Federal prosecutors have been investigating the financial transactions of the D.C. Retirement Board, which manages the city’s $10 billion pension fund for retired teachers, police officers and firefighters.
The fully funded municipal employee pension plan has long been the jewel in D.C.’s financial crown, the envy of other cities and a signal of the trustworthiness of the District’s finances to the credit rating agencies that issue municipal bond ratings.
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The existence of the investigation was disclosed in a whistleblower lawsuit filed in December against the D.C. Retirement Board by Erie Sampson, the agency’s general counsel since 2008.
Sampson alleges that she was placed on administrative leave in October in retaliation for alerting officials at the retirement board and in D.C. government, including the city’s chief financial officer and members of the D.C. Council, about problems in the retirement board’s accounting and governance — as well as for cooperating with the federal investigation.
A spokesperson for the retirement board declined to comment, citing the ongoing litigation.
On December 7, the National Association of Insurance Commissioners (NAIC) Financial Stability Task Force voted in a virtual meeting to expose, for a 30-day comment period, a list of “Regulatory Considerations Applicable (But Not Exclusive) to Private Equity (PE) Owned Insurers.” The Task Force assigned to its Macroprudential Working Group the role of coordinator of the ongoing evaluation of these considerations.
The decision is the latest public expression of increasing concern among regulators about the recent growth in number and complexity of private equity-owned insurers.
The current exposure has some antecedents in NAIC-directed efforts that began two years ago. In November 2019, the Statutory Accounting Working Group began an effort to change the Statement of Statutory Accounting Principles (SSAP) No. 25, which provides accounting rules on insurer transactions with related parties and affiliates.
Oregon’s public pension fund, which manages tens of billions of dollars in retirement savings, appears to have privately given its blessing to a 2019 deal by an investment fund to acquire NSO Group, the controversial spyware company.
A source with close knowledge of the matter and emails seen by the Guardian suggest that a senior official at the pension fund signalled his strong support for the takeover of NSO as early as 2018, months before the deal was announced.
Last month, Oregon officials said they were “deeply disturbed” by reports that NSO Group “enabled widespread human rights violations”.
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.
The California Public Employees’ Retirement System (CalPERS) has engaged financial services company Jefferies about the potential of selling up to $6 billion of its private equity stakes, according Buyouts magazine. This comes just after CalPERS announced it would be increasing the percentage of its portfolio allotted to private equity to 13% from 8% in November.
CalPERS board member Margaret Brown told Secondaries Investor in November that the fund is considering investing in secondaries and divesting from some of its legacy private equity investments.
“We have some really old private equity that’s just sitting there and doing nothing,” she said.
The financial press has gone into a round of hand-wringing over CalPERS’ efforts to chase higher returns in a systematically low-return market, now by planning to borrow at the CalPERS level on top of the leverage employed in many of its investment strategies, in particular private equity and real estate.
These normally deferential publications are correct to be worried. Not only is this sort of leverage on leverage dangerous because it can generate meltdowns and fire sales, amplifying damage and potentially creating systemic stresses, but the debt picture at CalPERS is even worse than these accounts they depicted. They failed to factor in yet another layer of borrowing at private equity funds and some real estate funds called subscription line financing, which we’ll describe shortly.
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CalPERS tells other less obvious fibs, such as trying to depict private equity as so critical to success that it need to put more money on that number on the roulette wheel. Remember, the name of the game in investment-land isn’t absolute performance but risk adjusted performance. Not only has private equity not generated the additional returns to compensate for its extra risk at least as long as we’ve been kicking those tires (since 2012), academic experts such as Ludovic Phalippou, Richard Ennis and Eileen Appelbaum have concluded private equity has not even beaten stocks since the financial crisis.
Let us stress that unlike German investors, who have a pretty good handle on all the leverage bets in their investment portfolios and thus can make a solid estimate of how much risk they are adding via borrowing across all their investments, CalPERS is flying blind with respect to private equity. It does not have access to the balance sheets of the portfolio companies in its various private equity funds.
And while having balance sheet would be a considerable improvement over what is has now, it doesn’t give the whole picture. CalPERS would also need to factor in operating leverage. When I was a kid at Goldman, whenever we analyzed leverage (as in all the time), we had to dig into the footnotes of financial statements, find out the amount of operating lease payments, and capitalize them, as in gross up the annual lease payments to an equivalent amount of borrowing so we could look at different companies on a more comparable basis.
Due to an active group of retirees and the assistance of a former Ohio attorney general, both the Ohio state auditor and the Ohio Department of Securities have launched inquiries into the Ohio State Teachers Retirement System (STRS Ohio), a $100 billion pension that has launched billions of dollars of investments into the riskier corners of the market, namely private equity and hedge funds.
“Ohio could be the first place where the secrecy surrounding public pensions and their investments in risky, speculative, and high-fee investment vehicles could be looked at in a serious way,” said Ted Siedle, a former SEC attorney and longtime pension whistleblower.
Pointing out that pension funds across the country have routinely invoked “trade secrets” exemptions to deny the public information about investment performance and fees, Siedle said the actions taken by the state auditor and securities commissioner “could be the beginning of the end” of such secrecy — not just in Ohio, but nationwide.
