California pensions | Pension360

CalPERS Is Proposing 98 Ways To Boost Member Pensions

CalPERS is drafting new regulation that could boost worker pensions, but critics say the rules would fly in the face of much of Gov. Jerry Brown’s 2012 reform efforts. CalPERS is holding a public hearing on the issue tomorrow (Tuesday August 19) to seek the public’s feedback.

The new regulations could increase pension benefits for many workers by adding 98 new types of “pensionable compensation”—or, in other words, types of pay that can be counted toward pension benefits.

For example, workers would receive pension boosts for holding various professional certifications, for being bilingual or for working at the same job for a long period of time.

[Read the full list of types of pensionable compensation at the bottom of this post].

From a CalPERS press release:

The proposed new regulation is intended to clarify the types of pensionable compensation items that state, public agencies, and school employers report to CalPERS as part of a new member’s retirement benefit. The most common items excluded as pensionable for new PEPRA members are bonuses, uniform allowance, and any ad hoc payments. Members who were hired on or after January 1, 2013 are considered new members under PEPRA.

Compensation that is reportable for classic members is unaffected under the new regulation.

One category of pensionable compensation would be Incentive Pay.

A few other interesting special pay items:

As the CalPERS released indicates, these changes would only apply to new hires. But critics say the new rules would directly undermine California 2012 pension reforms, which also only dealt with new hires. From a LA Daily News editorial:

At issue is what counts as income on which pensions are calculated. The 2012 law was clear: Pensions for new employees should be based on their “normal monthly rate of pay or base pay.” Whereas current employees can boost their pension calculations by also including “special compensation” for “special skills, knowledge, abilities, work assignment, workdays or hours, or other work conditions,” the Legislature didn’t include those sorts of extra pay items for new employees.

The hearing over the draft regulations will be held on Tuesday at 9:30 am pacific time.

It will also be live-streamed at www.calpers.ca.gov.

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San Diego Pension Fund Pays “Big” Price For Big Office Space

One of California’s largest city pension funds is not only paying a “big” sum for its huge, high-end office space—it’s also locked into a long lease.

An investigation by a ABC10 found that the San Diego City Employees’ Retirement System is locked into a 10 year lease for the office space it rents, and the System will pay over $10 million in rent over that period. From ABC10:

The San Diego City Employees’ Retirement System manages a $7 billion fund. A review of office leases by Team 10 found SDCERS will spend $10.1 million renting office space at 401 West A Street in downtown San Diego. The lease is for 26,000 square feet over 10 years, and an SDCERS spokeswoman said 58 employees use the space — which breaks down to roughly 450 square feet per employee.

“I have to wonder why more than 20,000 square feet. Forget whether you own or lease it. Why that big a space?” real estate appraiser and San Diego State University lecturer Dana Kahn asked after reviewing the SDCERS lease.

Those numbers fall roughly in line with what SDCERS has reported publicly for years; according to its latest financial report, the System spent $998,000 on rent in 2013.

The investigation also looked into office space rented by the California Public Employees Retirement System.

CalPERS—the nation’s largest public fund—has eight offices around the state, although its staff is much larger than that of SDCERS.

CalPERS is a bit more secretive about its rental costs, as its financial reports don’t specifically disclose the cost of rent for its offices.

Its latest financial report does disclose that the System pays $3,789,000 for “facilities operations”, which may include rent as well as utility costs associated with its office spaces.

ABC10 managed to get a hold of SDCERS’ spokesperson over email, and she answered a few questions.

1. Why did SDCERS choose to rent office space?

SDCERS has been renting office space for many years. We’ve been in the current locating for the past seven, and then rented space in other downtown office building locations for many years before that.

2. Did SDCERS considering buying space?

No. The only investments in real estate done by SDCERS are as part of the fund’s real estate holdings in our investments portfolio.

3. How many employees work in the office?

There are 58 budgeted staff positions at SDCERS.

4. How much of SDCERS portfolio consists of real estate?

Real estate holdings in our investments portfolio account for 9.1 percent of the fund, or approximately $630 million.

