A new Sacramento Bee story, California retirees are facing another hot election over who manages their pensions by Wes Venteicher, is generally evenhanded once you get past a slanted intro.1 The story focuses on this year’s election contest for the CalPERS retiree board seat, which pits the challenger, former board member JJ Jelincic, against the incumbent, board President Henry Jones.
Despite currently holding the seat, Jones is at a disadvantage, since Jelincic already has the endorsements of the two key retiree groups, the California State Retirees and the Retired Public Employees Association. Officers of these retiree organizations, as well as prominent individual retirees, such as former CalPERS board member George Diehr and Jim McRitchie, have been taking the unusual step (by CalPERS standards) of coming to Sacramento to voice concerns about how CalPERS has been (mis)managing its affairs.
As the SacBee article points out, CalPERS has been under a cloud due to a past failure of board supervision, namely, former CEO Fred Buenrostro taking bribes from a placement agent on behalf of private equity heavyweight Apollo and four smaller firms close to Apollo. That resulted in a successful criminal prosecution that has Buenrostro serving a four and a half year sentence in Federal prison.
Aside from the perverse spectacle of CalPERS board becoming even more deferential to staff in the wake of the Buenrostro private equity bribery scandal, which also led to four of CalPERS’ thirteen board member departing, the passivity of CalPERS board is also troubling given CalPERS’ deep underfunding.
Jones (and by implication, CalPERS) did himself no favors in this article. Jones made clear that he gives higher priority to not harshing the mellow of CalPERS’ staff than to doing his job as board member. In the through-the-looking-glass of CalPERS board values, asking basic questions in a mild-mannered way to protect beneficiaries is depicted as an affront and somehow detrimental to CalPERS. Funny how CalPERS’ Sacramento sister CalSTRS has board members regularly asking sensible questions and that pension fund isn’t mired in bad press.
The Kentucky Retirement System was at a similar level of underfunding before the financial crisis, when interest rates were higher than now. Its independent experts advised KRS that there was no way it could earn its way out; it would have to levy higher charges to the state to help fill the hole.
CalPERS refuses to address the problem honestly with its so-called stakeholders, regularly pumping out PR decorated with too many large photos of CEO Marcie Frost, cheerleading how great things are despite ample evidence to the contrary, starting with the state has making two mini-bailouts and municipal employers being socked with higher CalPERS contributions. No wonder beneficiaries are worried.
Venteicher makes clear that a defining campaign issue is board member oversight of staff, as in doing their jobs as set forth in the Public Employees Retirement Law, with which Jones appears to have limited familiarity. The PERL, as it is commonly called, makes clear that the buck starts and stops with the board. But you’d never get that if you believed The World of Pensions According to Henry Jones.
Venteicher does Jones a favor by presenting his stance first:
Jelincic, who worked as a CalPERS investment officer in addition to serving on its board, regularly questioned the pension fund’s staff in a manner that some people found inappropriate.
“There were a number of times when staff were making presentations to the board and J.J. either said to their face or later made disparaging comments about staff,” said Jones, 78, of Los Angeles. “To me that’s unacceptable.”
We’ll get to the fact that the charge that Jelincic is a meanie is wildly exaggerated. More important is the contrast in positions:
“I’m more concerned about monitoring the staff than being polite; he’s more concerned about being polite than monitoring staff,” Jelincic, 70, of Hayward, said of his opponent.
Jones is doubling down on the campaign messaging that got two other union-backed board members, Michael Bilbrey and former board President Priya Mathur, voted out of office. Margaret Brown beat Bilbrey by a solid six points; Corona police sergeant Jason Perez trounced Mathur by 14 points. Both ran on campaigns of accountability and transparency, as opposed to the norm of the board toadying to staff.
Note CalPERS has pointedly ignored our long-running observation that the board refuses to supervise staff as required by law and has invoked the bogus excuse that being “collegial” is more important than acting as prudent stewards of fund assets. Henry Jones has publicly confirmed our assessment.
Jones seems to think that being in charge means not being responsible. The days when you could get away with that on the CalPERS board are over, at least if you are in an elected seat, in no small measure due to a series of self-inflicted scandals. A partial list:
Misrepresenting CalPERS’ ability to find out what private equity firms were retaining in so-called “carry fees,” one of the biggest charges they levy, on CalPERS’ investments. Fiduciaries are required to know the fees and cost of investments, so this was already a very damaging admission. A firestorm of press criticism led CalPERS to retreat and get the data.
