CalPERS numbers attract fresh scrutiny

The California Public Employees’ Retirement System looks to see 2015 as another controversial year, especially around four budding controversies.

First, attention has focused in recent weeks around the way CalPERS pays its board members and executives. An investigation by the Sacramento Bee revealed that, for 15 years, CalPERS has reimbursed the “government pay and benefits of five board members who are on full- or part-time leave from their jobs to conduct fund business.”

While some board members receive little or even no money for their service, others received hundreds of thousands of dollars. Priya Mathur — recently stripped of her administrative posts, but not fired after repeatedly violating state ethics laws — was paid just shy of $300,000 during the last fiscal year. During the same period, John Chiang, an ex-officio board member in his capacity as the state controller, received nothing. He also will receive nothing when he remains on the board in January when he becomes the state treasurer, another ex-official CalPERS board membership.

Bonuses

Second, CalPERS executives received a substantial increase in lavish bonuses. The San Francisco Chronicle reported a 14 percent increase in bonus payments over the fiscal year before last, with $8.7 million going to investment staff and nearly $300,000 to the fund’s non-investment executives.

“The rewards are based on three-year performance verses a benchmark, as well as the earnings of each asset class and individual portfolios,” according to CalPERS spokesman Brad Pacheco. In an effort to deflect criticism for the windfalls, the Chronicle noted, CalPERS maintained it “must grant bonuses to help compete with the pay that employees could make if they went to work on Wall Street.”

According to Pacheco, “spending money on in-house investment management saves about $100 million a year that otherwise would be paid to Wall Street in fees.”

Secret deals

Third, in an area fraught with Wall Street competition of a different sort, CalPERS has proven itself willing to play political hardball to ensure financially stressed cities pay it first, and investor-creditors later. In an exclusive, Reuters cast a spotlight on how that process has played out secretly in the case of San Bernardino.

Speaking on condition of anonymity, a “senior city source” revealed details of CalPERS’ deal with the city that a judicial gag order had sought to keep under wraps. Although it hasn’t published a completed budget, San Bernardino has set aside over $10 million for an unnamed creditor — which the source identified as CalPERS.

The city’s decision “to strike a deal with Calpers first, and begin paying arrears before a bankruptcy exit plan could be formulated, shows the reluctance of California cities to take on the pension giant,” concluded Reuters.

Demographic destiny

Fourth, CalPERS has faced a new round of investor skepticism over its approach to funding. The Moody’s ratings agency warned this week that cities like San Bernardino will face increasing pressure from CalPERS obligations, “even after the relief provided by the bankruptcy adjustments” authorized by the courts. “The ratings agency calculated that San Bernardino’s adjusted net pension liability for the 12 months to the end of June 2014 was $731 million — nearly 10 times its outstanding debt,” according to the Chief Investment Officer website.

CalPERS’ unfavorable demographics were likely responsible for the projected future increases in required contributions. At PublicCEO.com, Ed Mendel reported that “in a few years CalPERS retirees are expected to outnumber active workers, a national trend among public pension funds that makes them more vulnerable to big employer rate increases.”

CalPERS has managed in recent years to boost its funding level to some 77 percent. But now, Mendel observed, “some think getting to 100 percent funding may become difficult if not impossible. Employer contribution rates would have to be raised to an impractical level, crowding out funding for other programs, and investments would have to yield unlikely returns.”

According to prevailing interpretations of the California Constitution, taxpayers are on the hook for any fund shortfalls.