5. Who negotiated the lease?

The original lease for SDCERS’ space at 401 West A Street was signed in April 2007. Signing for SDCERS were its then CEO and Board President. SDCERS was assisted in finding space by broker Irving Hughes. The first amendment to the current lease was signed in October 2013, again by its current CEO and Board President. SDCERS was assisted in negotiating the amendment by broker Hughes Marino.

Photo by Justin Brown via Flickr CC License

CalPERS Rescinds $700 Million Investment With Private Equity Fund Headed By Doctor With No Private Equity Experience

You probably trust your doctor with your life. But with your money? Many people might balk at the notion of their doctor making their investment decisions for them.

But back in 2007, CalPERS made a big bet: a $705 million investment in a private equity fund, Health Evolution Partners Inc., specializing in health care companies.

The CEO of the fund, David Brailer, is a nationally renowned physician who had previously been the “health czar” under George W. Bush. But this was his first foray into the investment space, and he had no experience running an investment fund or making private equity investments.

Still, he reportedly promised the CalPERS board healthy returns in excess of 20 percent.

But through seven years, the fund has never managed to exceed single-digit returns. And portions of CalPERS’ investment have actually experienced negative returns.

That has led CalPERS to cut ties with the fund, according to Pensions & Investments:

CalPERS is ending its unique experiment as the sole limited partner of Health Evolution Partners Inc., a private equity firm that focuses on health-care companies.

…

CalPERS data show the HEP Growth Fund had an internal rate of return of 6.5% from its inception in mid-2009 through Dec. 31, 2013. By contrast, the $5.3 billion growth fund portion of CalPERS’ private equity portfolio returned 12.72% for the five years ended Dec. 31, the closest comparison that could be made with the data the pension fund made available.

The HEP fund of funds has had more serious performance problems. Its IRR from inception in 2007 through Dec. 31, 2013 was -5.2%, show CalPERS statistics. CalPERS also wants out of that investment, but sources say a complicated fund-of-fund structure may make that difficult.

Mr. Desrochers would not comment on HEP, telling a Pensions & Investments reporter the matter was too sensitive to discuss.

CalPERS spokesman Joe DeAnda, in an e-mail, said, “We continue to evaluate all options relating to Health Evolution Partners.”

Mr. Brailer did not return several phone calls.

CalPERS paid the fund over $18 million in fees in the fiscal year 2011-12, according to the System’s financial report.

Meanwhile, CalPERS is gearing up for another large investment partnership, to the tune of $500 million, that will focus on infrastructure investments. FTSE Global Markets reports:

The California Public Employees’ Retirement System (CalPERS) today announced a new $500m global infrastructure partnership with UBS Global Asset Management.

CalPERS, the largest public pension fund in the US, will contribute $485m to the newly formed company, while UBS will contribute $15m and act as managing member.

The partnership will operate as Golden State Matterhorn, LLC and is set to pursue infrastructure investment opportunities in the US and global developed markets.

“UBS brings extensive experience and a proven track record in global infrastructure investing that makes them a great fit for this partnership,” says Ted Eliopoulos, CalPERS Interim Chief Investment Officer. “We’re excited to work with them as we identify and acquire core assets that will provide the best risk-adjusted returns for our portfolio.”

The CalPERS Infrastructure Program seeks to provide stable, risk-adjusted returns to the total fund by investing in public and private infrastructure, primarily within the transportation, power, energy, and water sectors.

Infrastructure investments returned 22.8% during the 2013-14 fiscal year and 23.3% over the past five years, outperforming the benchmark by 17.23 and 16.6 percentage points, respectively.

CalPERS holds about $1.8 billion in infrastructure assets.

Photo by hobvias sudoneighm via Flickr CC License

CalSTRS Fighting For Changes At PepsiCo After Underwhelming Performance

The California State Teacher’s Retirement System (CalSTRS) owns a $250 million dollar stake in PepsiCo. That makes the fund one of the corporation’s 60 largest shareholders, and it means that the fund’s opinions hold a certain power with PepsiCo—a power that they are now attempting to use after becoming dissatisfied with PepsiCo’s performance of late.

