CalPERS undermined earlier reforms, former lawmaker says

A former legislator is calling for reinstatement of his two decade-old law banning contact between CalPERS board members and persons selling investment products.

The suggestion came as a law firm hired by CalPERS probes the actions of a former board member, Al Villalobos, whose firm received more than $50 million in fees for helping private equity firms get billions in investments from CalPERS.

Former Assemblyman Dave Elder, D-Long Beach, said middlemen or “placement agents” such as Villalobos and others seeking CalPERS money should deal only with investment staff.

“If an investment proved to be a loser, the board could replace the chief investment officer,” Elder told the CalPERS board yesterday (Nov. 16). “If, on the other hand, board members advocated a particular investment which went bad, the board members would not be asked to resign.”

The former assemblyman said his bill, AB 2121, signed into law in 1991, prohibited contact between CalPERS board members and investment product sales people.

He said the bill was undermined by a CalPERS-sponsored bill, AB 1753 in 1998, that allows communication between board members and placement agents if disclosed or in social rather than business settings.

Elder was chairman of the Assembly Public Employees Retirement Committee from 1982 to 1992. He is best known now for early and unheeded warnings about the escalating cost of public employee retiree health care.

Another Elder bill two decades ago, AB 1104, created a retiree health care fund in the treasurer’s office. But the fund received little or no money, a lost opportunity to get investment earnings to pay for future health care costs.

A governor’s commission estimated last year that state and local governments in California owe at least $118 billion over the next 30 years for the health care promised current workers.

If annual payments for retiree health care had begun two decades ago, the debt could have been sharply reduced. The California Public Employees Retirement System and other pension funds say 75 percent of their revenue is from investment earnings.

Now CalPERS, after above-average losses in the stock market crash last year, faces questions about whether it can meet its long-term obligations without a taxpayer bailout as it struggles with a placement agent issue that first surfaced in New York.

Media criticism of CalPERS reached a kind of crescendo over the weekend with hard-hitting editorials in three California newspapers: the Los Angeles Times, the San Diego Union-Tribune, and the Sacramento Bee.

Some word play is based on all of that money, an investment fund currently valued at $200 billion, that makes industry-leading CalPERS the largest public pension fund in the nation.

“CalPERS finds itself caught in a maelstrom of troubles that threatens its reputation as the gold standard for public pension funds,” said a news story in the Los Angeles Times on Nov. 9.

A Reuters news service story on Oct. 23 said CalPERS lost $100 billion, when the fund plunged from a peak of $260 billion to a low of $160 billion, before rebounding this year.

“The other thing it lost was its gold-plated reputation, founded on steady returns, pioneering new investments and policing public companies as an activist shareholder,“ said Reuters. “Smaller rivals who were more conservative lost much less.”

CalPERS began responding to the placement agent issue in May by requiring that fees be reported. The California State Teachers Retirement System adopted a similar disclosure policy three years ago.

In May CalPERS also hired a law firm to take a cost-cutting look at reducing management fees for private equity firms. One of them, Leon Black’s Apollo, in which CalPERS owns a small stake, paid the bulk of the Villalobos fees, $13.2 billion for a single deal.

The placement agent issue hit home last month when CalPERS, responding to a Public Records Act request from the Wall Street Journal, revealed that the Villalobos firm received more than $50 million in fees from firms receiving CalPERS money.

The newspaper said unnamed staff said they felt pressured by a former CalPERS chief executive officer, Fred Buenrostro, to look favorably on deals put forward by the Villalobos firm.

Buenrostro told the newspaper he made introductions and answered questions, but the chief investment officer made the recommendations to the CalPERS board’s investment committee.

In its response to the placement agent issue, the CalPERS board voted in September to be neutral on a proposal before the federal Securities and Exchange Commission that would ban placement agents.

Some members wanted to oppose the ban. Placement agents are said to be important for small investment firms, who unlike large firms lack the staff to market their products to pension funds throughout the nation.

The CalPERS board voted unanimously yesterday to tighten the placement fee disclosure policy adopted in May and, in keeping with AB 1584 enacted this year, to add the disclosure of gifts and campaign contributions.

The board, meeting in public as the investment committee, took no action on two controversial proposals after a lengthy closed-door session.

A board consultant, Wilshire, recommended financial penalties to put some “teeth” into the fee disclosure policy. Another consultant, Pension Consulting Alliance, disagreed arguing that the loss of CalPERS business would be penalty enough.

“That is an incredibly powerful and strong penalty because it will cease the business relationship,” said Joe Dear, the CalPERS chief investment officer. “We think the penalties in the policy are more than enough to assure compliance.”

The CalPERS board president, Rob Feckner, announced last week that he and two other board members, Treasurer Bill Lockyer and Controller John Chiang, were urging their fellow board members to support requiring placement agents to register as lobbyists.

A news release said Feckner would discuss the registration issue at the board meeting this week. But he did not raise the issue yesterday, causing some observers to speculate there was a lack of support in the closed-door meeting.

The committee chairman, George Diehr, said he would “request staff to look at some of those additional efforts such as the classifying of lobbyists, the penalties and the total exclusion of contact — to take a look at what the impact might be and come back to us at a subsequent session.”

On the 13-member CalPERS board, Maeley Tom has replaced Patricia Clarey as the Personnel Board representative. Debbie Endsley has replaced Dave Gilb as the Department of Personnel Administration representative.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com