CalPERS Board Member Goes Rogue

December 10, 2015 By CPR Editors 1 Comment
Calpers headquarters is seen in Sacramento, California, October 21, 2009. REUTERS/Max Whittaker

Calpers headquarters is seen in Sacramento, California, October 21, 2009. REUTERS/Max Whittaker

A member of the CalPERS board has gone rogue, using public records laws to get documents from the agency while facing warnings that it is unacceptable for him to criticize staff at board meetings. Ed Mendel has details at Calpensions.com:

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.

Originally published by CalWatchdog.com

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How paid sick leave can be healthy for pensions

January 29, 2015 By Ed Mendel Leave a Comment

President Obama said during his State of the Union address last week that 43 million workers have no paid sick leave, forcing “too many parents to make the gut-wrenching choice between a paycheck and a sick kid at home.”

The president wasn’t talking about government employees.

Most of them not only have paid sick leave, but also an incentive not to use it. When they retire, their unused sick leave can be converted into “service credit” for time spent on the job, which increases the amount of their pensions.

Is this “spiking,” the improper boosting of pensions by manipulating the final pay or time on the job used in the formulas that set monthly pension amounts?

Many do not think so. The higher cost of pensions presumably is paid for in advance by rate increases resulting from what the actuaries assume will be the cost of converting unused sick leave to service credit.

California Public Employees Retirement System actuaries assume, when calculating future costs, that service credit for unused sick leave will increase pensions and other benefits by 1 percent for state workers and non-teaching school employees.

Actuaries for the California State Teachers Retirement System, making the calculation in a different way, assume that unused sick leave will increase the service credit for educators by 2 percent.

An analysis by the CalSTRS actuary, Milliman, issued in 2010 found that the average amount of unused sick leave converted to service credit was 0.5 years for members retiring after 26 years on the job.

Unused sick leave was not considered in the development of the anti-spiking provisions in Gov. Brown’s pension reform (AB 340 in 2012). The bill barred final pay boosts through overtime, bonuses, one-time payments or terminal pay.

Sick leave can vary through labor bargaining or for other reasons. State workers in CalPERS get eight hours of sick leave per month. CalSTRS members get one day of sick leave per pay period, and employers are charged more for exceeding a limit.

In the Vallejo bankruptcy, the lack of a cap on unused sick leave was an issue. A city consultant, Charles Sakai, said in a court filing that a firefighter working 20 years could accumulate up to 5,760 hours of sick leave worth nearly three years of service.

Vallejo firefighters retiring after 20 years on the job could take half of the unused sick leave in cash, Sakai said, and use the other half to boost their CalPERS pensions by adding 1½ years of service credit.

Unused sick leave helped give a San Ramon Valley Fire Protection District chief a pension far exceeding his salary, one of the cases reported by Daniel Borenstein of the Contra Costa Times that prompted the introduction of anti-spiking legislation.

The fire chief, Craig Bowen, age 51, with a salary of $221,000, retired in December 2008 after 29 years on the job with an annual pension of $284,000. Unused sick leave boosted his service credit to 30.3 years, adding $10,700 to the pension.

Bowen is in the Contra Costa County Employees Retirement Association, one of 20 independent county pension systems operating under a 1937 act. After anti-spiking legislation for CalPERS was approved in 1993, similar legislation for counties in 1994 cleared the Senate but died in the Assembly.
sick
The conversion of unused sick leave to service credit began for both CalPERS and CalSTRS with legislation in 1973-74. The reason for the CalPERS change, modified several times since then, was not readily available last week.

Why CalSTRS members were allowed to begin converting unused sick leave into larger pensions was explained in a later bill analysis.

“It was anticipated that this benefit would reduce sick leave usage and enable employers to achieve some salary savings from not having to hire substitute teachers to replace teachers who might otherwise have been absent from the classroom,” said a CalSTRS analysis of AB 1102 in 1998.

“However, the anticipated reduction in sick leave usage and the projected salary savings were not realized. Consequently, employer costs increased as employers continued to pay salary for teachers who were absent from work because of illness, covered the cost of substitute teachers, and also paid STRS for the cost of the additional benefit at retirement.”