From the Financial Times:

One of the US’s largest pension funds has asked Pepsi to give activist investor Nelson Peltz a seat on the board, after becoming disillusioned with the soft drinks maker’s performance.

Although Mr Peltz’s investment firm, Trian Partners, has made little headway in its year-long battle to persuade Pepsi to split off its snacks business, his meetings with scores of shareholders have persuaded some that his voice should at least be heard in the boardroom.

Calstrs is not backing the break-up call, but wrote in a letter dated June 30 that Trian could help Pepsi address its operational performance and open management to new ideas.

“Trian has a long history of doing very well at these food and beverage companies,” said Aiesha Mastagni, investment officer at Calstrs, who wrote the letter, citing its previous activist positions at Heinz, Snapple and Kraft.

CalSTRS isn’t the only major shareholder looking for change. A few other major players have come forward in favor of change, albeit anonymously. From FT:

[CalSTRS’] concerns were echoed by top 10 shareholders who did not want to be identified.

One said: “They are good shareholders and they have ideas worth looking at, so we are hoping everybody comes together.”

Another top 10 investor explicitly backed the idea of a board seat for Trian, saying Pepsi could learn from the investor’s industry experience while Mr Peltz could learn more about the business before continuing his campaign to split it in two.

“The bigger issue is leadership,” this shareholder said. “The CEO does not have the respect of the investor community. If Trian were on the board, maybe she would listen. I would like to think she is still flexible enough to adapt.”

CalPERS is also a major PepsiCo shareholder. But the fund has stayed on the sidelines during this ordeal and has no plans to join CalSTRS’ corner.

Jerry Brown Sends CalPERS Board Back to School

California Gov. Jerry Brown wanted to make sure that the members of the CalPERS board knew what they are doing when making decisions regarding the fund’s nearly $300 billion investment portfolio. Now, Brown can rest assured that the members have spent some time in the classroom, studying up on the topics that are relevant to the governance of the country’s largest public pension fund. That’s because he just signed a bill requiring all board members to receive 24 hours of education on a variety of investment issues every two years.

From the Associated Press:

AB1163 by Assemblyman Marc Levine, D-San Rafael, originally was introduced as a way to meet Brown’s request to “bring financial sophistication” to the California Public Employees’ Retirement System’s 13-member board, which is dominated by public employees and labor union representatives.

Its original language required adding two board members who had financial expertise and did not have a financial interest in the pension system. It also proposed replacing the State Personnel Board representative with the state Director of Finance.

The bill was changed to give board members 24 hours of education every two years, require records of board members’ compliance with education requirements, and provide an annual report on CalPERS’ website.

The topics of the training are varied, but they include fiduciary responsibilities, ethics, pension funding, benefits administration, investment management, actuarial matters, and governance. All great things to learn about when you govern one of the largest pension funds on the planet.

You can read the entire bill here.

Photo by Eric James Sarmiento via Flickr CC License

The University of California Retirement System Is Scrambling to Cover Funding Shortfalls

When a pension system gives employees and employers a 20-year contribution holiday, you can bet it’ll run into some funding troubles down the line. University of California’s retirement system has been knee-deep in that harsh reality for years now. That has led to the borrowing of billions of dollars to cover funding shortfalls. And the University system has now taken out another massive loan.

From Ed Mendel at CalPensions:

UC regents last week approved borrowing another $700 million internally to help close a pension funding gap, bringing the total borrowed to $2.7 billion in a pension bond-like strategy with risks or rewards, depending on investment earnings.

Five years ago University of California employers and employees were paying nothing into the pension system. In a remarkable contribution “holiday” that began in 1990, payments into the system dropped to zero and stayed there for two decades.

After restarting in 2010, the employer contribution to the UC Retirement Plan increased from 12 to 14 percent of pay this month and most employee contributions increased from 6.5 to 8 percent of pay, a total of nearly $2 billion a year.

