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Column: Amid multiple crises, CalPERS board turns on one of its own members

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CalPERS headquarters in Sacramento.
(Max Whittaker / Getty Images)

From time to time, the CalPERS board seems determined to have us think of it as a group of kindergarteners playing in grown-up clothes.

In the past, we’ve documented an overheated internal attack on then-trustee J.J. Jelincic, whose chief offense appeared to be challenging the complacency of other trustees about what they were being told about the giant pension fund’s investment strategies.

There’s the board’s indulgence of CalPERS CEO Marcie Frost, who in 2018 was granted a 4% raise (to $330,720) and a generous $84,873 bonus even after questions were raised about whether she had misrepresented her educational credentials and presided over the spectacular detonation of an unqualified appointee to the job of chief financial officer.

This was just a way to silence me.

CalPERS trustee Margaret Brown

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Now there’s what seems to be a campaign of discipline waged against another board dissident. She’s Margaret Brown, who was elected in 2017 as an at-large representative of CalPERS members — that is, public employees and retirees — and has since needled the board and staff over their alleged inadequacies.

On Dec. 20, Board President Henry Jones notified Brown by email that he was unilaterally imposing “private discipline” on her, ostensibly because she used “CalPERS” as part of her social media handles despite being advised that it was against California law and CalPERS policy.

Jones’ power to discipline Brown is evidently plenary. It doesn’t require the consent of or even consultation with anyone else on the 13-member board of administration, and isn’t appealable. If you think his “private discipline” sounds like the “double secret probation” levied by Dean Wormer on the refractory brothers of the Delta frat in the movie “Animal House,” you won’t get an argument here.

But that was played for laughs. This is deadly serious. Jones’ action provoked Brown to file a lawsuit on June 16 in Sacramento Superior Court. She’s seeking a court order forcing the board to rescind her discipline and provide her with an administrative appeal hearing before a neutral judge.

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During a meeting of the CalPERS board in Monterey on Jan. 19, board member Bill Slaton took the floor to launch an extraordinary attack on one of his colleagues.

Jones’ disciplinary order barred Brown from receiving reimbursement for travel on CalPERS business through the end of this month, except for attending board and committee meetings. That meant she was to be denied reimbursement for meetings with the public or her constituents, or professional conferences on issues important to the fund, such as healthcare financing conferences.

“This was just a way to silence me,” Brown told me.

Jones also warned he would “take [her] conduct into account in 2020 when I am considering committee appointments.” Indeed, he already ejected Brown from the board’s investment committee as part of a committee restructuring the board endorsed last summer.

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Jones instructed Brown to undergo new member orientation again, although she participated in the program when she was first elected. He censured her for “engaging in conduct that fails to meet the standards of ethical conduct anticipated by the Governance Policy” — that is, “improper use of CalPERS’s name.”

Brown asserts there’s more to it than that. “Sometimes my opinions are not in support of what the staff and a majority of the board want,” she told me.

One can sympathize, up to a point, with a 13-member board trying to solve a problem like an outspoken member, especially one with less regard for decorum than they’d like. But one might also think that the CalPERS board has more to worry about than the alleged missteps of a member.

The investment portfolio of CalPERS, which is the largest public pension fund in the nation, has been anything but a sterling performer in recent years.

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As of Dec. 31, the fund’s public equity investments, which account for about half the portfolio of some $400 billion, lagged their benchmark indices in the five-year, three-year, one-year and fiscal-year-to-date (since July 1) time frames.

When the CalPERS Board of Administration comes together for its regular three-day monthly meeting starting Monday, the agenda will include the annual performance review for the pension fund’s chief executive, Marcie Frost.

Private equity investments, which comprised nearly 7% of the portfolio, did much worse, yielding only 1.6% from July 1 through Dec. 31, compared with a benchmark goal of 4.4%. One bright spot was real estate, which yielded 6.3% in 2019, or about 1.75 percentage points ahead of its benchmark index.

Overall, however, CalPERS ranks consistently in the middle of the pack among 49 public pension funds tracked by the Pensions & Investments newsletter. That performance might well be an artifact of the fund’s sheer size, as beating the market averages is harder for large portfolios. But that only makes it more imperative that the board focus on Job 1, which is protecting the financial interests of its members.

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There’s no question that Brown has been a thorn in the board’s side. On several occasions, she has voted as a minority of one.

