Our Most Expensive Failure

Link: https://www.governforcalifornia.org/news/2023/12/1/our-most-expensive-failure

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Excerpt:

When launching GFC in 2011 it was my hope that we would see meaningful pension reform by 2020, but we have failed to achieve that objective and the negative consequences for public services and taxpayers have been enormous. As evidence, just look at the four-fold explosion in annual pension spending by the Los Angeles Unified School District this year compared to ten years ago:

Pension spending will keep exploding. That’s because California’s public pension funds still have inadequate ratios of assets to liabilities despite more than $200 billion of pension contributions and a doubling of the stock market since 2013-14.

Pension reform is not the only thing I got wrong. I thought it would be even easier to terminate California’s unnecessary spending on other post-employment benefits (OPEB), especially after the creation of Obamacare and that program’s generous federal healthcare subsidies, but LAUSD alone is spending $365 million on OPEB this school year. Together, pensions and OPEB consume one of every six LAUSD dollars, leaving that much less for classrooms and salaries. 

Author(s): David Crane

Publication Date: 1 Dec 2023

Publication Site: Govern for California

CalPERS, CalSTRS, Genworth Among Those Affected by Moveit Data Breach

Link: https://www.ai-cio.com/news/calpers-calstrs-genworth-among-those-affected-by-moveit-data-breach/

Excerpt:

The California Public Employees’ Retirement System, the California State Teachers Retirement System and Genworth Financial Inc. revealed that some of their clients’ personal information was involved in a data breach that hit third-party vendor PBI Research Services’ Moveit Transfer Application, used by thousands of organizations. 

PBI provides services to pension funds to identify member deaths so that proper payments are made to retirees and beneficiaries and to prevent overpayments or other errors. For life insurance firms like Genworth, the company helps identify the possible eligibility of beneficiaries for death benefits or for policies beneficiaries may not know exist.

According to CalPERS, while the data breach did not impact its information systems, it did impact the personal information of approximately 769,000 members, including retired members, some of whom are inactive members and may soon be eligible for benefits. The pension fund is offering free credit monitoring to retirees and beneficiaries with impacted personal information and is also mailing tips on how to protect their information. CalPERS is also providing information on its website and through its customer contact center.

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Genworth declined to elaborate on its June 22 SEC filing, in which it said it was notified by PBI of the breach and that it “believes that the personal information of a significant number of insurance policyholders or other customers of its life insurance businesses was unlawfully accessed.” Genworth stated it is “working to ensure that protection services are provided to those impacted individuals” and that it believes the breach did not impact any of its information systems, including its financial systems, and that there has not been any material interruption of its business operations.

Author(s): Michael Katz

Publication Date: 26 Jun 2023

Publication Site: ai-CIO

CalPERS Chief Investment Officer Musicco and Son in NBA Playoffs Courtside Seats Next to Billionaire Warriors Owner and Kleiner Perking Partner Joe Lacob. What Gives?

Link: https://www.nakedcapitalism.com/2023/05/calpers-chief-investment-officer-musicco-and-son-in-nba-playoffs-courtside-seats-next-to-billionaire-warriors-owner-and-kleiner-perking-partner-joe-lacob-what-gives.html

Excerpt:

CalPERS’ sense of privilege knows no bounds. The latest example is its Deputy Executive Officer, Communications & Stakeholder Relations Brad Pacheco unsuccessfully trying to ‘splain the very bad optics of Chief Investment Officer Nicole Musicco and her son getting NBA courtside playoff seats that are not available for purchase.

Even if Musicco was careful enough to have her receipt of these seats laundered through the box office, the pretense that a member of the general public could buy these seats is an insult to the intelligence of sports fans all over America.

….

Now one could argue that assuming Musicco bought the ticket, it’s still a sign of bad judgment for her to have gotten a courtside seat at a prized playoff game, the sort normally reserved for the connected and famous, and not state employees.2 But sports enthusiasts, season ticket resellers, and sports insiders all say no way, no how could Musicco have obtained these tickets, whether nominally purchased or not, without connected insiders making them available to her.

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But aside from the decidedly bought-and-paid-for look, does Musicco winding up with these seats amount to a corruption problem under California law? If you read the relevant provisions with care, the answer is yes.

Musicco is at a level in the California government where she is required to make annual disclosure of outside income and her assets through a Statement of Economic Interests, more informally called a Form 700 (here is Musicco’s current Form 700). Form 700 filers are only allowed to receive a maximum of $590 in gifts from each source per year.