But the steady increase of contributions that were once zero still falls short of closing the pension funding gap. Last year UC Retirement had only 76 percent of the actuarially projected assets needed to pay pension obligations over the next three decades.

To help close the funding gap, UC borrowed $1.1 billion from its own Short-Term Investment Pool in 2011 and $937 million from external sources. The $700 million loan approved last week is from the short-term pool.

The UC Retirement fund, with assets valued at about $50 billion, expects to earn an average of 7.5 percent a year, the same as the California Public Employees Retirement System. Critics say the earnings forecast is too optimistic and conceals massive debt.

In what some call arbitrage, money borrowed at a low interest rate from the UC short-term pool (which earned 1.7 percent last year) and invested in the pension fund earns a profit if the return is the expected 7.5 percent or even a little less.

“I do feel we are on a little bit of a slippery slope here,” said Regent Fred Ruiz. “I think we have to be very cautious … The market changes from year to year, and if we don’t get the returns we need to have, then we are in great trouble.”

This is the same concept, essentially, as Pension Obligation Bonds. And, just like POBs, the outcome of this borrowing can either be of great benefit or great harm to the U of C pension system. Whether this turns out good or bad depends on future investment returns.

STUMP blogger Mary Pat Campbell gives her take on the dangers of U of C’s decision:

One should always match one’s borrowing to one’s accrual of expenses. It’s okay to finance the acquisition of an asset (such as a car or a house) with a loan that amortizes over the life of the asset. It’s not okay to take out a 30-year-loan to pay for a trip to Disney. The first is based on good financial principles, the second indicates you are living way beyond your means.

Short-term financing for operational expenses is fine if one has “lumpy” cash flows (which the UC system may have, depending on how they pay their staff. I get paid for my adjunct teaching only during the semester.) But even though they’re calling it a short-term pool, it sounds to me like what they’re doing is borrowing under short-term limits, but keeping rolling over the debt, as if it were a longer-term loan.

I really don’t like the sound of that.

That is something that could escalate rapidly should interest rates start to rise.

Bottom-line: borrowing money for a fake arbitrage is bad finance. The 7.5% return is just an assumption, not a sure thing. Real life returns vary a lot the way they invest it — and the loan interest is a sure thing, just as the pension benefits are a (supposed) sure thing.

We won’t know for years how this decision ultimately plays out for the University of California system. But you can bet the Regents have their fingers crossed.

California Cities Are Lining Up To Divest From Fossil Fuels, but CalPERS Isn’t Following

A movement is taking hold in California that encourages state and local governments to divest in companies that hold the largest reserves of oil, natural gas and coal.

Over two-dozen California cities—Oakland, Richmond, Berkeley, San Francisco and Santa Monica among them—have already made plans to divest from such companies. Now, the mayors of Berkeley, Oakland and Richmond are publicly asking CalPERS to follow them. From an Op-Ed published by the mayors in the Sacramento Bee:

As elected officials, we believe our investments should instead support a future where residents can live healthy lives without the negative impacts of climate change and dirty air. It’s time for CalPERS to take our public pension dollars out of dirty fossil fuels and reinvest in building a clean energy future, for the sake of our health, our environment and our children.

In actuality, there are more than morals at play here. The value of fossil fuel investments, and by extension CalPERS’ portfolio, may be at risk as well. From the Sacramento Bee:

The International Energy Agency has concluded that “no more than one-third of proven reserves of fossil fuel can be consumed prior to 2050” if the world is to limit global warming to 2 degrees Celsius. That goal “offers the best chance of avoiding runaway climate disruption.”

That means if the world’s governments take responsible action to prevent climate catastrophe, fossil fuel companies will have to leave some 75 percent of their reserves in the ground. These companies are valued by Wall Street analysts on the basis of their reserves. Meanwhile, fossil fuel companies continue to spend hundreds of billions of dollars on exploration for new reserves. A growing “carbon bubble” – overvalued companies, wasted capital and stranded assets – poses a huge risk to investments in fossil fuels.

