Health Service Board begins formal review of fiduciary duties and investment policy for trust assets

The Health Service System Board took the first formal step toward clarifying how it will oversee its trust fund assets, hearing a legal briefing that framed the core question as whether to adopt the San Francisco Treasurer's investment policy or chart another course.

Eric Rapoport, counsel to the Board, told commissioners he intended the session to answer two basic legal questions: "First, what is the fiduciary standard that applies to the Health Service Board's oversight of trust fund assets?" and "Second, is it appropriate for the Health Service Board to continue to leave trust fund assets invested with the San Francisco Treasurer's Office?" He cautioned the presentation was forward-looking and hypothetical, not a review of prior investment decisions.

Rapoport reviewed charter language (including sections 12.203 and A4.29) that establishes the Health Service System as a trust fund and authorizes investment of trust assets. He noted a voter-adopted 1937 provision limiting investments to "of the character legal for insurance companies in California," and said he was following up with outside counsel about the exact contours of that limitation. Board members asked whether the insurance-language implied a more conservative approach; Director Catherine Dodd explained the historical reason was the plan's self-insured origin in 1937.

Rapoport described recent changes that led to larger reserves — "HSS reserves grew to over $70,000,000" — and said the Board's terms of reference include investment-administration language that, in practice, requires adoption of a written investment policy statement, compliance monitoring, and qualified managers. He told the Board that "fiduciaries acting in accordance with the UPIA ERISA prudence standards generally find it appropriate to retain outside expertise when the fiduciaries themselves do not have the expertise necessary," recommending the use of third-party investment advisors if commissioners lack in-house expertise.

Several commissioners favored codifying the practice the Board has followed by default, investing with the Treasurer's Office and including that in a written policy. Others warned the Board has not yet completed due diligence and reserved judgment on a final decision. Rapoport said the Board has two paths: adopt the Treasurer's policy formally or commission further expert review to consider alternatives.

The Board did not take a formal vote at the meeting; members directed staff and counsel to pursue additional legal advice and to return with specific options and an investment-policy draft at a later meeting. The Board paused for a scheduled break after the session.

What happens next: The Board is expected to receive outside-expert analysis and a draft written investment policy in a future meeting; any material change in how trust assets are invested would follow additional review and likely require a formal action by the Board.