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But rest assured Musicco would not have been able to collect this perk merely as a former partner in a sports-investment-happy fund; it is her status as current CalPERS Chief Investment Officer that makes her a celebrity-equivalent.

And keep in mind that celebrity treatment, normally kept well out of the public eye, is the norm in private equity. We’ve repeatedly discussed the soft corruption of government employees getting lavish perks like trips to attractive destinations with the fund manager providing lavish entertainment (such as the Stones and Elton John for the biggest funds) and meals, all charged to the fund, meaning the investors, meaning ultimately taxpayers. Here’s a recent indiscreetly-shared example from LinkedIn, of a sumptuous banquet at Westminster Abbey, of an annual meeting for Coller Capital, one of the largest private equity secondary investment firms (i.e., they buy the existing interests of limited partners). For once, enough gold to make even Donald Trump happy!

With that largess as not unusual, no wonder Musicco has come to see special treatment as normal.

Regardless, California takes an indulgent posture toward CalPERS, ignoring sins like cooking its books and covering up employee embezzlement.7 Remember, even in its pay to play scandal, where former CEO Fred Buenrostro was caught taking paper bags of cash, it was the Department of Justice,not the California Attorney General, that successfully prosecuted him, resulting in a four-and-a-half-year prison sentence. Even though the general public will take offense at the latest chicanery, CalPERS’ status in California as too big to fail apparently means it is too big to be disciplined.

Author(s): Yves Smith

Publication Date: 18 May 2023

Publication Site: naked capilism

CalPERS and CalSTRS Know Fossil Fuel Divestment is a Recipe for Disaster

Link: https://alec.org/article/calpers-and-calstrs-know-fossil-fuel-divestment-is-a-recipe-for-disaster/

Excerpt:

In the Golden State, the California State Teachers’ Retirement System (CalSTRS) and the California Public Employees’ Retirement System (CalPERS) are waking up to the fact that divestment hurts retirees and taxpayers.

CalPERS and CalSTRS are two of the largest pension funds in the country (by both membership and portfolio size). As California Senate Bill 252, a bill calling for fossil fuel divestment from public retirement systems in California, continues to move along in committee, CalPERS and CalSTRS have publicly opposed the bill because it conflicts with their duties as pension plan managers.

As ALEC VP of Policy Lee Schalk and I mentioned in our OC Register column last month, politicized investment strategies are a recipe for disaster. Research from Mike Edleson and Andy Puzder found that ESG investing yields lower returns than investing without political constraints. Additionally, researchers at Boston College found that ESG has failed to achieve its stated social goals.

Both CalPERS and CalSTRS realize that divestment hampers their ability to put members’ retirements benefits first, and the research shows divestment does not achieve its stated social goals. 

Author(s): Thomas Savidge

Publication Date: 28 April 2023

Publication Site: ALEC

CalPERS’ Refusal to Put Clearly Insolvent Long-Term Care Insurance Plan in Bankruptcy Increases Harm to Policyholders and Makes Board and Responsible Executives Liable

Link: https://www.nakedcapitalism.com/2023/02/calpers-refusal-to-put-clearly-insolvent-long-term-care-insurance-plan-in-bankruptcy-increases-harm-to-policyholders-and-makes-board-and-responsible-executives-liable.html

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The CalPERS long-term care fiasco continues, with the board and staff taking a course of action that increases harm to policyholders by continuing to bleed them rather than put the program in bankruptcy.

For those new to this train wreck, the public comment at the February 14 CalPERS board meeting by policy-holder and certified financial planner Lawrence Grossman provides an introduction. A key bit of background is that state legislation allowed CalPERS to jump on the long-term care insurance bandwagon in the 1990s. Most of these insurance plans have gotten into a world of hurt by underestimating the degree to which proper elder care would extend lifepsans of policy-holders and overestimating the lapse rate (lapsed policies mean the premiums paid by dropouts benefit the remaining policyholders). But CalPERS’ recklessness and incompetence were in a league of its own.

CalPERS not only considerably underpriced its policies compared to commercial competitors, but it made matters worse via giving CalPERS policyholders the options of lifetime benefits (as opposed to fixed dollar benefits) and inflation protection. Inflation protection would seem like an incredible promise for any long-term insurance scheme. Yet the policies were advertised as CalPERS policies, not those of a free-standing “CalPERS Long-Term Care Fund,” as in not backed by CalPERS or the state of California.

