California agencies are trying to figure out the implications of a vague executive order issued by Gov. Gavin Newsom in September that orders many policy decisions to be made with the need to “mitigate climate change” kept in mind.

A recent Sacramento Bee story suggested that among the most vexed were the California Public Employees’ Retirement System and the California State Teachers’ Retirement System, the two pension giants with estimated unfunded liabilities of $136 billion and $107 billion, respectively, according to 2018 data.

The Bee reported that while the Newsom administration wasn’t ordering CalPERS and CalSTRS to divest from firms involved in fossil fuel, it was requiring them to make new investment decisions that reflect “the increased risks to the economy and physical environment due to climate change.”

Newsom thinks fossil fuel companies are in trouble

This reflects the assumption of the Newsom administration that there will be a rapid shift away from fossil fuels – a view that many hedge funds, mutual funds and large institutional investors don’t share. Large energy corporations remain popular with their stock pickers despite global warming fears. And contrary to the idea that these companies are in decline, some investors see fracking continuing to increase oil production in the U.S. for years to come. Last week, for example, the Motley Fool investment website strongly recommended buying ExxonMobil in 2020, noting that its annual divided “has increased more than 100 percent over the past 10 years.”

Newsom’s edict is producing heartburn with some members of the CalPERS board. That’s because, as the Bee noted, “pension systems have a financial obligation to earn as much as cash as possible to provide retirement security for millions of government employees.”

Former Garden Grove Unified manager Margaret Brown, a CalSTRS critic who won election to the board in December 2017, wrote on Twitter that “unless the governor is willing to take even more $$$ from over-taxed California citizens, Newsom should step back.” 

Corona police Sgt. Jason Perez upset CalPERS Board President Priva Mathur in the October 2018 election after running a campaign that blasted Mathur and other trustees for not focusing solely on returns in their investment decisions.

But the CalPERS and CalSTRS boards have a history of using investments for decades to make political statements. In September, state Treasurer Fiona Ma – who sits on both boards – strongly endorsed such investment activism.

CalPERS quietly shifting from low-risk ‘passive investing’

That means CalPERS and CalSTRS executives are under heavy pressure to improve returns while making investments that can be defended as socially responsible.

The Naked Capitalism website reported in October that this pressure may have led to CalPERS making a major shift in investing part of its portfolio. Instead of traditional “passive equity investing” in index funds that track the S&P 500 or other large categories of stocks and emphasize diversified portfolios, CalPERS has begun to adopt a more aggressive “factor investing” approach that has a chance of generating bigger returns by focusing on industries with better prospects for short- and medium-term gains, among its many tenets. The approach is also somewhat riskier than using index funds.

Reporter Yves Smith wrote that this was a major shift in investment strategy on a par with “CalPERS’ renouncement of hedge funds” in 2014.

The website, which is run by veterans of the global financial industry, has broken a series of stories about CalPERS in recent years.

In August 2018, it revealed that CalPERS CEO Marcia Frost had misrepresented her academic background and didn’t have a college degree.

This August, it offered evidence that CalPERS was hiding a negative audit of its hiring practices that had been triggered in part by the agency’s failure to vet Frost’s claims.

A rowdy, muckraking financial blog that has repeatedly raised later-corroborated concerns about how the California Public Employees’ Retirement System operates has gotten traction with one of its new allegations.

The Naked Capitalism blog’s report that CalPERS CEO Marcie Frost had misled the giant pension fund about her education prompted state Treasurer John Chiang to seek an independent investigation.

Naked Capitalism blogger Susan Webber offered evidence that Frost – who does not have a college degree – allegedly told a consultant who evaluated her job application before her hiring in 2016 that she was enrolled in a degree program at Evergreen State College in Olympia, Washington. The Sacramento Bee reported that she hadn’t taken any classes at the college since 2010. Before coming to CalPERS, Frost led Washington’s Department of Retirement Services, which oversees more than a dozen defined-benefit state pension funds.

In May, Webber’s reporting led CalPERS to oust Chief Financial Officer Charles Asubonten for making misleading claims about his employment history before he was hired.

With CalPERS’ new mess, a potentially big problem for Frost is that while she might be able to dismiss questions about whether she was honest over her education as the result of a misunderstanding, Naked Capitalism’s recent reports actually raise bigger concerns.

Accuracy of death-benefits claim questioned

For one example, Naked Capitalism writer Yves Smith last week wrote a persuasive analysis that argued that CalPERS had cherry-picked among data in claiming it was doing a better job processing death benefits in 45 days or less.

