, or 6.58 percent of payroll for fiscal 2006. The
increases reflect enhanced wages and benefits and the lowering
of investment earnings assumptions in 2003.
SFERS' commitment to fiscal prudence puts it in sharp
contrast to troubled public pension plans throughout the
country. An extreme case in point: the San Diego City
Employees' Retirement System. Unlike San Francisco, which stuck
to a prudent benefits policy even in the heat of the bull
market, San Diego made a name for itself as a model of
profligacy and, possibly, self-dealing. In 1996 and 2002 the
San Diego plan trustees voted to allow the city to underfund
the pension system and boost retirement benefits at the same
time. The result: a 66 percent funding ratio and a $1.4 billion
shortfall for the San Diego plan and a downgraded bond rating
for the city that has prevented San Diego from borrowing at
reasonable rates. In May the district attorney for San Diego
County filed felony conflict-of-interest charges against six
former and current members of the system; the Federal Bureau of
Investigation and U.S. Attorney's Office are investigating
possible federal fraud and public corruption; and the
Securities and Exchange Commission is probing whether city
officials violated securities laws by failing to disclose San
Diego's financial plight to bond investors (Institutional
Investor, March 2005). Last month, in the wake of the ongoing
scandal, the city's mayor, Dick Murphy, resigned.
For its part, the San Francisco retirement system has been
well served by its seven-person board -- there are three
mayoral appointees, three representatives elected by active and
retired employees and one member of the city board of
supervisors -- which has strongly supported the fund's
innovative investment approach. Most important, SFERS has made
a substantial and largely successful bet on alternative assets.
The portfolio, which dates to 1987, includes venture capital,
private equity and distressed debt but notably does not embrace
hedge funds. The plan has also scored major gains from an
outsize stake in real estate.
The fund's overall returns have been consistently strong.
The ultimate beneficiaries, Murphy notes, are the city's
workers and retirees. "Every month we write 19,500 retiree
checks worth just under $40 million," she says. "It's wonderful
to be paying people what they earned, with real money."
AT THE HELM OF THE SAN FRANCISCO PENSION fund, Clare Murphy
radiates the confidence of the hometown girl that she is. Born
in San Francisco in 1949, she grew up the eldest of 11 children
in a crowded house in the working-class neighborhood of Glen
Park. Everyone in the family had a strong sense of public
service; Murphy's mother was a community activist focused on
crime. Today five of Murphy's brothers and sisters work for the
city and county of San Francisco, while two others work for the
states of California and Oregon.
Sharing a bedroom with three sisters and eating dinner in a
family of 13 inculcated both civics and civility, Murphy says.
"We'd discuss all sides of an issue, but in a civil fashion,"
she says. "I learned when to listen and when to hold firm to a
viewpoint. We all learned not to have fat heads."
Murphy attended Catholic schools, earning scholarships to
the University of San Francisco, where she earned a BA in
political science in 1971, and to Georgetown University, where
she took a master's degree in government in 1973.
That year Murphy signed on with SFERS full-time, landing a
management job. She began a four-year project to transfer the
accounts and assets of 5,500 teachers from SFERS to the
California State Teachers' Retirement System. "I was managing a
team, educating members, doing calculations and learning about
investments," she recalls. "I was completely hooked."
In 1976, Murphy became an assistant to the executive
director, a position that allowed her to work with her father,
Cornelius, who was leading a project to establish a new city
payroll system. "He was an exceptionally patient man," says
Murphy. Her father worked for the city for 33 years and enjoyed
a retiree's pension for 15 years before he died in 1996.
Murphy moved steadily through the ranks. In 1982 she became
the staff actuary, gathering data for the consulting actuary to
crunch. In 1985 the board of supervisors named her executive
director, a civil service position. Over the years she has won
the admiration of plan trustees and her colleagues in the
state, who praise her straightforward style and common
"She's a strong administrator who can say, 'Here's how
things work,' and she has the respect among the political
leadership to make those ideas prevail," says Rich Goss,
administrator of the California Association of Public
"Clare can rub people the wrong way when she tells them
things they don't want to hear," notes William Breall, a
cardiologist who served as an SFERS trustee for 15 years before
stepping down in 2004. "But I say, good for her."
Last year, for instance, Murphy urged caution when board
members tried to create a program that would allow retiring
workers to bank unpaid sick pay and comp time -- payments that
can total as much as $100,000 for a firefighter or a police
officer -- in tax-deferred accounts. "I was telling them that
this was complex and it would need to meet Internal Revenue
Service regulations, which hadn't been defined," Murphy says.
Fire and police unions persuaded the board of supervisors to
put the proposal before city voters in March 2004. It passed.
But within a week the IRS issued new regulations that
conflicted with the plan, which has not been implemented.
Murphy's managerial skills have been tested in SFERS'
investment division as well. Herb Meiberger, a midlevel
employee, works on cash flow and compliance issues, but since
1992 he has also served as a trustee, elected by plan members.
