CalPERS May Have Approved Special Pay Items Without Doing The Math On Cost

one dollar bill

CalPERS recently approved a list of 99 “special pay items”, or bonuses given to workers whose jobs meet certain requirements.

But a report from the Los Angeles Times suggests that CalPERS approved the items without knowing how much they would cost.

From the LA Times:

CalPERS repeatedly told The Times it didn’t know how much the bonuses were adding to the cost of worker pensions even though cities submit detailed pay and bonus information that is used to calculate retirement pay.

Even a small bump in salary can cause a public agency’s pension costs to soar. An increase of $7,850 to a $100,000 salary can amount to an additional $118,000 in retirement if the employee lived to 80, according to an analysis by the San Diego Taxpayers Assn., a watchdog group that scrutinizes city finances.

Fitch, a Wall Street rating firm that weighs in on the financial health of governments, warned that the pension fund’s vote would burden cash-strapped cities.

“Cities and taxpayers will undeniably face higher costs,” said Fitch analyst Stephen Walsh. “Pensions are taking a bigger share of the pie, leaving less money for core services.”


At The Times’ request, CalPERS analyzed salary and bonus costs for Fountain Valley — one of hundreds of cities and public agencies that award pension-boosting bonuses to workers.

CalPERS found the Fountain Valley perks could hike a worker’s gross pay as much as 17%. About half the city’s workforce received the extra pay that will also increase their pensions, most of them police and fire employees.

CalPERS’ response to the report:

CalPERS executives said they don’t understand the anger caused by the board’s vote. The action simply clarifies the 2012 reform law, which was designed to stem rising pension costs, said Brad Pacheco, a spokesman for the agency.

CalPERS always assumed that new employees would continue to benefit from bonuses just as those hired earlier did, Pacheco said. The reform law is still estimated to save taxpayers $42 billion to $55 billion over the next 30 years, he said.

“It’s far-stretched to say this is a rollback of reform,” Pacheco said. “We implement the law as it was written, not how others wish it were written.”

The special pay items passed a vote from the CalPERS board, but some board members have voiced their displeasure for the rules, according to the LA Times:

State Treasurer Bill Lockyer and state Controller John Chiang both complained about the pension boosters but said they had little choice but to approve them.

“Many of the items on this premium pay list are absolutely objectionable,” said Tom Dresslar, a spokesman for Lockyer. But frustration, he said, “needs to be directed to the proper place, which is the public agencies that negotiated the perks through collective bargaining agreements.”

All of Pension360’s coverage of CalPERS’ special pay items can be read here.

How Should Investors Manage Climate Change Risk?

windmill field

CalPERS is measuring the carbon footprint of its portfolio. CalSTRS is helping to fund a study on the market impact of climate change.

For the first time, institutional investors are beginning to wonder: How will climate change impact the value of our investments?

Howard Covington of Cambridge University and Raj Thamotheram of the Network for Sustainable Financial Markets tackled that question in a recent paper, titled How Should Investors Manage Climate Change Risk, in the most recent issue of the Rotman International Journal of Pension Management. From the paper:

The consequences of high warming, if we collectively go along this path, will emerge in the second half of this century; they are therefore remote in investment terms….Capital markets anticipate the future rather well, which suggests that investment values may respond strongly over this time scale as views on the most likely path begin to crystallize. Technologies for producing and storing electrical energy from renewable fuel sources, for energy-efficient housing and offices, and for reducing or capturing and disposing of greenhouse gas emissions from industrial processes are moving along rapidly. In important areas, costs are falling quickly. Given appropriate and moderate policy nudges and continuing economic and social stability, it is overwhelmingly likely that the global economy will substantially decarbonize during this century.

If…an emissions peak in the 2020s becomes a plausible prospect, investment values for fossil fuels, electrical utilities, and renewable energy (among others) will react strongly. The value of many fossil fuel investment projects will turn negative as assets lose their economic value and become stranded; companies and countries will face significant write-downs, with clear consequences for financial asset prices.

As the authors note, we don’t know exactly how the earth will eventually react to greenhouse gasses. Different responses will have different implications for the global economy. From the paper:

If we are unlucky, and the climate’s response comes out at the upper end of the range while emissions go on climbing, the likelihood of the global economy’s potentially heading toward rolling collapse will significantly increase. A run of extreme weather events in the 2020s, particularly events that lead to sharp increases in prices for staple crops or inundate prominent cities, might then focus the attention of the capital markets on the consequences. A broad adjustment of asset values might then follow as investors try to assess in detail the likely winners and losers from the prospect of an increasingly turbulent global social, economic, and political future.