Considerably exaggerating how much CalPERS had reduced investment costs, and failing to back down even after a prominent trade press reporter had started questioning CalPERS’ claims
Failing to do adequate due diligence on a CFO, Charles Asubonten, who was discovered to have made significant resume misrepresentations. CalPERS made this bad situation worse by reflexively defending Asubonten rather than investigating. Asubonten was eventually rejected from probation
Engaging in systematic, flagrant abuse of copyright for years across hundreds of publications, such as purloining over 9000 articles from the Wall Street Journal. Because CalPERS refused to pull down its Daily News Summary site even after we publicized its existence, we collected the data as to which articles CalPERS had lifted and how many it amounted to per publisher. CalPERS got away comparatively easy by paying around $4 million in settlements. No one was held accountable even though this was an obvious dereliction of duty by General Counsel Matt Jacobs
Persisting in the impermissible practice of having board members pre-sign blank expense claim forms when new board member Margaret Brown tried to stop it, leaving her no recourse other than to go to the media
Discussing outsourcing its private equity program with Blackrock without having obtained any authorization whatsoever from the board
Falsely announcing in May 2018 that the board had approved a “new private equity business model,” leading three board members to publicly dispute that claim. That forced CEO Marcie Frost to walk back what she, Chief Investment Officer Ted Eliopoulos, and none other than Henry Jones had told the press at the next board meeting and admit that no decision had been made
Refusing to investigate clear-cut evidence that CEO Marcie Frost had made significant misrepresentations during and after hiring, including presenting herself as enrolled in a non-existent dual bachelor’s/master’s degree program when Frost had never enrolled in any degree program and had only taken a writing course. Not only did the board reject then board member, Treasurer John Chiang’s call for a formal probe, but the board gave Frost a large increase in base pay and a large bonus even after she engaging in “why we are in Iraq”-level changing explanations of her (mis)conduct
Yet Jones claims that his approach is working:
Jones said he favors holding the fund’s CEO accountable rather than criticizing staffers in an open setting, a practice he said is unproductive and reflects poorly on the fund, which has many business partners.
“Favors holding the CEO accountable”? Pray tell what does it take for that to actually take place at CalPERS?
Has Jones managed to forget that with the CEO before last, the Federal prosecutors were the ones to had to step in when the board failed to do just that? Recall that the two most influential board members back then, Rob Feckner (who still sits on the board) and Priya Mathur defended Buenrostro to the bitter end.
On top of that, Buenrostro was caught not thanks to internal controls but because his now ex-wife blew the whistle. That calls for more oversight, not less.
Jones makes clear he’s more concerned about optics than CalPERS running a tight ship on behalf of beneficiaries and California taxpayers who backstop the fund. Jones’ complaint about CalPERS’ tarnished image ignores that it is incompetence and dishonestly that hurts CalPERS reputation, not the sunlight. If Jones is unhappy about criticism of CalPERS, he needs to look in the mirror, since he and other lazy board members are ultimately responsible.
The story also makes clear that Jelincic and Jones differ on CalPERS’ newfangled private equity scheme, which is really a costly, risky, and otherwise inferior repackaging of recent fads via what is effectively a separately managed account. CalPERS could have had one of those set up with considerably less brain damage from an established private equity fund manager long ago and avoided the embarrassing spectacle of having staff flail about and expose their ignorance.
CalPERS’ staff has already admitted that the two new vehicles it intends to create will cost more than their current approaches; that one will deliver lower returns, and has failed to explain why the other one will perform well, beyond “because private equity”. No wonder retirees are lining up behind Jelincic. Again from the story:
Jelincic has shown up at board meetings to criticize the plan, saying it gives the fund too little control over investments and provides too little transparency to the fund’s members. Those concerns were shared by the Retired Public Employees’ Association and California State Retirees, another group that has endorsed Jelincic.
Jones said that while private equity is less transparent for members than the stock market, transparency for staff under the new strategy would be enhanced compared to the way the fund invests in private equity now, which puts the fund’s money in the hands of third-party managers.