CalPERS holds almost $10 billion in major fossil fuel company stocks and recognizes this financial risk. It recently adopted “investment beliefs” that include consideration of “risk factors, for example climate change and natural resource availability, that emerge slowly over long time periods, but could have material impact on company or portfolio returns.”

There’s actually precedent for pension funds following social movements and divesting in certain companies. In the 1980’s many funds divesting from companies doing business in South Africa as a way of protesting Apartheid—in that instance, California funds pulled nearly $10 billion worth of investments.

And it happened again last year, when numerous funds (including CalSTRS) divested from gun manufacturers in the wake of several school shootings.

But this time, CalPERS doesn’t appear to be interested in divesting from fossil fuel companies. The fund’s senior portfolio manager Anne Simpson addressed the issue in an editorial in the Sacramento Bee:

We all have a shared concern with climate risk, but our view is that the solution lies in engaging energy companies in a process focused on finding solutions, rather than walking away.

We at CalPERS talk to more than 100 companies on an annual basis to ensure the high standards of corporate governance that underpin effective climate change risk management, and we invest in climate change solutions across our global equity, private equity and real estate portfolios.

CalPERS was a founding member of the Investor Network on Climate Risk, a leading group of 100 institutional investors representing more than $10 trillion in assets, addressing a policy agenda that calls on governments and regulators to introduce carbon pricing and disclosure, so that risks can be tackled effectively.

CalPERS is also actively collaborating in the Carbon Asset Risk Initiative, led by the nonprofit Ceres, which draws together 70 global investors managing more than $3 trillion in assets. The initiative asks 45 large oil and gas, coal and electric power companies – including ExxonMobil, Royal Dutch shell, BHP Billiton, Rio Tinto and Vale – to assess the financial risks climate change poses to corporate business plans.

Of course, there is some evidence that divesting doesn’t actually accomplish the social goals these funds have in mind when they pull their money from companies. Liz Farmer at Governing explains:

There’s no proof that divesting actually effects change. In fact, a 1999 study concluded that apartheid-related pension divestments had no significant financial impact on companies doing business in South Africa.

What’s worse, targeting investments based on social causes has proven to be dangerous for pension plans. In 1983, a study found that 10 states that had targeted investments in mortgage-backed securities as a way of encouraging homeownership either inadvertently or deliberately sacrificed returns. In some cases, they gave up as much as 2 percent in returns all for the goal of making homeownership more accessible. In 1990, Connecticut’s pension fund bought a 47 percent interest in Colt Industries in an attempt to protect Connecticut jobs. The firm went bankrupt two years later and the fund lost $25 million.

This will be an interesting story to watch play out. CalPERS will likely come under scrutiny no matter what they decide to do. In any case, any investment decision that results from this campaign should be transparent and financially sound. Pension360 will keep you updated on future developments.

CalPERS and CalSTRS Rake in Big Returns, But Much Work Left To Be Done

The 2013-14 fiscal year ended June 30, which means we’ve entered a new year for public pension funds, at least in fiscal terms. It also means that the latest investment performance data is being released, and that data has some funds smiling.

California is one state that has to be happy with what it sees: big investment returns for both of the state’s major pension funds, CalPERS and CalSTRS. From SWFI:

The California Public Employees’ Retirement System (CalPERS) returned 18.42% for the fiscal year that ended on June 30th. CalPERS defeated its custom benchmark of 17.98% and surpassed last fiscal year’s return of 13.2%. The private equity portfolio of CalPERS generated 19.99% returns, just 3.31% shy of the benchmark. The asset classes of real estate and fixed income beat their respective benchmarks.

And CalSTRS saw similar success, says SWFI:

Looking toward the other Sacramento pension giant, CalSTRS posted 18.66% for the fiscal year that ended on June 30th.

The CalSTRS global equity portfolio posted 24.73% in returns. CalSTRS private equity posted 19.61% in returns.

