Bizarre Valedictory Interview by CalSTRS Investment Chief, Chris Ailman, Asks Private Equity to Be Nice and Share with Workers

Link: https://www.nakedcapitalism.com/2024/02/bizarre-valedictory-interview-by-calstrs-investment-chief-chris-ailman-asks-private-equity-to-be-nice-and-share-with-workers.html

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The Financial Times made its interview with departing CalSTRS’ Chief Investment Officer Chris Ailman its lead story yesterday: Private equity should share more wealth with workers, says US pension giant. The Financial Times was too polite to say so, but Ailman could lay claim to being the best large public pension fund chief investment officer. CalSTRS, which manages the pensions of California teachers, is in the same general size league as its Sacramento sister CalPERS, and regularly outperforms CalPERS by a meaningful margin.

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It’s hard to know where to begin with this. Limited partners like CalSTRS, who are, in Wall Street parlance, the money, have not even been able to get basic disclosures from the general partners like how much in total the private equity firms hoover out in fees and expenses, despite many years of pleading. Mind you, it’s a requirement for a fiduciary to evaluate the costs and risks of any investment, yet these investors have accepted this abuse.

Limited partners don’t get P&Ls of portfolio companies. They don’t get independent valuations even though that is considered to be essential for every other type of investment. So it’s ludicrous to think that general partners will share money with one of the very weakest parties in the picture, mere workers, when they won’t give information to the limited partners.

Someone new to this topic might wonder why limited partners don’t say “no”. The reason is they perceive private equity to be necessary for them to earn enough to reduce their level of underfunding, which in the public pension fund world is typically pretty bad. To make up for the shortfalls, pension funds like CalPERS and CalSTRS have also been increasing the amount they charge to cities, counties, and other local government entities. These pension costs are taking up larger and larger proportions of these budgets, creating concern and anger.

Author(s): Yves Smith

Publication Date: 16 Feb 2024

Publication Site: naked capitalism

Fired head of Colorado’s public pension system will get a year’s salary — more than $400,000 — as severance

Link: https://coloradosun.com/2023/05/17/ron-baker-pera-severance/

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The fired head of Colorado’s $60 billion-plus public pension system will receive a year’s salary — more than $400,000 — as severance, under his contract and because of the way his employment was terminated. 

Ron Baker was fired May 1 by the 16-member Public Employees’ Retirement Association board nearly two months after he went on a leave of absence

Neither the board nor PERA has disclosed why Baker was fired, and Colorado Sun attempts over the past several months to contact Baker have been unsuccessful. Emails, texts and voicemail messages to Baker from The Sun, including for this story, were not returned.

Baker will get $412,108.80 in severance because the board terminated his contract without cause. Had he been fired for cause, he wouldn’t have been eligible to collect the severance. 

Baker’s contract says he could only be fired for cause if there was a breach of his employment agreement, for gross negligence, or if he had committed or pleaded guilty or no contest to a felony criminal charge. The contract says he could also be fired for cause for “wilfully engaging in any activity which is contrary to the best interest of the association (for) which activity is uncured by the executive for a reasonable period of time after he receives written notice concerning such activity.”  

Author(s): Jesse Paul

Publication Date: 17 May 2023

Publication Site: Colorado Sun

Ron Baker, the head of Colorado’s public pension system, is fired after two-month leave of absence

Link: https://coloradosun.com/2023/05/02/ron-baker-pera-fired/

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Ron Baker, the executive director of Colorado’s Public Employees’ Retirement Association, was fired Monday night by the 16-member board overseeing the state’s $60 billion-plus public pension system. 

Baker’s firing comes nearly two months after he went on a leave of absence. PERA refused to say why Baker went on leave or to say whether his absence was self-initiated or initiated by the PERA board.  

The PERA board convened in downtown Denver on Monday evening for a special meeting to discuss Baker’s employment status. The board immediately voted unanimously to enter a secret executive session, which lasted more than six hours. 

When the board emerged from its closed-door session, Vice Chair Suzanne Kubec made a motion to terminate Baker, which was seconded by Colorado Treasurer Dave Young, who sits on the board. The motion passed unanimously and the meeting adjourned.

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Baker was appointed to be PERA’s executive director in 2018 and made an annual salary of more than $400,000, In January, the PERA board voted to award Baker a 19% performance bonus and increased his salary by 4%, according to meeting minutes.

Author(s): Jesse Paul

Publication Date: 2 May 2023

Publication Site: Colorado Sun

Public Pensions: Double-Check Those ‘Shadow Banker’ Investments

Link:https://www.governing.com/finance/public-pensions-double-check-those-shadow-banker-investments

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For almost a decade leading up to 2021, bond yields were suppressed by low inflation and central bank stimulus. To make up for scanty interest rates on their bond investments, many public pension funds followed the lead of their consultants and shifted some of their portfolios into private credit funds. These “shadow bankers” have taken market share from traditional lenders, seeking higher interest rates by lending to non-prime borrowers.

Even during the pandemic, this strategy worked pretty well, but now skeptics are warning that a tipping point may be coming if double-digit borrowing costs trigger defaults. It’s time for pension trustees and staff to double-check what’s under the hood.

For the most part, the worst that many will find is some headline risk with private lending funds that underwrite the riskiest loans in this industry. Even for the weakest of those, however, the problem will not likely be as severe as the underwater mortgages that got sliced, diced and rolled up into worthless paper going into the global financial crisis of 2008. And until and unless the economy actually enters a full-blown recession, many of the underwater players will still have time to work out their positions.

The point here is not to sound a false alarm or besmirch the private credit industry. Rather, it’s highlighting what could eventually become soft spots in some pension portfolios in time to avoid doubling down into higher risks and to encourage pre-emptive staff work to demonstrate and document vigilant portfolio oversight.

Author(s):Girard Miller

Publication Date: 8 Aug 2023

Publication Site: Governing

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

CalPERS seen weighing proposal on rule changes for hiring, firing of CIO

Link: https://www.pionline.com/pension-funds/calpers-seen-weighing-proposal-rule-changes-hiring-firing-cio

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The CalPERS board is looking at a change in the way it will decide who replaces Yu ‘Ben’ Meng as CIO of the fund.

CalPERS board is expected to weigh a move that would modify a recent governance change calling for the full board in conjunction with the CEO to hire, evaluate and terminate the pension fund’s CIO.

Author(s): ARLEEN JACOBIUS

Publication Date: 23 February 2021

Publication Site: Pensions & Investments