It's an inherently awkward situation. As an employee, Meiberger
is subordinate to deputy director of investments Kushner and
ultimately to Murphy; yet as a board member, he is part of a
group with authority over investment decisions. "It's been a
touchy situation," concludes Meiberger, adding that he has
voluntarily recused himself from participating in the annual
evaluation of the executive director.
Nonetheless, tensions have flared. In an unusual move
Meiberger in 1992 filed suit against Murphy and the board,
alleging that they were withholding information from him. The
parties settled when the board strengthened its open-records
policies and agreed to provide information in a more timely
manner. Meiberger also chides Murphy for a 2001 consultant's
study that suggested changing the city charter to allow SFERS
to use an outside actuary instead of employing one in-house.
"It was a bought-and-paid-for study," says Meiberger. "It was a
power grab by the executive director." Murphy says the board of
trustees ordered the study.
"Mr. Meiberger is expressing his own opinion, which is not
consistent with the board's view to date," she asserts. Murphy
has acted as the plan's actuary since July 2002, six months
after the previous staff actuary, Kieran Murphy (no relation),
disappeared at sea.
Despite the occasional controversy, Murphy has enjoyed
especially smooth relations with San Francisco's board of
supervisors -- not surprising, given that the system's strong
funding levels meant that no contributions were required from
the city for six years.
"If you add costs to a budget, that causes everybody's red
flags to go up," says Murphy. "But if you don't impose new
costs, you become to a degree invisible."
It wasn't such a rosy picture back when Murphy joined SFERS.
Inflation sparked by the oil shock of 1973 was triggering wage
increases and boosting employer pension contributions that for
firefighters and police officers would peak in excess of 100
percent of salaries in the early 1980s.
In 1976, John Barbagelata, a supervisor who had run a close
second to George Moscone in the race for mayor the year before,
tried to repair the system. He proposed that benefits for new
employees be cut by about 20 percent, back to the levels of the
late 1960s and below statewide averages. Voters supported
Barbagelata's proposal; benefit levels held steady for the next
In another act of fiscal prudence, voters agreed in 1980 to
amortize future benefit increases over 20 years instead of the
30-year period used by most public pension funds. Under the
previous method the plan would have approached but never
achieved full funding.
During the past two decades, bolstered by San Francisco's
judicious benefit policies, SFERS investment staffers, working
with board members, have developed the plan's top-performing
Aside from its outsize bets on alternatives (10.3 percent of
total assets, versus an average of 4.2 percent for public plans
surveyed by Nasra) and real estate (8.2 percent of assets,
almost double the level of its peers), SFERS' asset allocation
is generally in line with most public plans'. As of March 31
the fund kept 32.7 percent of assets in U.S. equities and 17.3
percent in international equities, 30.2 percent in fixed income
and 1.3 percent in cash. Roughly 80 percent of SFERS' assets
are actively managed and outsourced; about 20 percent are
The bond mix is a spicy one, and it has been a major driver
of performance. At the end of March nearly 10 percent of the
bond portfolio was in emerging-markets debt, 10 percent was in
high-yield corporates, and 10 percent was in high-yield
commercial-mortgage-backed securities. Over the past five
years, San Francisco's fixed-income investments have returned
an annualized 9.1 percent, nearly 200 basis points more than
their policy benchmark, an 80-20 blend of Lehman Brothers'
universal and global aggregate bond indexes. The San Francisco
plan's ace bond managers include Ashmore and Grantham, Mayo,
Van Otterloo & Co.
Less impressive is the plan's stock-picking prowess.
Equities have slightly underperformed, mostly because of SFERS'
international investments, all actively managed. In the 12
months through March, the fund's stock portfolio returned 9.52
percent, compared with 9.85 percent for its benchmark, which is
a blend of roughly two thirds the Russell 3000 index and one
third its international equity benchmark. Over the past five
years, stocks lost an annualized 2.04 percent, while the
benchmark lost 1.77 percent.
SFERS has benefited handsomely, however, from its relatively
big bet on real estate. Beginning with a $40 million investment
in the closed-end Coldwell Banker Institutional Fund III in
1978, SFERS has steadily deepened its exposure to the sector
and now includes co-investments in apartments and industrial
properties. Over the past five years, the plan's real estate
portfolio has returned an average annual 9.92 percent, about
even with the National Council of Real Estate Investment
Fiduciaries property index and well above the annualized
3.16 percent return of the Standard & Poor's 500
One of San Francisco's boldest investment moves seemed at
first terribly ill-timed: In September 1987, just a month
before Black Monday, SFERS became one of the first public plans
to invest in venture capital. It committed $30 million, or
about 1 percent of its assets, to Crossroads Group, a
Dallas-based fund of funds. Callan Associates, then the plan's
general consultant, endorsed the move, and Cambridge
Associates, which took over as chief consultant in 1989,
encouraged further alternative investments.
San Francisco's stakes in such top flight private equity
funds as Battery Ventures, Knightsbridge Advisors and Polaris
Venture Partners helped the plan's venture capital portfolio
deliver an average annual 22.6 percent return between its 1987
inception and year-end 2004. That is well above the 15.96
percent posted by the portfolio's benchmark, the S&P 500
index plus 5 percentage points.