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Four years later and things are going according to CalPERS’ abusive plan. Even though Judge Highberger clearly rejected CalPERS’ position that it can violate policy terms and raise premiums, CalPERS has continued to increase premiums because the court so far has issued only preliminary decisions. Note these increases are vastly in excess of those implemented by commercial carriers.

Author(s): Yves Smith

Publication Date: 15 Feb 2023

Publication Site: naked capitalism

Investing Novices Are Calling the Shots for $4 Trillion at US Pensions

Link: https://www.bloomberg.com/news/features/2023-01-04/us-public-pension-plans-run-by-investing-novices-are-on-the-edge-of-a-crisis?cmpid%3D=socialflow-twitter-economics&utm_campaign=socialflow-organic&utm_medium=social&utm_source=twitter&utm_content=economics

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In the US, a lineup of unpaid union-backed reps, retirees and political appointees are the vanguards of a $4 trillion slice of the economy that looks after the nation’s retired public servants. They’re proving to be no match for a system that’s exploded in size and complexity.

The disparity is dragging on state and local finances and — together with headwinds that include a growing ratio of retirees to workers and lenient accounting standards — gobbling up an increasing share of government budgets. Precisely how much it’s costing Americans is hard to say. But a Bloomberg News analysis of data from CEM Benchmarking, which tracks industry performance, indicates that the price tag over the past decade could run into the hundreds of billions of dollars.

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The disconnect was on display at a 2021 investment committee meeting of the California Public Employees’ Retirement System, which provides benefits to more than 750,000 individuals. An external adviser warned board members that the boom in blank-check companies was a sign of froth in financial markets.

“I had never heard of those,” chairwoman Theresa Taylor told her fellow directors of the then-sizzling products known as SPACs, according to a transcript of the meeting.

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Systems are underfunded partly because public officials face greater pressure to fulfill today’s demands than to fund obligations 20 or 30 years away. And because hikes in taxes and contributions are unpopular, there’s an incentive to downplay the problem.

Instead, plans are investing in higher risk assets, which make up about one-third of holdings, according to data from Preqin. That allocation has more than doubled since just before the 2008 financial crisis as plans have poured $1 trillion into alternatives.

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Many pension advisers make smart recommendations: the guidance that CalPERS should stay away from SPACs, for one, was proven sound once regulators ramped up scrutiny of that market, which has all but ground to a halt. Yet it remains unclear how closely individual directors evaluate investments that get put in front of them.

“I served with one director for about 15 years and never saw him ask a question” about his system’s investments, said Herb Meiberger, a finance professor who sat on the board of the $36 billion San Francisco Employees’ Retirement System until 2017. A spokesman for the system said it takes governance and fiduciary duty very seriously, and that board members receive training to help them execute their duties.

Harvard finance professor Emil Siriwardane has researched why some US plans have put more money into alternatives. It wasn’t the worst-funded or those with the most aggressive performance targets. “By a factor of eight-to-ten,” the closest correlation is the investment consultants that pension plans hire, Siriwardane found.

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Canada’s detour from the American-style model began in the late 1980s, when Ontario’s government and teacher federation decided to reboot a plan that was invested in non-marketable provincial bonds. They set up the Ontario Teachers’ Pension Plan in 1990, concluding the province could save $1.2 billion over a decade by operating more like a business.

Ontario Teachers’ first board chairman was a former Bank of Canada governor and its first finance chief was a corporate finance veteran. It soon began investing directly in private markets and infrastructure, opened offices in Europe and Asia and acquired a large real estate firm. The system pays its board members close to what corporate directors make, and manages 80% of its investments internally. Those practices have put it on a solid financial base: Ontario Teachers’ says it’s been fully funded for the past nine years, with a current funding ratio of 107%.

Until the 2008 financial crisis, boards in the Netherlands — where traditional public sector pensions are common — looked a lot like those in the US. Then the country’s central bank was given authority to assess candidates. It looked at directors’ combined risk management, actuarial and other expertise.

Many smaller Dutch funds didn’t make the cut. The regulatory hurdles helped set off a wave of mergers that, over the past decade, has reduced the number of plans by over two-thirds. The system has sprouted professional directors who serve more than one at a time. 

Few US boards are following suit. Only 19 of 113 funds studied made changes to their board composition from 1990 to 2012, a paper published in The Review of Financial Studies in 2017 found.