But just because you can see the light doesn’t mean you’re out of the tunnel. CalPERS still has a lot on its plate. From the Sacramento Bee:

Happy days are hardly here again for the California Public Employees’ Retirement System, or for taxpayers who must make good on government pensions.

“There’s much, much work to be done,” said Ted Eliopoulos, CalPERS’ interim chief investment officer. “We’re ever vigilant; we try not to get too excited in good years or bad years about one-year results.”

Eliopoulos knows better than most that CalPERS remains in a deep hole.

Even with the 18.4 percent return, CalPERS estimates that it is only 76 percent funded, a remnant of overpromises made by the Legislature in 1999 and the finanical crash of 2007 and 2008. CalPERS would need to make 18 percent on top of 18 percent for several years running, and no one should expect that to occur.

CalPERS was also in the news last week when its former chief executive, Fred Buenrostro, pleaded guilty in a sordid federal criminal case in which he admitted to taking bribes of $200,000 in cash, some of it delivered in a shoebox, no less, as detailed by The Sacramento Bee’s Dale Kasler.

The case against Buenrostro and Villalobos is salacious, but it’s also a sideshow. No matter how corrupt they might have been, they would not have affected the giant pension fund in any significant way.

The far bigger problem is CalPERS’ unfunded liability. That will take years to fix.

In fact, although both funds have come a long way since 2008, neither one is out of this mess. From the Sacremento Bee:

On the surface, CalPERS and CalSTRS have recovered from the crippling multibillion-dollar losses they suffered when the housing bubble burst and the stock market crashed in 2008. CalSTRS’ portfolio, for example, has risen to $189.1 billion in market value, well above the pre-crash watermark of roughly $160 billion. Similarly, the CalPERS portfolio has soared 83 percent since bottoming out at $164 billion in 2009, putting it at $299 billion.

Despite the comeback, the funds spent several years after the crash with a much smaller pool of money to invest. That limited the amount of money they could earn. Even as they made gains, they’ve been unable to keep pace with their pension obligations, which have continued to rise as government workers accumulate years of service.

As a result, CalPERS is 76 percent funded. CalSTRS is 67 percent funded. They have more than enough money to pay pension benefits for now and the foreseeable future, but don’t have enough for the long term. Experts say 100 percent funding is ideal, although a funding level as low as 80 percent is acceptable.

To be fair, California isn’t in denial about the funding status of its two largest funds. And it isn’t letting big returns blind them to the issue, either.

Both funds are increasing contributions rates for members and employers, and the state has increased its own 2014 contribution to both funds. The changes will bring in billions more dollars annually to the system.

New Details Emerge In CalPERS Conspiracy Case; Ex-CEO Accepted $200,000 in Bribes

Slowly but surely, we are learning more details about the bribery, conspiracy and cronyism that took place within the walls of CalPERS between 2002 and 2008. Prosecutors have had working theories since early 2013, but the case broke wide open last week when former CalPERS Fred Buenrostro pleaded guilty to charges of fraud conspiracy and bribery.

Now, he’s telling his story. Much of what he is saying we already know: he and his friend Alfred Villalobos (a placement agent) conspired to direct billions of dollars in CalPERS investments to a private equity firm called Apollo, for which Villalobos was working as a placement agent.

They also falsified documents to make sure Villalobos raked in massive finders fees to the tune of $14 million; Buenrostro was rewarded with a Lake Tahoe condo, free trips to Dubai and Hong Kong, and a cushy $300,000 a year job at an investment firm after his retirement from CalPERS.

But in a new twist, Buenrostro says he received $200,000 in bribes, delivered via paper bags and shoeboxes, for his trouble. Breitbart reports:

What was new Friday was the blockbuster admission that Buenrostro took $200,000 in cash from Villalobos. In his written plea agreement, Buenrostro said Villalobos paid him in three installments in 2007, “all of which was delivered directly to me in the Hyatt hotel in downtown Sacramento across from the Capitol.”

