CalPERS Misappropriates Funds, a Violation of the Criminal Code, By Laundering $40,000 Speaker Fee Through Randle Communications, a Nearly $500,000 a Year Advisor to Marcie Frost

As famed short seller David Einhorn would say, “No matter how bad you think it is, it’s worse.” That is particularly true of CalPERS.

The results of a new Public Records Act request has exposed that not only has CalPERS paid a $40,000 fee for a single speech to entertain participants in a “stakeholder” event, an expense so unnecessarily high that it looks like an indefensible use of public funds, but also that CalPERS engaged in accounting chicanery to find the funds to pay for it. CalPERS laundered the expenses through a Sacramento public relations firm called Randle Communications, which even before this extra cost was billing CalPERS at a roughly $500,000 annualized burn rate.

As we’ll explain, this is a misappropriation of public funds under California Penal Code 424. In other words, this is defined in the law as a criminal activity, not that niceties like obeying the law seem to matter much at 400 Q Street. A California attorney opined that it could even rise to the level of a felony.

What is also disturbing is the casualness and openness with which CalPERS officers decided to run their expenses through a third party to solve their funding problem, and that Randle Communications was so willing to facilitate this accounting abuse.

And what we know so far about Randle Communications isn’t pretty either. CalPERS already has the biggest PR department of any public pension fund, at 81 people¹, which has grown from 72 under Marcie Frost’s watch. Yet CalPERS also lavishes money on outside hired guns. Given how regularly the press, including this humble blog, reports on CalPERS’ misconduct, it is not surprising to learn that the manning of the agency’s Enterprise Compliance, at only 21 employees is just over 1/4 of that of the Communications & Stakeholder Relations Department.

As you can see from the purchase order at the end of this post, the purchase order for Randle Communications for seven months ended January 2020 was nearly $313,000. Backing out the $40,000 speaker fee, which is Item 8, you get $273,000. Annualizing that produces $468,000. If anything, this is likely to be a low estimate since little happens between mid-December and mid-January.²

As we’ll discuss, this level of billing is hard to reconcile with the fact that Randle Communications repeatedly describes externally as having Marcie Frost, not CalPERS, as its client, and that Randle Communications is only one of a raft of communications firms that CalPERS hires.

CalPERS Questionable Decision to Hire Unnecessarily Expensive Entertainment

We took interest in CalPERS’ dealings with motivational speakers Jon Gordon and John O’Leary after we found that Marcie Frost had listed herself with the All American Entertainment speakers’ bureau, and CalPERS employees told us that CalPERS had been hiring other performers listed with that agency.

It would seem to be an irresponsible use of public funds for a governmental body, and in this case a seriously underwater public pension fund, to sign up what amounts to pricey entertainment. Yet Jon Gordon was the keynote speaker at an “Employer Education Forum” last fall. These employers are the schools, local governments and agencies that participate in the CalPERS system. Bear in mind that the employers pay to attend this event, and their conference fees in theory cover all the costs of the extravaganza.

In practice, as we found, the Jon Gordon fee of $40,000 not only broke the budget, but it was also markedly higher than that of speakers that CalPERS had hired for the same event in past year. The effect of running this event at a loss meant that it added to the underfunding that all CalPERS employers have to cover, whether they chose to attend this event or not. Even if the numbers aren’t large, it shows that CalPERS won’t give up on profligate spendinng when the employers in its systems are having to make cuts, often deep ones, to meet their CalPERS obligations.

In addition, despite Randle Communications making clear in the e-mails we got so far that they were fans of Gordon, it appears the firm made no effort to get Gordon to give CalPERS a more favorable rate. Recall that All American Entertainment listing is set as a gross fee; the All American Entertainment brokerage charge is bundled into that. On top of that, Gordon, in contrast to typical gigs where he is speaking to athletes or employees, was facing a roomful of potential clients:

Or was CalPERS instead fixated on delivering Gordon’s “No Complaining” message, per the swag that came back with our Public Records Act request and presumably was displayed in handouts to the audience?

Reader ChrisPacific pointed out the real motivation for hiring Gordon:

Out of curiosity I looked up some GoodReads reviews for some of Jon Gordon’s work. Almost without exception, the top reviews were from people who had been required to read them by senior management, school principals etc. Most were uncomplimentary.

He seems to have a real knack for marketing to senior managers, who typically buy multiple copies to be distributed to their staff (his evident success in this pursuit is one of the few things that reviewers admire about him). He seems to be big on positive thinking and against complaining, so I’m guessing they find value in it as a professionally acceptable way to tell people to stop whining and fall in line.

Needless to say, that’s a really cheeky ‘tude for CalPERS to take towards employers who are already up in arms about CalPERS’ charges, which are already so high that they were crowding out other budget items even before Covid-19 ravaged state and local government revenues. But Marcie Frost has never exhibited much of a sense of propriety.