The costs were capped by legislation in 1979 that limited the conversion of unused sick leave to persons hired before July 1, 1980. Legislation in 1985 paid for the conversions by raising the CalSTRS employer contribution from 8 to 8.25 percent of pay.

Then in 1998 the unused sick leave conversion was reinstated by AB 1102 for those retiring on or after Jan. 1, 1999. Backers said the bill was needed for “equity” with CalSTRS members hired before July 1, 1980.

The bill was part of a package of increased pension benefits enacted as the funding level of CalSTRS, which was about 30 percent in the 1970s, climbed toward 100 percent under the Elder full-funding plan enacted in 1990 and a booming stock market.

An Assembly analysis of AB 1102 said supporters believe the bill and others in the package are “a fair compromise on the use of the Elder full funding money and will encourage teachers nearing retirement age to postpone retirement and stay in the classroom a little longer.”

Much of the current CalSTRS funding gap, which a $5 billion rate increase being phased in over the next six years is intended to close, is due to state and teacher contribution cuts and benefit increases enacted around 2000. Finally reaching the long-sought full funding was treated as a windfall to be spent.

The state CalSTRS contribution was cut from 4.6 percent of pay to 2 percent. For 10 years, a quarter of the teacher contribution to CalSTRS, 2 percent of pay, was diverted into a new individual investment plan. A half dozen small increases included the unused sick leave conversion and a longevity bonus.

CalSTRS would have had a funding level of 88 percent if it had not made the contribution and benefit changes around 2000 and continued to operate under the 1990 structure, a Milliman report said in 2013 when the funding level was 67 percent.

Last week President Obama called on Congress to “send me a bill that gives every worker in America the opportunity to earn seven days of paid sick leave. It’s the right thing to do.”

The president said the U.S. is “the only advanced country on Earth that doesn’t guarantee paid sick leave or paid maternity leave to our workers.” California has been in the vanguard of change.

Gov. Brown signed legislation last September requiring businesses to give employees at least three days of paid sick leave each year. In 2006, San Francisco required employers to give workers paid sick leave.

The president expanded paid sick leave for federal workers this month by adding six weeks to care for a new child or ill family members. And during his first year in office he expanded the conversion of unused sick leave to boost pensions.

Only federal workers hired before a cost-cutting pension reform in 1987 had been allowed to convert unused sick leave to pension service credit. In October 2009, Obama signed a bill giving a similar benefit to federal workers hired after the 1987 reform.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com. Posted 26 Jan 15

Originally published by CalPensions.com

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Sad End For CalPERS Private Equity ‘Golden Years’

January 21, 2015 By Ed Mendel 2 Comments

The apparent suicide last week of Alfred Villalobos, who faced a bribery trial next month, is a sad end for a former CalPERS board member paid more than $50 million by firms seeking money from the big pension fund.

Most of his fees came from private equity firms during the years leading up to the financial crisis in 2008. Some call the period private equity’s “golden years,” when leveraged buyouts of corporations yielded huge profits.

Villalobos flourished as a “placement agent” offering help for firms seeking investments or contracts from CalPERS, particularly after another former board member, Fred Buenrostro, became chief executive of the pension fund in 2002.

Now Buenrostro, who pled guilty to accepting Villalobos bribes, awaits sentencing in May. Pushed out of CalPERS in 2008 amid complaints of investment meddling, he received a $300,000 salary from Villalobos and possibly a Lake Tahoe condo.

During the boom years CalPERS private equity investments soared (see chart below from annual report, p. 21). Above-market returns expected from private equity help the pension fund meet its earnings forecast, said by critics to be overly optimistic.

Among several types of private equity the biggest and most profitable by far is the leveraged buyout. Loans needed to buy a company are typically obtained by using the targeted company’s own assets as collateral.

A long-running controversy over leveraged buyouts flared publicly in the 2012 presidential campaign of Mitt Romney, made wealthy by Bain private equity. Some of his Republican primary opponents called the buyouts job-destroying “vulture capitalism.”

Leveraged buyouts also have been sharply criticized by SEIU, a large and aggressive union with members in the public and private sectors. Some say corporate regulation, often pushed by public pension funds, makes private equity more attractive.

A boost for leveraged buyouts came from an analysis of 3,200 buyouts from 2000 to 2005 issued in December 2013 by researchers at the universities of Chicago, Harvard, Michigan and Maryland.