According to Buenrostro, Villalobos told him to be careful how he deposited the cash in order to avoid detection by banking authorities. “Villalobos told me to be sure to ‘shuffle’ the currency before making any deposit, as the bills were new and appeared to be in sequential order,” Buenrostro wrote.

Later, after he’d left CalPERS and the investigation into their relationship gained momentum, Buenrostro said he accepted an additional $50,000 from Villalobos, paid by check.

Buenrostro is hoping that by cooperating with the investigation, his prison sentence will be reduced. But that depends on how much he has to tell; after all, much of what he has said was already public knowledge. Ed Mendel of CalPensions has read the plea agreement:

Apart from providing the bogus disclosure documents for Apollo, the plea agreement has few specifics about what Buenrostro accomplished for Villalobos while taking gifts and cash from late 2004 until leaving CalPERS in May 2008.

Would Buenrostro tell what success he had in influencing specific CalPERS investment decisions? Does he know if confidential information helped Villalobos, who received at least $50 million in fees, get specific clients seeking CalPERS investments?

What additional information, if any, federal prosecutors may want is not mentioned in the plea agreement.

But there are hints of a larger conspiracy here. Is it possible other CalPERS board members were in on it? Or is Buenrostro simply dropping half-truths to improve his bargaining position with authorities? Again from Mendel:

The Buenrostro plea agreement twice uses the phrase “I did knowingly and intentionally conspire with Villalobos and others.” Whether “others” refers to persons not yet named or is just a legal catch-all term is not clear.

An oddly veiled incident briefly described in the plea agreement seems to suggest that Villalabos used undue influence, if not small bribes, to get the CalPERS board to approve a pharmacy benefits contract.

“In approximately 2005, I observed Villalobos provide valuable casino chips to certain (now former) members of the CalPERS board as well as my wife before the board considered a proposal from Health Care Company No. 1 in connection with CalPERS’ health care benefit program,” said Buenrostro.

Without naming the company or board members, Buenrostro said he saw two of the board members recommend a contract with the company in a CalPERS committee, and then at the full CalPERS board all three chip recipients voted for the contract.

A similar incident is described with names and more detail in a special review of placement agents done for CalPERS by the Steptoe & Johnson law firm and Navigant Consulting, costing $11 million and issued in March 2011.

In 2004, Medco Health Solutions, which lost the CalPERS pharmacy benefits contract several years earlier, hired Villalobos as a consultant for $4 million, said the special review.

Later that year three CalPERS board members — Charles Valdes, Kurato Shimada and Robert Carlson — met with Villalobos, Buenrostro and the Medco CEO, David Snow, at Villalobos’ home at Lake Tahoe.

The five men (excluding Snow) had served together on the CalPERS board ten years earlier, said the review. Buenrostro was hired as CEO in 2002 with the support of Valdes, Shimada and Carlson.

“Valdes also reportedly joined Buenrostro and Villalobos at casinos local to the Villalobos home, where he and others are said to have accepted hundreds of dollars in playing chips from Villalobos while there,” said the review.

“We understand that the chips were offered to Valdes, Buenrostro’s wife at the time, and others to allow Villalobos more time to speak with Buenrostro alone.”

The review said “Shimada also reportedly joined Buenrostro, Valdes and others on visits to casinos local to the Villalobos home and has, at different times, denied and acknowledged accepting playing chips from Villalobos while there.”

Valdes left the CalPERS board in 2009 without seeking re-election.

Shimada resigned from the board in 2010. In 2007, he was the head of a CalPERS committee that rejected a proposal to disclose placement agent fees associated with CalPERS investments.

CalPERS Sends Message to Cities: Pay Up

In 2012, the city of San Bernardino, California made an unprecedented move: bankrupt and financially handcuffed, the town defied pension juggernaut CalPERS and simply stopped paying its contributions to the system. It has since resumed making those payments, but the fight is far from over. Now, CalPERS wants the city to pay back the payments it missed:

At issue is the $17 million in back payments and penalties that San Bernardino failed to make between declaring bankruptcy in August 2012 and resuming payments in July. Calpers has maintained that it is owed in full. But now in bankruptcy negotiations, the city is hoping to pay only a fraction of that, arguing that the city’s creditors must all share in the bankruptcy pain. The amount may be small, given the system’s assets, but if San Bernardino gets a reduction, the precedent could be huge, opening the door to other struggling municipalities using bankruptcy law to justify delaying or withholding payments to the pension system.