We are not suggesting that this kind of outcome is unavoidable, or even that it is the most likely. We are merely noting that the chance of events’ unfolding in this way over the next 10 to 15 years is significant, that it will rise sharply in the absence of a robust climate deal next year, and that long-term investors need to factor this into their investment analysis and strategy.

If these scenarios correctly capture the likely outcomes, then we have reached a turning point for the global economy. For the past 150 years, the exploitation of fossil fuels has generated enormous value for investors, both directly and by enabling global industrialization and growth; but it is now rational to anticipate that continued and increasing emissions from fossil fuel use might, over several decades, lead to the destruction of investment value on a global scale. Moreover, capital markets may adjust to this possibility on a relatively short time scale.

So how should institutional investors respond?

Broadly speaking, there are three main ways that investors can help. The first is to raise the cost of capital for companies or projects that will increase greenhouse emissions. The second is to lower the cost of capital for companies or projects that will reduce greenhouse emissions. The third is to use their influence to encourage legislators and regulators to take action to accelerate the transition from a high- to a low-emissions economy.

Formally adopting a policy of divesting from the fossil fuel sector can be helpful with the first of these, provided that the reasons for doing so are made public, so that other investors are encouraged to consider their own positions. Alternatively, active investors might take significant shareholdings in fossil fuel companies, so as to exert a material strategic influence to prevent investments that encourage long-term value destruction.

Supporting investments in renewable energy sources and related sectors is particularly effective where the potential exists to disrupt traditional industries. Tesla Motors is a case in point, since the potential for rapid growth of electric vehicles could transform the auto industry. Through the related development of high-performance, low-cost battery packs, it may also transform both the domestic use of solar power and the electrical utility business.

There is little time left for legislators to agree on the terms for orderly cooperative action to reduce emissions. Investors concerned about long-term value should act now to encourage the adoption of mechanisms to ensure an early peak and rapid decline in greenhouse missions. By the end of 2015, the chance for this kind of action will have largely passed.

The above excerpts represent only a portion of the insights the paper has to offer. The rest of the article can be read here [subscription required].


Photo by Penagate via Flickr CC

“Historic” Ruling Expected in Stockton Bankruptcy Case; Can A Bankrupt California City Cut Pensions?

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Can a bankrupt California city legally reduce both its payments to CalPERS and the pension benefits it promised to its workers?

Those are the questions that will likely be answered by the end of the day Wednesday in what’s already being called a “historic” ruling. From the Sacramento Bee:

After months of buildup, U.S. Bankruptcy Judge Christopher Klein is likely to rule on a protest filed by one of Stockton’s creditors, Franklin Templeton Investments. Franklin said the city can’t continue paying its full pension contribution every year to CalPERS while offering a meager payout on the $36 million owed to the investment firm.

At a July 8 hearing, Klein hinted that he was sympathetic to Franklin’s view. “I might be persuaded that … the pensions can be adjusted,” he said.

It’s not at all certain whether Stockton would reduce its pension payments, even if Klein says it can. Under state law, CalPERS says it would have no choice but to end Stockton’s pension plan. Pension benefits would drop by an estimated 60 percent, which city officials believe would trigger a mass exodus by police officers and other employees.

Regardless of what Stockton does, CalPERS has been fighting strenuously to avoid a legal ruling that says pension contributions are no longer untouchable. The giant pension fund’s lawyers say CalPERS is merely trying to protect a system that serves the public well.

“Pensions secure financial futures and help the state and its local subdivisions recruit and retain valuable public servants,” CalPERS’ lawyers said in a recent court filing. “Putting a cloud over public pensions only invites worry and uncertainty about the security of those pensions.”

Public pensions have been considered ironclad for generations. State legislatures are free to reduce benefits for new workers, as California did in 2013, but it’s long been agreed that promises made to existing employees and retirees must be kept.

Those legal protections, however, have been under duress ever since Stockton filed for bankruptcy protection in 2012. Several of the city’s Wall Street bond creditors, who lent the city more than $200 million during the housing boom, warned that they would fight in court if they were left with peanuts and the city’s $29 million-a-year contribution to CalPERS was left intact.

A bankruptcy judge ruled earlier this summer that Detroit could indeed cut pension benefits as part of its bankruptcy proceedings.

But CalPERS argues that the ruling doesn’t apply to California, because California protects pension benefits under its constitution. Michigan doesn’t.

CalPERS Is Ramping Up Its Real Estate Portfolio. Why?

Businessman holding small model house in hands

Last week marked a big shift in investment strategy for CalPERS, and it goes beyond hedge funds. The pension fund’s hedge fund pullout got all the headlines, of course, but CalPERS also decided to invest an addition $1.3 billion in real estate.