But, like many investors in the bubble years, Murphy &
Co. made the mistake of overinvesting in venture capital, more
than doubling the plan's commitment to the asset class just as
valuations were reaching their peak in 1999 and early 2000.
Many start-ups backed by venture funds suffered significant
write-offs or write-downs after the bubble burst.
As a result, for the five years ended December 31, 2004,
SFERS' venture capital portfolio returned 12.5 percent,
compared with a 2.7 percent gain for its benchmark. During the
same period the plan's private equity portfolio did
considerably better, returning an average annual 3.6
Interestingly, while other public plans have moved into
hedge funds, San Francisco, the established innovator, has
steered clear. Says Kushner, "We're concerned about the lack of
transparency, high fees and the inability to benchmark-manage
hedge fund managers and strategies." Adds trustee E. David
Ellington, a lawyer and entrepreneur, "Now we'd be late to the
Through booms and busts the SFERS board has remained
unusually receptive to new investment approaches. "The trustees
are more willing than a standard public fund board to embrace
new ideas and think ahead of the curve," says Kushner, who
joined the system in 2001 after stints at ING Investment
Management in Atlanta and ICC Capital Management in Orlando,
Leading the way is board president Driscoll, a San Francisco
firefighter who estimates that he spends an average of 20 hours
a week on board matters, reading journals and reports and
meeting regularly with fund managers, often at his fire station
at 7:00 a.m.
"Joe's one of the brightest guys I've ever met," says
Ellington. "Before he proposes an idea, he makes sure that
senior people in the system know where he's coming from, and he
invites them to poke holes in his reasoning."
In 1996, Driscoll pushed SFERS to become one of the first
public pension plans to invest in emerging-markets debt,
beginning with a $100 million commitment to a fund run by
Boston-based Grantham Mayo. The fund, which invests mainly in
sovereign debt instruments, including defaulted loans, trade
receivables and Paris Club obligations, isn't for the
squeamish. It plunged 40 percent in August 1998 after the
collapse of the Russian ruble and the meltdown of Long-Term
"A lot of people got scared, and a lot of people got
nailed," recalls William Nemerever, who co-manages Grantham
Mayo's fixed-income group.
Not the San Francisco retirement system: It persevered. The
Grantham Mayo fund recovered and by the end of the year had
lost only about 25 percent. Since 1996 it has returned an
impressive 19 percent a year, compared with 12 percent for its
benchmark, the J.P. Morgan emerging markets bond index. Other
U.S. public pension plans have invested in the fund, but none
has invested an amount even close to that of SFERS, says
Nemerever. At the end of March, SFERS' investment in the fund
was valued at $260 million, representing 2 percent of plan
With Murphy's administrative support, Driscoll also helped
lead the board into sovereign debt investing. In 2002, SFERS
allocated $75 million to an emerging-markets local-currency
debt fund run by Ashmore. The fund holds positions in bonds,
interest rate swaps and other derivatives in about 20
countries. "The use of derivatives is problematic for some
investors, but these investments are not particularly high
risk," says Ashmore's Booth. "San Francisco was ahead of the
Over the three years ended in March, the fund's stake in the
Ashmore fund, now worth $109 million, has returned an average
annual 15.57 percent, about 240 basis points higher than its
benchmark, the J.P. Morgan emerging local markets index.
Driscoll also pushed for the plan's new currency-overlay
program, which began on July 1. The managers of the program,
San Franciscobased Barclays Global Investors, London-based
Pareto Partners and Bridgewater Associates of Westport,
Connecticut, will make targeted currency bets to reduce
volatility and, it is hoped, add alpha to 80 percent of the
plan's $2.2 billion international equities portfolio.
"Compared with other public pension plans, it looks like the
risk and diversity of our portfolio is at the edge of the
envelope," says Driscoll. "But maybe the other plans are in the
The fund's general consultant, Angeles Investment Advisors
of Santa Monica, California, is expected to complete an asset
allocation study in September. In July the board agreed to
accept Angeles Investment's recommendation to adjust its
current targets. The target for international equities would
rise by 5 percentage points, to 20 percent; U.S. equities would
be trimmed by 3 points to 28 percent and real estate by 2
points to 10 percent, reflecting a dearth of good investment
prospects. Still, SFERS is set to make its first investment in
international real estate with a $50 million commitment to AMB
Property Corp.'s AMB Japan Fund I. No other significant
allocation shifts are likely, Kushner says.
Despite the plan's investment successes, the city's pension
outlays are rising, to 4.48 percent of employee payroll in
fiscal 2005 and 6.58 percent for fiscal 2006. And the San
Francisco employee union is pressuring the city to boost
benefits for the 87 percent of active members who are not
police officers or firefighters.
"The city's contributions are going to keep growing and will
create a budgetary burden that the city had been relieved of
for a while," says Angeles consultant Leslie Kautz.
Political pressures would inevitably redound on Murphy,
especially if the city laid off workers or raised taxes to pay
for the benefit increase. But in San Francisco, it is the
citizens who determine the retirement benefits of city workers.
"It's the voters who make the commitment," Murphy says. "It's
our job to make good on the pension promise."