CalPERS’ Misappropriation of Public Funds

The e-mails that came back with our Public Records Request were disconcertingly open about CalPERS’ willingness to violate the Penal Code to solve its overspending problem.³ You can see Randle Communication invoiced the Gordon fee on July 31, 2019 so that CalPERS could get around the fact that it had exhausted its budget for the Educational Forum event.

The PRA response shows a concerted effort to try to reclassify the expenditure in January back from org code 1410 to 1413. This is just more cooking of the books, since the payment was clearly made through Randle Communications under a change order to its original purchase order..

Here is when CalPERS identified it had a budget problem:

From: Evans, Linda
Sent: Tuesday, June 4, 2019 11:43 AM
To : Pacheco, Brad ; Fox, Kelly
Subject: RE: Confirmed EdF Keynote
Yes, I was informed that our budget cannot sustain the $40K now. Our operating expenses are operating expenses are coming in high.

And the immediate idea of getting Randle Communications to act as a laundrymat:

[Sender not included in PRA response but footer shows it was from Linda Evans]
Sent: Tuesday, June 4, 2019 11:11 AM
To: Pacheco, Brad ; Fox, Kelly
Subject: FW: Confirmed EdF Keynote
With all other cost items for this Ed Forum, I have been made aware that we will not have $40K for Jon Gordon. What can we do? Randle? Please see below for the amounts we have paid previously
for keynotes.
Linda M. Evans | Office of Stakeholder Relations | 916-795-0791

Jenn Lim – $25,000
Grant Korgan – $18,000
Lisa Ling – $28,000
Kevin Carroll – $17,500
John Martin – $8,500 / Theresa Peyton – $15,000 = $23,500
John Bul Dau – $11,500

It turns out Deputy Executive Officer Brad Pacheco had already anticipated there might be a money issue and had come up with the same too-clever idea:

From: Pacheco, Brad
Sent: Wednesday, May 08, 2019 1:20 PM
To: Fox, Kelly ; Evans, Linda
Subject: FW: Jon Gordon
Are we already in contract with the keynote we identified for the Ed Forum? Randle
Communications recommended this guy and they have a relationship with him so we could probably
funnel through their contract.
Let me know what you think.

This may not seem like a big deal, but it is. Per California Penal Code, section 424. Note the highlighted sections:

a) Each officer of this state, or of any county, city, town, or district of this state, and every other person charged with the receipt, safekeeping, transfer, or disbursement of public moneys, who either:
1. Without authority of law, appropriates the same, or any portion thereof, to his or her own use, or to the use of another; or,
2. Loans the same or any portion thereof; makes any profit out of, or uses the same for any purpose not authorized by law; or,
3. Knowingly keeps any false account, or makes any false entry or erasure in any account of or relating to the same; or,
4. Fraudulently alters, falsifies, conceals, destroys, or obliterates any account; or,
5. Willfully refuses or omits to pay over, on demand, any public moneys in his or her hands, upon the presentation of a draft, order, or warrant drawn upon these moneys by competent authority; or,
6. Willfully omits to transfer the same, when transfer is required by law; or,
7. Willfully omits or refuses to pay over to any officer or person authorized by law to receive the same, any money received by him or her under any duty imposed by law so to pay over the same;—
Is punishable by imprisonment in the state prison for two, three, or four years, and is disqualified from holding any office in this state.
(b) As used in this section, “public moneys” includes the proceeds derived from the sale of bonds or other evidence or indebtedness authorized by the legislative body of any city, county, district, or public agency.
(c) This section does not apply to the incidental and minimal use of public resources authorized by Section 8314 of the Government Code.

So there’s no question that this is a violation of the Criminal Code, even if it’s on the small beer end of the scale. And it isn’t unheard of for government bodies in California to engage in expense-gaming upon occasion and get only a slap on the wrist when they are caught out.

But what ought to be disturbing is the casualness with with CalPERS officials, including one of its very top officers, perpetrated this abuse, including having no concern whatsoever about discussing it in e-mail. It suggests this sort of thing is business as usual at CalPERS. Staff has no compunction about breaking the rules or even violating the criminal code so that Frost could have her $40,000 man.

And while this attitude is seamy for a taxpayer-funded entity, it’s even more alarming to see it coming from a fiduciary, which ought to be operating at a higher standard than a small-town waterworks.

But given that Attorney General Xavier Becerra, who was an inactive member of the state bar from 1991 till after he was appointed Attorney General, isn’t big on practicing law, particularly with respect to discomfiting CalPERS, were not holding our breaths.

But this incident should be included on the CalPERS rap sheet when it goes all dewy-eyed before the legislature trying to ‘splain its way out of hot water.

And What About Randle Communication?