“This city has taken on the 800-pound gorilla, which is Calpers,” said Ron Oliner, a lawyer for the San Bernardino Police Officers Association, which represents the city’s uniformed officers. “Everyone in California is watching San Bernardino, and everybody in the nation is watching California.”

Calpers has for many years resisted all efforts to allow cities, for whatever reason, to stop making their required payments. (Federal law allows bankrupt companies to slow them greatly.) While agreeing that “significant progress has been made in the mediation,” Rosanna Westmoreland, external communications manager for Calpers, said the pension system’s hands were largely tied by statutes mandating that all the pension system’s participants make their full contributions on time and that no workers’ benefits be reduced. “It is the law,” she said.

The problem is that it remains unclear whether, in cases like this, federal bankruptcy law trumps state pension laws. A federal judge hearing the Detroit bankruptcy case ruled, for instance, that federal laws took precedence in that case, so the benefits of city workers in Detroit could be reduced in defiance of state law. But Calpers has insisted that this does not apply to the situation in California, an assertion that may be tested in court, if the mediation provides no solution.

Even before a recent wave of municipal bankruptcies hit California, the California Public Employees’ Retirement System, known as Calpers, had also insisted that under state law, no local government or public agency could reduce the benefits of current workers or retirees.

Cutting pension costs have proved difficult in California. That’s due to the so-called “California Rule”, which prohibits the rollback of pension benefits, even on a go-forward basis. Economist Sasha Volokh explains:

Most states are free to alter public employee pensions, as long as they do so on a purely prospective basis. For instance, a state can reduce cost-of-living adjustments (COLAs), say from 3% to 2%, as long as the amount accrued so far is still subject to the old COLA. But the rule is otherwise in California: California courts have held that ‘upon acceptance of public employment [one] acquire[s] a vested right to a pension based on the system then in effect.
In California, when a public employee begins work, he not only acquires a right to the pension accumulated so far—presumably zero on the first day, and increasing as he works longer—but also the right to continue to earn a pension on terms that are at least as generous as the ones then in effect, for as long as he works. And if pension rules become more generous in the future, then those more generous terms are the ones that are protected. Any changes to these rules must be reasonable, meaning that they ‘must bear some material relation to the theory of a pension system and its successful operation,’ and any disadvantages to the employees ‘should be accompanied by comparable new advantages.’ This is the ‘California rule.

Cities have tried to roll back their pension obligations. San Jose was one such city; earlier this year, it passed a plan forcing employees to pay more towards pensions. But the courts responded with a resounding “you can’t do that”. Volokh, for one, doesn’t like the economics behind that ruling.

When pensions are given special protection that’s unavailable for other job characteristics, the mix of wages and pensions is distorted relative to what it would otherwise be (given collective bargaining, tax policy, employee time and risk preferences, and other factors). If market or fiscal pressures mean government compensation must become less generous, it’s salaries and other benefits that must take the hit, even if some employees would prefer to take some of the blow in terms of decreased pension benefits. Those with shorter life expectancies — men, the less-educated, the poor, minorities, and those in bad health — suffer the most from policies that protect pensions at the expense of current salaries. Some of the pain will also fall on taxpayers, and some of that pain may result in trimming state government services (e.g., police, fire, garbage collection, DMV, schools). The California rule thus makes reductions in government compensation either more painful for employees or more expensive to taxpayers than they would be if pension terms could adjust together with salaries and other benefits.

Anyhow, CalPERS is setting a precedent with its action towards San Bernardino. It’s a precedent that indicates, bankrupt or not, cities still owe CalPERS its money.

Photo by Pete Zarria via Flickr CC

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