PD Editorial: Say no to secrecy at CalPERS
California’s massive public employee pension system has a chronic problem: There isn’t enough money to cover its obligations.
That’s no secret.
The pension system’s handling of its $440 billion investment fund shouldn’t be a secret either.
Yet, as CalMatters columnist Dan Walters reported on Sunday, the California Public Employees Retirement System is seeking permission to gamble on risky ventures and hide their wagers from public scrutiny.
Assembly Bill 386, by Assemblyman Jim Cooper, D-Elk Grove, would carve out an exemption from the California Public Records Act for loans made by CalPERS, which stewards retirement funds for state and local employees.
CalPERS has just 71 cents of every dollar it needs to pay the pensions promised to its 3.5 million members.
One big reason for the shortfall is an unreasonably optimistic goal of earning 7% annually on CalPERS’ investments. In the most recent fiscal year, the rate of return was 4.7%. Over the past 20 years, the average return is 5.5%.
Taxpayers are on the hook for any shortfall.
CalPERS is looking for ways to improve its return, which is commendable. As investors know, higher rates of return generally require taking greater risks with your money. In this instance, other people’s money is in play.
CalPERS’ strategy is to augment investments in stocks and bonds with loans to individuals and businesses — or, to use a technical phrase, “private debt investments.”
There is precedent for lending retirement fund money. The typical practice would be for CalPERS to place money with a venture capital group or some other money manager, which in turn makes loans and other investments.
Details of investments through private money managers aren’t always available for public scrutiny. But, as Walters pointed out, these outside entities usually have some of their own money at stake. CalPERS wants to start making loans on its own, but the people making lending decisions wouldn’t have skin in the game. That’s one problem.
Here’s another: CalPERS doesn’t want to be tethered to the transparency requirements of the California Public Records Act.
Backers of AB 386 contend that borrowers might not deal with CalPERS if details of their loans, such as due diligence reports, were subject to public scrutiny. But, as the Retired Public Employees Association notes in a letter of opposition, it’s necessary to understand the terms of a proposed loan to determine if it’s a prudent risk.
“Only then may the public, and the members and beneficiaries, independently determine whether CalPERS staff have negotiated a good deal and whether the CalPERS Board are acting as sound fiduciaries,” the retired employees say.
There also are ethical considerations.
CalPERS just adopted new conflict of interest rules following the resignation of its chief investment officer, who had a substantial personal investment in Blackstone Group, a New York investment firm with whom he placed $1 billion in CalPERS funds.
In 2016, a former CalPERS CEO was sentenced to prison for his role in a bribery scandal involving a former CalPERS board member.
Unfortunately, AB 386 zipped through two Assembly committees with barely any discussion — and without a single no vote.
There is still plenty of room for reforming the benefits side of public employee pensions, but there is nothing to gain — and plenty to lose — from putting a shroud over investment decisions made by CalPERS.
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