In 2018, she was the only board member to vote against the raise and bonus for Frost. Even then-State Treasurer John Chiang, who sat on the board ex officio, voted to approve Frost’s compensation, though he also called for an investigation into whether Frost had misrepresented her educational experience.

As we’ve reported, Frost doesn’t have a college degree. That’s been known since she was appointed as CEO in 2016. The issue is whether she misrepresented her enrollment in a program at Evergreen State College in Olympia, Wash., aimed at obtaining dual bachelor’s and master’s degrees in public administration. Evergreen administrators, however, said that no such dual program existed.

Brown irked fellow board members again in April through her sharp criticism of CalPERS Chief Investment Officer Ben Meng over financial hedges that would have cushioned the pension fund’s losses during the coronavirus-related stock market plunge earlier this year.

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At a March 18 board meeting, the official transcript shows, Brown asked Meng how the hedges were performing — specifically, whether they were working as anticipated.

“They should perform well in this kind of a down market, as they were exactly designed to do,” Meng replied. “And from what we know... most of these strategies are performing as anticipated.”

But Meng didn’t volunteer that CalPERS in fact had unwound one of the hedges just weeks before the downturn. That deprived the pension fund of an estimated gain of more than $1 billion. Meng said later that the hedge was expensive and scrapping it appeared to be a good idea at the time.

“We need to strongly resist ‘resulting bias’ — looking at recent results and then using those results to judge the merits of a decision,” he said later in his defense.

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Instead of scrutinizing Meng’s omission of clearly relevant information at the March 18 meeting, board members subsequently piled on Brown. At the April 20 meeting of the board’s investment committee, members excoriated Brown by name for allegedly taking her criticism to the public — having “coerced and helped other people get with... misinformation,” in the words of investment Committee Chair Theresa Taylor.

“I think it’s incumbent on us to call on bad behavior when we see it,” Taylor said.

Taylor’s complaint implicitly referred to the financial blog nakedcapitalism, whose proprietor Susan Webber has expertly dogged CalPERS investment and administrative failings for years. Webber, a financial analyst who writes under the name Yves Smith, says Brown wasn’t the source of her reporting on Meng’s management of the hedge.

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What the blowup underscored was the board’s weird misconception of its own responsibilities. At the April 20 meeting, Taylor remarked that “the board and staff... works as a team.”

As Webber observes, that’s absurd. The board exists to oversee the staff’s work, not to play footsie with its employees. “In fact,” Webber correctly states, “the board’s sole legal duty is to the beneficiaries.” Sometimes that will involve calling out bad behavior by the staff when it sees it — such as obscuring the truth about a hedging strategy.

The California Public Employees’ Retirement System played along as three credit rating firms it blames in a suit gave three mortgage funds AAA ratings. Its investment in them led to a $1-billion loss.

Most recently, Brown has questioned a policy that will increase CalPERS’ investments in private equity and private debt through leverage — that is, effectively by borrowing to make the investments. That strategy could increase the riskiness of the fund’s positions.

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All this makes Jones’ action against Brown look petty in the extreme. CalPERS says the board took action only after it warned Brown several times that her use of the fund’s name in her social media handles violated the law and its rules. Brown says she changed her handles in response to the board “cease and desist” warnings, but apparently it was never enough.

“I don’t see this as retaliation,” says board member Rob Feckner, a former board president, who was designated to speak for the board. Feckner observed that other board members have been disciplined, and generally accept their process without making it public. “It’s not picking on someone,” he told me. “We have protocols in place and we all try and follow them. When you’re one out of 13 that chooses not to, you can either let it go or address it.”

That said, the board seems to be taking a rather crabbed view of the sanctity of the CalPERS name. It’s true that state law prohibits individuals or companies from using the name or insignia of a government agency without authorization, but the law applies to misuse for the purposes of implying an endorsement of a “product or service,” which is not what Brown was doing.

The law also carves out an exception for anyone with an “expressed connection” with the government agency — such as, say, membership on the CalPERS board of administration?

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CalPERS, like other institutional investors, is facing a long period of portfolio uncertainty thanks to the coronavirus outbreak. Brown may not be as courteous and tactful as her colleagues would like, but she’s raising important issues — sometimes alone. The board should be listening to what she says, and paying less attention to how she says it.


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