 “A lot of funds in the US like the idea of transforming, want to transform, but don’t have the political fortitude to do it,” said Brad Kelly of Global Governance Advisors, a Toronto-based firm that works with US and Canadian pension funds.

Author(s): Neil Weinberg

Publication Date: 3 Jan 2023

Publication Site: Bloomberg

Wrong Way CalPERS Increased Private Equity Allocation by Over 50% as Investors Are Dumping Holdings

Link: https://www.nakedcapitalism.com/2022/08/wrong-way-calpers-increased-private-equity-allocation-by-over-50-as-investors-are-dumping-holdings.html

Excerpt:

CalPERS is so reliably bad at market timing that the giant fund serves as a counter indicators. Last fall, CalPERS increased its allocation to private equity from 8% of its total portfolio to 13%, which is an increase of over 50%. This is after this humble blog, regularly citing top independent experts, pointed out that the investment raison d’etre for private equity had vanished in the 2006-2008 time frame, not once, but many many times as various studies kept confirming that finding. Not only did private equity no longer earn enough to compensate for its much higher risks (leverage and illiquidity) but it was no longer beating straight up large cap equities.

Now there is a way out of this conundrum: to bring private equity in house. Private equity fees and costs are so egregious (an estimated 7% per annum) that even a bit of underperformance relative to private equity indexes will be more than offset by greatly lower fees. A simpler option would be public market replication of private equity.

But the dogged way funds like CalPERS stick to private equity points to rank corruption, of the sort that landed CalPERS former CEO Fred Buenrostro in Federal prison for four and a half years.

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Another problem is cash flow management. Private equity funds do not take investor money at closing. Instead, investors get “capital calls” to pony up part of their commitment to the fund so the fund manager can buy a company. These capital calls require the dough to be sent as specified in the offering memorandum, usually in five to ten days. The consequences of missing a capital call are draconian. The fund manager can seize all the investments made so far and distribute them to the other limited partners.

In the financial crisis, CalPERS had too little cash on hand to meet private equity capital calls. It wound up dumping stocks at distressed prices to satisfy the private equity demands. So the risk outlined below is real.

Author(s): Yves Smith

Publication Date: 9 Aug 2022

Publication Site: naked capitalism

The Government Pension Reckoning Cometh

Link: https://www.wsj.com/articles/the-government-pension-reckoning-cometh-equable-institute-report-11660084312?st=j8a7o7efyyvjtdp&reflink=article_email_share&utm_source=Wirepoints+Newsletter&utm_campaign=24f39fc2e0-RSS_EMAIL_CAMPAIGN&utm_medium=email&utm_term=0_895ee9abf9-24f39fc2e0-30506353#new_tab

Excerpt:

The California Public Employees’ Retirement System reported a negative 6.1% return for the year, which includes a 21.3% positive return on private equity and 24.1% return on real estate as reported through the second quarter of 2022. What will happen if real-estate prices start to fall and some leveraged private-equity buyouts go south amid rising interest rates?

Collective-bargaining agreements limit how much workers must contribute to their pensions, so taxpayers are required to make up for investment losses. Employer retirement contributions—that is, taxpayers—make up 20% of government worker compensation. That amount has soared over the past decade as pension funds tried to make up for losses during the 2008-2009 financial panic.

A recent report by the Equable Institute found that state and local pension plans now are only 77.9% funded on average, which is about the same as in 2008. But some like Chicago’s are less than 40%. Advice to taxpayers in Illinois: Run.

Author(s): WSJ Editorial Board

Publication Date: 9 Aug 2022

Publication Site: WSJ

CalPERS Cooks the Books While Taking an Unnecessary Loss to Exit $6 Billion of Private Equity Positions

Link: https://www.nakedcapitalism.com/2022/07/calpers-cooks-the-books-while-taking-an-unnecessary-loss-to-exit-6-billion-of-private-equity-positions.html

Excerpt:

CalPERS is up to its old crooked, value-destroying ways. Its sale of $6 billion in private equity positions, at a big discount….because CalPERS was in a hurry despite no basis for urgency, shows yet again the sort of thing the giant fund routinely does that puts it at the very bottom of financial returns for major public pension funds.