The analysis concluded “private-equity buyouts catalyze the creative destruction process, as measured by job creation and destruction and by the transfer of production units between firms.”

PE3

As the private equity boom ended with the financial crisis, a pay-to-pay scandal erupted in New York. Placement agents and private equity firms, some doing business in California, were accused of paying bribes to get public pension fund investments.

CalPERS did not know whether private equity firms were paying big placement fees for its investments. A board member who once worked for Villalobos, Kurato Shimada, chaired a committee that had blocked a staff move to require fee disclosure.

And during the boom years CalPERS was an eager private equity partner. In 2006 Los Angeles Times reporters asked CalPERS for letters, e-mails or memos from Villalobos and former state Sen. Richard Polanco about investment opportunities.

In a rejection of the Public Records Act request, a letter from a CalPERS attorney to the Times said “ the release of the (sic) some of the requested information may harm CalPERS’ ability to continue to invest with top-tier private equity funds.”

The letter said some private equity firms warned that “CalPERS’ current status as an ‘investor of choice’ will be damaged” and other private equity firms “recently expressly refused to allow CalPERS to invest with them” because of concerns about disclosure.

After the New York scandal erupted in April 2009, CalPERS adopted a fee disclosure requirement and asked private equity firms and other money managers if they had paid placement fees for CalPERS investments.

In October 2009 a CalPERS report said Villalobos and his small family firm, ARVCO, had received more than $50 million in placement fees from firms seeking CalPERS investments.

A review of placement fees ordered by CalPERS, lasting 18 months and reportedly costing $11 million, was led by an outside lawyer, Phillip Khinda, and a consulting firm. State and federal prosecutors filed lawsuits against Villalobos and Buenrostro.

Before it was all over, Shimada resigned from the board. A long-time board member and chairman of the investment committee, the late Charles Valdes, was linked to Villalbos in a number of ways and chose not to run for re-election.

A 37-year board member with the CalPERS auditorium named in his honor, the late Robert Carlson, was said to have met at Villalobos’ Lake Tahoe home in 2004 with Villalobos, Shimada, Valdes, Buenrostro and an executive of Medco, which paid Villalobos $4 million after receiving a CalPERS contract.

The top CalPERS private equity officer, Leon Shahinian, was suspended and then left CalPERS. He resisted and reported pressure by Buenrostro, but “lost his way” by accepting a Villalobos private jet trip to New York for an event honoring Leon Black of Apollo private equity.

The Khinda-led review found that in general the CalPERS investment staff, resisting pressure from Buenrostro and others, did not make improperly influenced investments that caused “substantial” losses.

But the review found that CalPERS indirectly paid for placement fees received by Villalobos and others. Private equity firms charged higher management fees to offset the cost of the placement fees, apparently raising investment costs and lowering returns.

If CalPERS funded some agent-backed investments instead of others equally qualified, said the review, there may have been no direct losses. But CalPERS would have been harmed if capable managers thought the process was unfair and didn’t apply.

The review said “one of the most troubling discoveries” was that placement agent fees were being paid by Apollo and other money managers that already had strong ties to CalPERS.

In these cases, the review speculated, the placement agent fees may have been paid as “insurance” against the placement agents using their connections against the firm, risking the loss of investments or contracts.

CalPERS responded to the scandal by sponsoring legislation requiring placement agents to register as lobbyists and banning contingency fees based on the amount of the CalPERS investment.

Several of the big firms that used placement agents agreed to $215 million or more in CalPERS fee reductions. A number of CalPERS actionswere taken to insulate investments from improper influence.

In September 2011 CalPERS began a five-year private equity “strategic plan” to cut costs, reduce complexity, focus on regulatory compliance and create a new in-house system for accounting and reporting.

An annual CalPERS report last month showed that private equity is still yielding above-market returns: 20 percent for the year ending last June 30 and 12.4 percent over the last 20 years.

Buyouts were 61 percent of the total private equity portfolio valued at $31.3 billion, followed by “growth-expansion” style funds at 17 percent and “credit-related” at 12 percent.

“Buyouts will continue to be a large component of our portfolio going forward, as the returns have met our expectations,” Scott Jacobsen, CalPERS senior portfolio manager, told the investment committee.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

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