There’s also not a lot to like about the Randle Communications purchase order either. The first is the structure of the charges. Virtually all professional services firms, save one or two partner ones, make their money off leverage, as in marking up junior employee time and having senior officers act as marketers, relationship managers, and providers of quality control.

Instead, if you look at the Randle Communications purchase order, you’ll see the anticipated billings, just about half is from the top-billing professionals, or over eight weeks of man hours in a seven-month period that included the Christmas-New Year holiday period. This top-heavyness might make sense if these two billers, Jeff Randle and Mitch Zak, were primarily engaged in training or coaching member of the CalPERS PR team.

Instead, various marketing documents by firm depict Marcie Frost and not CalPERS as their client. For instance:

Yesterday President and CEO @jeffrandle and Partner @mitchzak attended the 20th annual #CalPERSEdF. They were thrilled to support our client @CalPERS CEO Marcie Frost and greatly enjoyed @JonGordon11's keynote speech. His 'Power of Positivity' is a central philosophy at our firm. pic.twitter.com/cQojy1PvWt

— Randle Communications (@randlecomm) October 30, 2019

This section of Mitch Zak’s bio similarly describes Frost, and not CalPERS, as his client:

Mitch is one of California’s leading PR strategists…He has worked with several of California’s most notable leaders including Quibi CEO Meg Whitman, CalPERS CEO Marcie Frost, Golden 1 Credit Union CEO Donna Bland and former governors Arnold Schwarzenegger and Pete Wilson.

Not only does it seem like a wild misuse of time for Frost to be spending eight plus weeks out seven months on coaching. but her calendar does not reflect it.

We have gotten a copy of her calendar for the time period covered by the purchase order, and it shows only five meetings with Randle Communications. Given the heavy preponderance of social meetings, one wonder how much actual coaching got done:

10-11-2019 lunch with Randle
10-23-2019 Greater Sacramento Lunch @ Randle Communications
12-10-2019 Randle Communications

There may be an additional item:

And Randle Communications also billed for attending the Education Forum, but it’s not clear what if any value that added to CalPERS.

This level of expenditure might not be so galling if it weren’t being depicted as all about Marcie Frost (which one presumes is substantially true, otherwise the Randle Communications marketing claims are misrepresentations) and if CalPERS didn’t have a raft of other outside communications guns it pays for on top its oversized in house PR team, as you can see from the final embedded document. We are in the process of obtaining the contracts and related purchase orders and invoices.

____

¹ Even though the 2020-21 budget shows only 79 staff members for the Communications & Stakeholder Relations Department, the current e-mail list shows 81 names: 17 in Stakeholder Relations, in the 53 Public Affairs Office, and 11 in Legislative Affairs. I understand at least one person is a temp, but they get paid too.

² If you assume there is no/little action from mid-December to mid-January, then the guesstime would be $273,000/six months of activity x 11 (for an 11 month working year) for $500,500. Well have a better idea soon since we have put in more Public Records Act requests.

³ This is the message, in budget-speak, reconfirms in January 2020 that efforts to tidy up the accounting failed:

From: Ishikawa, Suzi
Sent: Wednesday, January 15, 2020 9:30 AM
To : Hernandez, Sylvia; Taraya, Rebecca; Halog, Quenniemary; Herrera, Marco; Guerra,
Yvonne; FCSD AP Invoice
Cc: Gonzalez, Liza; Mason, Erma
Subject: RE: Req 14174 / PO 75234
Hi, Sylvia
It appears, as you suspected, ePro will not allow me to make this change. The message states disallowance of negative funding requests. As an additional clarification, has the original $40,000 been transitioned by hand over to 1413 already?

Happy to assist however I am able.
Thanks again for everyone’s efforts on this.

From: Hernandez, Sylvia
Sent: Wednesday, January 15, 2020 8:22 AM
To : Taraya, Rebecca ; Halog, Quenniemary ;
Ishikawa, Suzi ; Herrera, Marco ; Guerra, Yvonne
; FCSD AP Invoice
Cc: Gonzalez, Liza ; Mason, Erma
Subject: RE: Reg 14174 / PO 75234
Hi Rebecca,
No, I’m not able to make any org changes to the line because of the voucher paid on that line. Quennie let us know that you would be able to change the org on the voucher since the voucher cannot be lifted from line 8 on the PO.
PA OF and Budgets have worked out that there is funding in the org and that these type of expenses should now be paid against org 1413. Unfortunately, with the voucher attached, I am unable to make any org code changes. If you are not able to make the org code changes on your end, are you able to lift the voucher so I
can try it on my end?

00 PRA #5341 - Randle Communications PO
00 PRA #5341 Randle Invoice for Gordon
00 CalPERS Notice-Of-Intent-To-Award-Contract-1-12-18 (1)