Oh, and on top of that, CalPERS admitted to Bloomberg that it is lying in its financial reports for the fiscal year just ended this June 30 by not writing down these private equity assets. As former board member Margaret Brown stated:

In Dawm Lim’s Bloomberg story, Calpers Unloads Record $6 Billion of Private Equity at Discount, CalPERS admits to cooking the books. Not recognizing the sale (the loss in value) in the same fiscal year can only be to play shenanigans with the rate of return. So if, or more likely when, CalPERS again does badly in comparison to CalSTRS and similar funds, remember it would be even worse if CalPERS was accounting honestly.

Author(s): Yves Smith

Publication Date: 8 July 2022

Publication Site: naked capitalism

High Inflation Leads to Expensive Cost-of-Living Adjustments for CalPERS and Others

Link: https://www.ai-cio.com/news/high-inflation-leads-to-expensive-cost-of-living-adjustments-for-calpers-and-others/

Excerpt:

With big returns come big expenses. That’s what seems to be the case for pensions across the country, as they are forced to increase their payouts to beneficiaries due to inflation. While the past year has been a record breaker for pension fund returns, inflation will be claiming its fair share of the gains as well.

For CalPERS members, those who retired between 2006 and 2014 will receive the biggest increase at 4.7%. This will be the largest cost-of-living increase for beneficiaries in the past 32 years, dating to 1990.

While the Bureau of Labor Statistics has estimated the Consumer Price Index to have increased by 7% over  2021, CalPERS is not using the 7% to calculate its increased payments. Instead, it uses an average of each month’s numbers.

CalSTRS similarly also has built in inflation protection, thanks to a California law that requires public pensions to do so. However, CalSTRS’ method of calculating this payment is slightly different. The fund gives quarterly supplement payments to those whose annual benefit falls below 85% of their original benefit. This year’s inflation numbers will likely increase the number of supplemental payments that CalSTRS in forced to provide.

Author(s): Anna Gordon

Publication Date: 1 Mar 2022

Publication Site: ai-CIO

California Public Pensions Are Major Fossil Fuel Investors

Link:https://www.rigzone.com/news/wire/california_public_pensions_are_major_fossil_fuel_investors-09-dec-2021-167254-article/

Excerpt:

California’s climate-conscious policies aren’t matched by the investment choices of its largest public pension funds, according to a report from two environmental groups. 

Of the 14 top U.S. pension funds analyzed by Stand.earth and Climate Safe Pensions Network, California Public Employees’ Retirement System, known as Calpers, and California State Teachers’ Retirement System, known as CalSTRS, were the largest investors in fossil fuel companies, with $27.1 billion and $15.7 billion, respectively, according to findings published Wednesday. 

The two combined hold about half the fossil fuel assets for the entire group, according to the study. Calpers also came first in fossil fuel holdings as a proportion of its total assets under management, at 6.9%.  

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The New York State Teachers’ Retirement System had the second-largest share of its portfolio invested in fossil fuels, at 6.6%. 

Author(s): Robert Tuttle

Publication Date: 9 Dec 2021

Publication Site: Rigzone

Wrong Way CalPERS: Dumping $6 Billion of Private Equity After Struggling to Put Money to Work and Then Increasing Target

Link: https://www.nakedcapitalism.com/2022/01/wrong-way-calpers-dumping-6-billion-of-private-equity-after-struggling-to-put-money-to-work-and-then-increasing-target.html

Excerpt:

When CalPERS does something as obviously nonsensical as planning to dump $6 billion of its private equity holdings, nearly 13% of its $47.7 billon portfolio, when it just committed to increasing its private equity book from 8% to 13%, it’s a hard call: Incompetent? Corrupt? Addled by the latest fads (a subset of incompetent)?

And rest assured, the harder you look, the more it becomes apparent that this scheme is as hare-brained as it appears at the 30,000 foot level. But unlike another recent hare-brained private equity scheme, its “private equity new business model,” beneficiaries won’t have the good luck of having it collapse under its own contradictions. CalPERS has loudly announced that Jeffries & Co. will be handling these dispositions, so they will get done….at least in part. But the fact that CalPERS’ staff has gone ahead and merely informed the board, as opposed to getting its approval, is yet another proof of how the board has abdicated its oversight and control by granting unconscionably permissive “delegated authority” to staff.

The one bit of possible upside would not just be unintended, but the result of CalPERS acting in contradiction to its expressed objectives: that its allocation to private equity would undershoot its targets by an even bigger margin than otherwise.

Author(s): Yves Smith

Publication Date: 14 Jan 2022

Publication Site: naked capitalism