“CalPERS used an obviously cooked-up basis of comparison. Rather than take the same time period in successive years, CalPERS instead chose a set number of cases to examine (300 each) before and after a suspiciously arbitrary-looking cutoff date, February 12. Under questioning, the presenters admitted the ‘before’ cases included ones submitted in November and December,” Smith wrote.

“Why does this matter? The beginning of November through end of January is certain to be the worst time of year in terms of efficiency for a government agency. First, you have a high density of holidays compared to the rest of the year (Veterans’ Day, Thanksgiving, Christmas, Martin Luther King Day). Output suffers due to distractions like holiday shopping, more interaction with family members, and even getting out of the mood to work. Second, many employees also take vacation days around these holidays (and recall that CalPERS employees have generous vacation allowances). So there was also almost certainly reduced manpower to process claims during this period.”

There is no sign that Chiang or others with oversight authority are looking at this allegation. Last week, the CalPERS board made its feelings known about Frost, voting to raise her pay by 4 percent to $330,720 and to give her an $84,873 bonus.

Board officials suspicious of blog’s motives

A Sacramento Bee story last week about Naked Capitalism’s critiques of CalPERS gave space to CalPERS’ officials’ claims that there is something suspicious or perhaps partisan about an East Coast-based blog paying so much attention to a pension system across the nation.

In comments that the Bee reported were intended for Webber, CalPERS Vice President Rob Feckner said, “You’re not from California. Why would you be involved in a California election for that board? Why is it so important to you to get someone elected in that board?” Webber has been sharply critical of Feckner and other board members who have close relationships with Frost.

Naked Capitalism’s tart response: “CalPERS likes to relish its status as the biggest, highest profile public pension fund, but when it gets bad press, its stance is that it’s a parochial organization and why isn’t it left alone?” wrote Yves Smith.

No one familiar with the blog would consider it obsessed with CalPERS. The website’s roster of authors with Wall Street or banking backgrounds is long and their targets are widely varied. The site’s index cites nearly 5,000 stories about the global finance industry versus 98 about CalPERS.

The West Coast Times focused on the misleading campaign mounted by CalPERS to win passage of Senate Bill 400 in 1999. That’s the highly controversial law that provided a 50 percent increase in pensions to state employees, including for years already worked. The article, while hard-hitting, broke no new ground.

But the East Coast Times piece offered a sensational claim: CalPERS has two sets of books detailing members’ fiscal obligations — one upbeat, one grim. 

The N.Y. Times’ story amounted to an attack on the pension status quo of making long-term estimates of returns on investment in evaluating how well-funded CalPERS’ agencies were instead of using the more tough-minded “market approach,” which often results in much higher estimates of unfunded liability.

The anecdotal lead the paper used focused on the sticker shock in the tiny Citrus Pest Control District No. 2 when it tried to pull out of CalPERS and shift to a 401(k)-type system. The amount of money that CalPERS said the district was due was far less than what it had expected based on what it had been told about its funding liability.

CalPERS = Hotel California: ‘You can never leave’

To N.Y. Times reporter Mary Williams Walsh, this seemed like a Catch-22:

In California, some struggling local governments now doubt they can really afford their pension plans, and have told CalPERS they want out.

In response, CalPERS has calculated the heretofore unknown market value of their pension promises — and told them that’s the price of leaving, payable immediately. Few have that much cash, so it’s welcome to the Hotel California: You can check out anytime you like, but you can never leave.

CalPERS says it must bill departing governments for every penny their pensions could possibly cost because once they cash out, CalPERS has no way of going back and getting more money from them if something goes wrong. CalPERS keeps that money in a separate “termination pool.”

But a CalPERS spokeswoman said this approach was old news and was in keeping with state law. She suggested the N.Y. Times was confused about how pension agencies work: “CalPERS does not exist to make money. CalPERS exists to fully pay out benefits that are promised to its members.” 

The Naked Capitalism site agreed with CalPERS’ assessment. It knocked the two “Big Lies” of Walsh’s analysis:

First, CalPERS does not keep different sets of records. The pension fund has a very conservative, arguably punitive, methodology, which is enshrined in law for how to determine how much government entities that contract with CalPERS owe when they exit the pension system. … Second, the termination amount has been disclosed for every plan on CalPERS site since 2011, and prior to that, CalPERS would provide that information if an employer asked for it.

In other words, the failure of the six-employee Citrus Pest Control District No. 2, the itty bitty pension fund at the heart of this story, to access public information is being presented as some sort of nefarious plot. It had an overfunded pension, wanted to leave, but found that the method that CalPERS used to determine its “termination liability” resulted in the district owing money to CalPERS, not vice versa.