The reasoning behind dropping hedge funds has been made clear. But what about the real estate investments? Over at, Erika Morphy explores some of the reasons that could be behind CalPERS’ deep dive into real estate.


It’s business as usual

It was just real estate’ turn, says Stephen Culhane, who heads the investment management practice at the law firm Kaye Scholer.

“Institutional investors are always assessing and reassessing their allocations,” he tells “Commercial real estate valuations are strong and it is perceived as a bit as a safe haven particularly for non US and long-term investors.”

It’s a shift in investment philosophy – and not just a change in asset allocation

CalPERS handles over $300 billion for over 1 million current and former state employees. Their investing philosophy is transitioning from a classic hedge fund, 60/40 model, to more of an endowment model, says Jeff Sica, founder and CIO of Circle Squared Alternative Investments.

“CalPERS is aiming to reduce volatility and obtain a more predictable annual return across their portfolio,” Sica tells “Their move into real estate provides them with stability and a quantifiable income stream. With reduced volatility and a stabilized annual return, it will be more beneficial to them in the long run instead of fluctuating with the equity market,” he says.

Hedge funds have lost their appeal.

Despite CalPERS careful explanations, this is the theory of Bill Militello, co-founder and CEO of Militello Capital.

“The increasing trend of moving away from hedge funds is due in part to their lack of transparency and a lack of understanding of the investments—they are intangible,” he tells “Hedge funds are simply public securities in a different wrapper, they are not an asset class, they are a compensation scheme.”

There is also evidence that hedge funds on an overall basis have actually underperformed versus passively managed funds, Chauncey M. Swalwell, partner with Stroock & Stroock & Lavan LLP, tells—”making the relatively high fees typically paid to hedge fund managers untenable at CalPERS.”

It is an inflation hedge

This is the flip side of fund’s decision, Militello adds. “Properly purchased real estate in supply constrained markets with built in demand drivers provides access to well-insulated investments that protect against rising interest rates.”

There isn’t space here to list all the potential reasons listed. You can read all seven reasons here.

LACERS also committed an additional $190 million to real estate investments last week.

5 Potential Outcomes Of CalPERS’ Hedge Fund Pullback

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The last week has seen a flurry of debate of what CalPERS’ hedge fund divestment actually means in the bigger picture.

Is this an instance of just one fund shifting its investment strategy? Or is it emblematic of a larger, accelerating trend?

At FinAlternatives, the founder of a hedge fund marketing firm has weighed in on the potential outcomes of CalPERS’ decision. Don Steinbrugge writes:

Agecroft Partners believes we will see the following 5 outcomes:

1. Continued pressure on hedge fund fees for large mandates

Over the past 5 years there has been a strong trend of hedge funds increasingly offering fee breaks for large pension funds and the clients of institutional consulting firms. These fee breaks began with a discount on management fees only, but now often includes performance fees. Fee breaks vary by manager, but for a typical hedge fund with a 2 and 20 fee structure the discount is often 25% off standard fees…

2. Pension funds will continue to increase their allocation to hedge funds

The average public pension fund will continue their long term trend of increasing their allocation to hedge funds in order to enhance returns and reduce downside volatility of their portfolio…

3. More focus on smaller hedge fund managers

In a study conducted from 1996 through 2009 by Per Trac, small hedge funds outperformed their larger peers in 13 of the past 14 years. Simply put, it is much more difficult for a hedge fund to generate alpha with very large assets under management…

Steinbrugge writes much more over at the link, here.

Steinbrugge is the Founder and Managing Partner of Agecroft Partners, a global hedge fund consulting and marketing firm.

CalSTRS Doubles Down On Clean Energy Investments

smoke stack

At least one pension fund is seeing the potential for “green” (read: big money) in clean energy investments.

CalSTRS announced plans to significantly ramp up investments in the “green” sector from $1.4 billion to $3.7 billion over the next 5 years. AP reports:

CalSTRS CEO Jack Ehnes says the pension fund is seeing more opportunities in low-carbon projects and technologies. The fund is hoping also to help push for stronger policies aimed at fighting climate change, Ehnes says.

If policies are adopted that impose a price on carbon emissions to discourage pollution, the fund could increase its investments further, to $9.5 billion.

The fund has a $188 billion portfolio.

The clean energy and technology investments will be made through holdings in private equity firms, bonds, and infrastructure as suitable investments come available, the fund says.

The move comes on the heels of calls in recent years for pension funds to divest from fossil-fuel dependent investments. From the Financial Times:

At least 25 cities in the US have passed resolutions calling on pension fund boards to divest from fossil fuel holdings, according to figures from, a group that campaigns for investors to ditch their fossil fuel stocks.