Help me. First, Jones concedes the far more important issue that Jelincic raised, that the CalPERs would be managing the difficult trick of giving fund managers even more of a blank check than they have now. The new vehicles are intended to be very long lived, removing the one major control investors like CalPERS have on private equity fund managers, that they need to stay in investors’ good graces since they want to be able to raise new money from them in four or so years. CalPERS’ only recourse would be to exit the vehicles, which would be hugely embarrassing, and if the fund managers are competent negotiators, subject to large penalties.
Second, any increase in disclosure is debatable, and its utility limited if not shared with the board. How can the board hold CEO Marcie Frost accountable, which Jones has claimed is important, if it chooses to keep itself uninformed about what she no doubt fancies will be her signature initiative? More important, what good is the additional information since CalPERS’ staff and board won’t be able to act on it? This doesn’t even rise to the level of being oversight theater.
The reason Jelincic has good odds of defeating Jones is that Jelincic has the backing of the retirees, who have emerged as kingmakers in the last two election upsets. Both of them were for seats in which the eligible voters were not just retirees, but also current employees, who are overwhelmingly represented by unions. Yet even though the union members outnumbered the retirees in each of the last two contests, the retirees not only have a higher propensity to vote to begin with but the retiree groups also are better able to get them to turn out.
Recall that Jelincic and Jones are competing for the retiree seat, meaning current union members aren’t voting. Thus union backing does Jones little good. From the article:
Jelincic, a former president of California state government’s largest union, has secured support from some of the biggest retiree groups, who have some of the best contact information for retirees. Jones has support from unions, who he hopes will nudge the retirees among them his way.3
The retirees have long appreciated Jelincic’s vigilance and persistence in the face of staff and board efforts to discredit him. For instance, Jelincic has criticized two Chief Investment Officers, Ted Eliopoulos and his predecessor, Joe Dear, for being unqualified for the job. Eliopoulos’ actions confirmed Jelincic’s assessment because Eliopoulos handed off investment responsibilities, which is the part of his job that warranted the big bucks,3 turning his CIO job into an administrative role. Jones has maligned Jelincic, who correctly called out Eliopoulos’ lack of needed experience, by trying to paint Jelincic as out of line for the very rare occasions when Jelnicic has pointed out staff shortcomings in skills or performance.
As anyone who reviews CalPERS board meetings would have seen over the years, if anything, Jelincic’s failing is in being too mild-mannered, not too tough. He always kept a polite tone of voice and was clearly out to get answers, not to find “gotchas”. Indeed, Jelincic had many opportunities to drive in the knife with pointed follow-on questions when staff members gave misleading or simply lame answers, and I cannot recall a single time when he did so. The whining over being treated with kid gloves is remarkable. Jelincic has become more direct in his public comments as a former board member, but even then, he stays measured.
CalPERS staff members ought to review board transcripts from the mid-1990s to see how often and aggressively board members would go after staff if they thought staff wasn’t giving them the information they sought. More vigorous supervision is key to getting CalPERS back on the right track. CalPERS desperately needs more board members like Jelincic.
1 “In the last two years, a former CalPERS board member known for his sharp criticism of the nation’s largest public pension fund worked to unseat two of its leaders in tense elections.”
Huh? First, “sharp criticism” insinuates that the unfailingly polite and understated Jelincic is unduly aggressive, when his criticisms are well warranted. Second, “worked to unseat” again implies there was something unseemly. Last I checked, California was democracy and the candidates Jelincic backed won, so why not “helped to unseat” or better yet, “helped to replace’?
Third, pray tell how the elections were “tense”. They didn’t even rise to being “hard fought”. Both incumbents (and CalPERS executives) assumed the incumbents would win by virtue of union backing. But given that CalPERS is no longer given the benefit of the doubt by many voters, those days are past.
2 Jones may have misled Venteicher, or Venteicher didn’t want to spend the pixels to give a more accurate explanation. Current unions members are not voting in the retiree election, period. There are some retiree organizations affiliated with unions, such as a retiree organization for former CalFire members. These union-connected retiree organizations have very few members relative to the two main CalPERS retiree groups that have endorsed Jelincic.
3 CalPERS’ CIO is far and away its highest paid employee.