That means these rubes did not do their homework and got stuck with a big bill.

Website has trashed CalPERS for years

Pension reformers such as former state lawmaker Joe Nation might say Naked Capitalism is being too charitable to CalPERS, since the New York Times’ analysis gets to criticism that CalPERS has long faced for being unrealistic in its funding estimates.

But Naked Capitalism, which has ripped CalPERS for fudging the numbers on its returns, for being poorly managed and for being openly hostile to public criticism, has credibility. Author Yves Smith’s key points are that CalPERS is following national standards in assessing pension valuations and in penalizing agencies which seek to withdraw, and that it’s simply false to say the giant pension fund is hiding what it’s doing.

Smith suggests CalPERS’ history of dubious behavior makes it vulnerable to unfair attacks, but that this record doesn’t justify “a basic fail of journalism.”

Given CalPERS’ prominence — it is the largest public pension agency in the United States — the New York Times’ story could well end up before the newspaper’s de facto ombudsman, Public Editor Liz Spayd.

As one of 13 CalPERS board members, J.J. Jelincic presumably has some authority. But last June and July, he filed Public Records Act requests to force CalPERS to give him weekly reports from its federal lobbyists, much like any member of the public.

 

CalPERS tripled its federal lobbying force last year from one all-purpose firm, the Lussier Group, to three separate lobbying representatives for retirement policy, investment and market regulation, and health care issues.

 

Jelincic wanted to see what CalPERS was getting for its increased spending. So he asked for the weekly reports from the lobbyists, as specified in their contracts. But the rest of the board had decided monthly reports, also specified in the contracts, are enough, and Jelincic’s informal request was denied.

 

The unusual Public Records Act requests by a board member helped trigger a CalPERS governance committee discussion last month of “board member behavior” that was clearly aimed at Jelincic.  … In addition to filing the Public Records Act requests, Jelincic was criticized by other board members for “disparaging” staff in public and taking more than his fair share of time at board meetings by asking questions.

Board targets only member who challenges staff

CalPERS’ actions got two much more savage takedowns at Naked Capitalism, a popular niche website dedicated to exposing improper and unethical behavior by large financial institutions and corporations and the government agencies which regulate them. Susan Webber, a 35-year veteran of Wall Street and high finance, writes for the site under the name Yves Smith. Among her allegations:

• CalPERS board routinely tries to hide basic information about what its doing, apparently at the behest of its staff, which doesn’t like outside scrutiny.
• CalPERS ignores state laws on taking testimony at its meetings and uses security guards to intimidate individuals who ask difficult or multiple questions.
• CalPERS is trying to break Jelincic’s will by hassling him. Some specifics from Webber:

[Some video of last month’s] Governance Committee meeting clearly shows that the board, aided and abetted by [fiduciary counsel Robert] Klausner, is in the process of establishing a procedure for implementing trumped-up sanctions against Jelincic, presumably so as to facilitate an opponent unseating him in his next election. But Jelincic’s term isn’t up until 2018, so from their perspective they are stuck with an apostate in their ranks for an uncomfortably long amount of time. Part of their strategy appears to harass him into compliance with the posture the rest of the board, that of ceding authority to staff and conducting board meetings that are largely ceremonial. …

 

The board ganging up against Jelincic comes straight out of The Peter Principle. One of its corollaries was “hierarchical exfoliation,” in which organizations expel both poor performers and notable outperformers, the latter because they make everyone else look bad. Jelincic, the lone board member willing to do his job, must be tarred and feathered for his crime of showing the rest of the board up. …

 

[It] is particularly unseemly that the board member who has been the most aggressive in pushing the illegal notion that CalPERS can and should sanction Jelincic over filing Public Records Act requests is Priya Mathur, who has been fined repeatedly for violating state ethics laws.

Jelincic has history as CalPERS maverick

This isn’t the first time Jelincic has tangled with other board members and top CalPERS officials. The Sacramento Bee reported in April on one contretemps, involving limits put on his voting to avoid conflicts of interest because his full-time job is as a CalPERS investment officer.

In 2011, Jelincic was officially reprimanded for alleged sexual harassment of co-workers in CalPERS’ investment office. But he denied the allegations and called the sanctions “politically motivated.”

But Jelincic’s campaign biography and website doesn’t focus on his maverick ways. Instead, they emphasize his history as a union leader, including time as president of the California State Employees Association. Strong union support helped him first win his seat on the CalPERS board in 2009.