State securities regulators and NASAA have historically had very little to say about Wall Street looting of these pensions. That’s not altogether surprising given that state securities regulators almost universally serve at the whim of elected politicians—politicians who depend upon Wall Street campaign contributions. If a state securities regulator aggressively pursues Wall Street pension looting, she may be swiftly out of a job.
However, since NASAA believes “every investor deserves protection and an even break” the organization should focus upon the disturbing fact that today public pension stakeholders in all 50 states are routinely denied prospectuses and other material investment information related to their pension assets—the very same information which is widely disseminated globally to wealthy individuals. In the absence of prospectuses, public pension stakeholders cannot possibly evaluate whether pension assets are prudently invested.
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Recently I filed a complaint with the Ohio Department of Commerce, Division of Securities regarding the State Teachers Retirement System of Ohio which has failed since February to provide prospectuses and other offering materials related to the teachers’ pension investments in response to my public records request filed on behalf of 19,000 Ohio teachers. Not a single page of a single prospectus has been released to me by STRS Ohio since February. The Division is investigating my complaint at this time.
In Rhode Island, my request for the prospectuses regarding that state’s pension investments was also denied by Treasurer Seth Magaziner last week as the pension perversely asserts, on behalf of Wall Street, that widely distributed prospectuses can somehow be “trade secrets.” I intend to file an appeal and a lawsuit challenging Magaziner’s secret pension dealings in Rhode Island.
Given that public pensions in all 50 states today refuse to provide some or all prospectuses to stakeholders, including both participants and taxpayers, publci pension secrecy is a national problem that needs to be addressed.
California transferred an extra $2.31 billion to its teachers’ and public workers’ pension funds after stock gains and the economic recovery bolstered income tax collections, according to budget documents. Connecticut Treasurer Shawn Wooden is transferring an additional $1.62 billion to that state’s teachers’ and workers’ pension funds in accordance with a mandate that excess revenue be used to pay down debt.
This year New Jersey is making the full pension payment recommended by its actuaries for the first time since 1996, plus an extra half-billion dollars, funneling a total of $6.9 billion to the state’s deeply underfunded retirement plan, the New Jersey treasurer’s office said.
Asked how the money would be used, a spokeswoman for the state’s division of investment said it “will continue to move forward toward the previously established allocation targets.” The $101 billion fund’s private equity, private credit, real estate and real assets portfolios each contained between $1 billion and $3 billion less than the goal amount as of Aug. 31, records show.
For nearly two decades, alternative investment managers have been permitted to handle public pension money while they refuse to play by the rules applicable to these funds and submit to public scrutiny.
Wall Street alternative managers have successfully argued that the very same investment information widely distributed to wealthy individuals somehow amounts to “trade secrets” exempt from public records laws… when requested by state workers.
While it’s not surprising Wall Street’s biggest gamblers want to keep investors in the dark as to their misdeeds, it’s unconscionable that STRS Ohio and other public pensions around the nation are willing to abandon transparency, exposing workers to unfathomable risks and jeopardizing their retirement security.
Alternative investment managers may seek to keep secrets, but it’s no secret what’s often in these well-guarded documents: excessive and illegal fees; outrageous conflicts of interest and self dealing; fiduciary breaches and outright violations of law—even criminal conduct. For example, eight years ago the SEC staff found that a majority of private equity firms inflate fees and expenses charged to companies in which they hold stakes.
Private equity firms widely distribute their prospectuses and offering materials to prospective wealthy investors as they trawl globally to raise capital for their costly, high-risk funds. Yet when state and local government pension stakeholders request prospectuses of the funds in which their pensions invest, PE firms claim these very same broadly disseminated documents are “trade secrets” exempt from disclosure under state public records laws. On the one hand, PE risks, fees, and questionable business practices are fully disclosed via prospectus to wealthy investors who can afford to gamble. On the other, government workers in severely underfunded pensions (many of whom have already seen their retirement benefits cut) and taxpayers who are on the hook for any public pension gambling losses, are intentionally kept in the dark. SEC and state securities regulators should demand that every PE investor, including public pension stakeholders, be provided with all material investment information related to these risky investments and end PE secret fleecing of government workers’ pensions.
Private equity investments lack transparency and are difficult to value. As opposed to publicly traded securities, limited partnerships used by private equity managers can’t provide frequent performance updates and, as a result, advise stakeholders after the end of each fiscal year. This leads to a lag in reporting important details. Moreover, shares of companies owned by private equity funds are not publicly traded, meaning that their values can only be estimated, which is subject to potential bias. Private equity firms are also not obligated by the law to publish their lists of assets in accordance with Securities and Exchange Commission rules. While this information can be found on Bloomberg Professional Terminal, it is not available to the general public. This lack of transparency should be concerning to employees and retirees who rely on these funds and taxpayers who contribute to them.
For the Pennsylvania teacher system, the management fees associated with private equity investments that the plan had to pay over the past four years ($4.3 billion) are more than the total amount members paid into the plan during the same time ($4.2 billion). The pension plan recently announced that member contributions will have to be raised going forward because of long-term investment results below the plan’s benchmark. As a point of comparison, the New York State Teachers’ Retirement System, which has double the assets of PSERS, reported 36% less in total investment fees and expenses than PSERS.