Three Californian cities, Richmond, Berkeley and Oakland, urged Calpers, one of the largest US pension schemes, with $288bn of assets, and which manages their funds, to divest from fossil fuels. Calpers has ignored their request.

Calpers said: “The issue has been brought to our attention. [We] believe engagement is the best course of action.

No pension funds have yet divested from fossil fuel-dependent investments for social reasons, including CalSTRS.

But you can expect pension funds to go where they think the money is; in the case of CalSTRS, they are seeing “green” in clean energy going forward.


Photo: Paul Falardeau via Flickr CC License

CalPERS Sticking With Commodities After Considering Pullback

stock market numbers and graph

CalPERS is not exiting commodities, a fund spokesman said this week, although it had slashed its commodities portfolio earlier this summer. CalPERS’ complete pullback from hedge funds made some observers wonder whether other allocation shifts were on the horizon.

But for now, the fund says its commodities investments will continue as planned. From Reuters:

The $300 billion Calpers…has maintained a portfolio of commodity futures tied to the S&P GSCI since 2008.


“This [hedge fund] decision does not impact … commodities, or any other program, at Calpers,” he said in an email, referring to Calper’s decision to pull out of hedge funds entirely.

Some of the hedge funds on Calpers list may have commodities exposure and dropping them could indirectly affect sentiment in the sector, investment advisers said.


The Calpers’ commodities portfolio has fluctuated in value since its 2008 inception, due to both the performance of the S&P GSCI and portfolio adjustments made by Calpers.

From $1.4 billion at end-June 2008, it plunged nearly 60 percent in value over the next year to around $600 million after the financial crisis. After rising to $700 million in 2010 as commodity markets rebounded from the crisis, the portfolio suddenly rocketed in value, reaching a high of $3.2 billion at end-June 2012, apparently from new money channeled by Calpers.

But as commodity markets struggled again in 2013 and Calpers realized little earnings from the investment, it slashed the portfolio, bringing it to $1.3 billion by June this year, a preliminary report for 2014 showed. Much of the funds were diverted to inflation-linked bonds, Calpers data showed.

Reports had surfaced back in August that CalPERS was seriously considering cutting back its commodities investments. The Wall Street Journal wrote:

One of the more-dramatic moves under consideration is a complete pullback from tradable indexes tied to energy, food, metals and other commodities, according to people familiar with the discussions. Calpers began making such investments in 2007 as a way of diversifying its portfolio…


The discussions are taking place between the fund’s interim Chief Investment Officer Ted Eliopoulos and Calpers’s other top investment executives. The Calpers board hasn’t yet been informed about any possible changes and no final decisions have been made, the people said.

Obviously, CalPERS never pulled the trigger on a commodities exit. But the fund has shown a willingness to quickly shift its investment policy and a preference for low-cost investments.

Video: CalSTRS CIO On Sticking With Hedge Funds

In the above video, we get to hear the Chief Investment Officer of CalSTRS, Christopher Ailman, weigh in on CalPERS’ decision to divest from hedge funds. The gist: CalPERS did what was right for them, but CalSTRS is sticking with hedge funds.

“CalPERS’ decision does not change our mind or our opinion,” Ailman said during the interview.

CalSTRS made its first hedge fund seed investment earlier this year when it committed $200 million to Legion Partners Asset Management LLC. Bloomberg reported back in May:

CalSTRS, based in Sacramento, California, pledged $200 million to Legion in February and took a 30 percent minority stake, investment officer Philip Larrieu, who oversees the pension’s allocations to activist managers, said in an interview last week at the SkyBridge Alternatives Conference in Las Vegas.
The pension system, which has about $4.6 billion with activist managers including Trian Fund Management LP and Relational Investors LLC, is weighing additional investments in the strategy, especially in managers such as Legion that invest in small- and mid-cap companies. Activist investors take stakes in companies and then push for changes aimed at increasing value.


The pension system will consider additional seed investments for the ability to take minority stakes in funds and early allocations for concessions on fees, according to Larrieu. CalSTRS’ other activists include Blue Harbor Group LP, New Mountain Capital LLC, Starboard Value LP, Cartica Capital LLC and Knight Vinke. CalSTRS commits a minimum of about $100 million to each fund and prefers to be the sole investor in a pool, also known as a fund-of-one structure, Larrieu said.

Advisors, Fund Managers React To CalPERS’ Hedge Fund Pullout

Scrabble letters spell out Hedge Fund

We’ve heard what CalPERS officials had to say about the decision to cut ties with hedge funds. But how are advisors and fund managers within the industry reacting to the news?

