Examiner faults CalPERS ethics rules
The California Public Employees’ Retirement System needs stricter ethics rules and stronger oversight to avoid the kinds of conflicts of interest that have plagued the fund over the last few years, according to recommendations from an independent examiner.
In addition, the state Legislature should pass laws making it easier to take disciplinary action, including dismissal, against CalPERS executives, according to the report from Washington attorney Philip Khinda.
Under current law, CalPERS must engage in a lengthy process in accordance with the state’s complex civil service laws and regulations. Khinda said the pension fund should ask the Legislature to streamline that process and change the law so that the fund would not have to pay executives’ “high salaries through the normal progressive discipline and termination process.”
The report also recommended restrictions on so-called revolving-door moves by staff from CalPERS to outside firms that do significant business with the pension plan.
Khinda was hired to examine policies at the nation’s largest public pension fund after disclosures that intermediaries known as placement agents reaped huge fees just for introducing investment firms to CalPERS executives.
His preliminary report, issued Monday, includes a series of recommendations. His full investigative report examining CalPERS investment practices is scheduled to be issued in February at the earliest.
Overall, Khinda said, the fund should move away from the practice of paying large management fees to its investment partners and instead pay fees based on financial performance.
“CalPERS should insist that nearly all of the fees it pays be in the form of incentive fees,” the report said, “based on the success of its external managers in investing CalPERS assets.”
The Khinda report also criticized the practice of CalPERS’ investment partners holding meetings at luxury resorts and spas.
“Lavish meetings are inconsistent with the mission of CalPERS to prudently invest and manage its trust funds,” the report said.
Future meetings, it went on to suggest, should be held at the business headquarters of one of the partners, including CalPERS’ headquarters in Sacramento, the report said.
Within the last year, one CalPERS board member and a top investment official left the fund after disclosures that they took unreported luxury international trips provided by placement agents or investment funds.
In May, California Atty. Gen. Jerry Brown filed a fraud lawsuit against former CalPERS board member Alfred J.R. Villalobos. Villalobos, a placement agent who had previously been a deputy Los Angeles mayor, received about $50 million in fees for helping to seal a number of investment deals between outside fund managers and CalPERS.
The U.S. Securities and Exchange Commission is investigating Villalobos and other placement agents who did business with CalPERS.
Khinda’s report called upon the board to take responsibility for dealing directly with potential or actual lapses in ethical conduct by anyone involved with investment decision making.
He also recommended that actions be taken against outside fund managers and investment consultants who provide lavish gifts and free travel to fund officials. Specifically, Khinda recommended that any contractor involved in two or more violations of the fund’s gift policy be prohibited from doing business with CalPERS for no less than two years.
State Treasurer Bill Lockyer, who serves on the CalPERS board, supported the recommendations in the report. He said Monday that the pension fund “has already taken significant steps to prevent corruption and protect the integrity of investment decisions. These reforms will make the system more transparent and more accountable to workers, retirees and taxpayers. If implemented properly, they should help restore the public’s confidence.”
The investigation is part of an ongoing effort by CalPERS to repair a tattered reputation.
“Our goal is to restore trust and make sure that there is never again any doubt about CalPERS living up to its core values of openness and accountability,” said Chief Executive Anne Stausboll. “These recommendations provide us with more than lessons learned. They are a blueprint for restoring that trust and the respect of everyone we serve.”
Being tinged by a scandal isn’t the only problem CalPERS currently has to deal with. The $220-billion fund, which provides retirement benefits for about 1.6million state and local government workers, retirees and their families, lost tens of billions of dollars during the recession. Since then, it has recovered about 60% of those losses and is rejiggering its portfolio.
On Monday, the CalPERS Investment Committee decided to cut corporate bond holdings by 4.1 percentage points. It also opted to increase U.S. Treasuries and cash from 2% to 4% of total investments.
The shift is aimed at boosting investment returns and minimizing the risk of severe losses.
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