A few anonymous hedge fund advisors have claimed that CalPERS’ problem wasn’t hedge funds as an asset class—the problem was that the pension fund was bad at picking which hedge funds to invest in. From Business Insider:

“I think CalPERS is not a particularly good hedge fund investor,” one prominent hedge fund manager told Business Insider. He cited the pension fund’s lackluster annualized rate of return of 4.8% over the last ten years. “I would redeem too.”

He continued: “I think it’s not hedge funds as an asset class. It’s the ones they invest in.”

Another prominent hedge fund manager echoed that same sentiment.

“They got what they paid for since they only invested in managers who would cut fees. So the best funds wouldn’t do that, so they had a mediocre portfolio.”

Another investment officer gave a more measured response to the New York Times:

“I think the industry is changing. There is less tolerance for underperformance in an environment when you have a relative huge outperformance with more liquid opportunities like an S.&P.-500 index fund,” said Elizabeth R. Hilpman, chief investment officer at Barlow Partners.

“There is a lot of disappointment that hedge funds have not been able to capture more of the market results,” she added.

Several advisors gave some interesting opinions to Wealth Management, too:

“All taxable investors should take notice of this decision, because if Calpers doesn’t think the asset class is adding value for them, how does any taxable investor believe the asset class can add value in their portfolio—especially those in the top couple tax brackets?” said Scott Freund, president of Family Office Research.


“We already ignore the [hedge fund] genre because they are the Groucho Marx club of investing: The only ones that will let us in are the ones in which we don’t want to be invested,” said Stephen Barnes, investment manager and chief compliance officer of Barnes Investment Advisory. “Fees are too high. Truly a ‘heads I win, tails I don’t lose’ proposition for the hedge fund manager.”

Some advisors defended hedge funds in light of CalPERS’ decision. From Wealth Management:

Ryan Graves, wealth advisor with FirstPoint Financial, said alternatives play an important role in mitigating the risks associated with traditional asset classes.

“The time for a ‘true’ hedge fund (and not the levered up investment vehicles that many morphed into pre-2008) is when valuations are high, not after the correction has already occurred,” Graves said. “Just wait for a pullback in next 12-24 months and see how they try to explain away dumping an absolute return strategy.”

“To a contrarian this might mean it is time to consider investing in hedge funds,” said Kris Maksimovich, president of Global Wealth Advisors. “The decision could push hedge funds, especially the more expensive variety, to reconsider their pricing.”

There are plenty more quotes in the linked articles.

Photo credit: Lending Memo

CalPERS, LACERS Ramp Up Real Estate Commitments

Businessman holding a small model house

CalPERS already made headlines today for deciding to pull $4 billion from hedge funds and hedge funds-of-funds.

But there was another bit of news that was less headline-worthy, but still important: CalPERS has decided to invest an additional $1.3 billion in real estate funds, according to a report from Pensions & Investments:

The $298 billion California Public Employees’ Retirement System, Sacramento, added $600 million to Institutional Logistics Partners, a real estate partnership with Bentall Kennedy. CalPERS first invested $250 million in Institutional Logistics Partners in March 2013. The strategy seeks to invest in core industrial properties.

Separately, CalPERS added a total of $700 million to two real estate partnerships with GI Partners.

The pension fund added $400 million to TechCore and $300 million to CalEast Solstice. TechCore invests in “technology advantaged” properties in the U.S., such as data centers, Internet gateways, corporate campuses for technology tenants and life-science properties in U.S. metropolitan areas, according to a news release from CalPERS. The pension fund first invested $500 million in TechCore in May 2012. The size of the CalEast Solstice portfolio could not be learned by press time.

LACERS, meanwhile, is committing $190 million to real estate funds over the next two years, according to a separate Pensions & Investments report:

Los Angeles City Employees’ Retirement System plans to commit $140 million to four new open-end core real estate funds this year and make $50 million in additional commitments in 2015, minutes from the pension fund’s Aug. 26 board meeting show.

Townsend Group, real estate consultant for the $14.4 billion pension fund, is recommending the pension fund this year commit about $35 million each to Clarion Partners’ Lion Industrial Trust, Jamestown Premier Property Fund,Morgan Stanley(MS) Real Estate’s Prime Property Fund, and Principal Real Estate Investors’ U.S. Property Account.

The recommendations will be presented to the board for approval at a later meeting. The recommendation is part of the pension fund’s decision in May to double its exposure to core real estate to a 60% target and decrease non-core investments to 40% from 70%. LACERS has an overall 5% allocation to real estate, with $739 million funded as of March 31.

Photo by thinkpanama via Flickr CC License

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