California Senate Shoots Down CalPERS’ Private Debt Secrecy Bill; Board Hissy Fit Reveals It Never Questioned Staff Misrepresentations

Is CalPERS’ influence in Sacramento finally slipping? While one robin does not make a spring, CalPERS’ arrogant and dishonest treatment of beneficiaries, the public, and as a result, California legislators, backfired in the form of a defeat on a private debt secrecy bill that CalPERS had touted as crucial to meeting its return targets.

Yesterday, the California Senate Judiciary Committee shot down a CalPERS-only bill, AB 386, on a vote of 3 in favor, 4 opposed, and 4 abstentions. That level of abstentions is very unusual and as we’ll discuss, appears to be the result of CalPERS being either unwilling or unable to answer a basic question posed by a Senator: what information does the board get when reviewing private debt investments? As regular CalPERS readers know, the answer is none, since the CalPERS board has reneged on most of its fiduciary duties by handing the keys to the money kingdom over to staff.

This vote took place on the last scheduled meeting of the Judiciary Committee this year. The Committee was necessary stop for AB 386 before it would be up for a full Senate vote (it had already gotten through the Assembly, albeit without amendments added by the Senate Committee on Labor, Public Employment and Retirement) means it is dead for this year. CalPERS could conceivably bring it back next year, but the bill would need to be substantially different.

This repudiation of an indefensible CalPERS private debt secrecy bill represents a rare victory for democratic processes. A key beneficiary group, the Retired Public Employees Association, had won concessions in the form of amendments requiring disclosure of collateral and covenants, as well as a five-year sunset. Some amendments appeared to have been removed at the latest waystop, the Senate Judiciary Committee.

Worse, CalPERS’ justification for the bill was completely at odds with what it had told the board and the public at large. CalPERS implausibly asserted that it needed secrecy to make high risk, high return distressed loans. It turns out CalPERS actually wanted to make low return loans to private equity funds, called subscription line financing! So CalPERS apparently wanted to shroud its scheme to toady up to and further enrich private equity barons.

Even if CalPERS tries to revive AB 386, since CalPERS pulled a different variant of this legislation last year after then Chief Investment Officer Ben Meng resigned abruptly (the predecessor bill included CalSTRS), it’s now had two unsuccessful attempts. The longer it takes to get something done, the more it accrues an aura of failure.

Because the CalPERS board was in session at the time of the vote, and even had a legislative update on the agenda, it learned almost immediately of this black eye. The board had quite the hissy fit. The upset remarks only served to confirm that the Senate reservations were entirely warranted. The board made clear it has no idea the true reasons staff was pushing this bill, which legislative director Danny Brown admitted directly to RPEA officers and later reiterated in the Judiciary Committee hearing.

Background

It’s worth noting that what would normally seem to be a no-brainer, a measure to increase the seriously underfunded CalPERS’ returns, had already run into serious opposition due to the lack of any bona fide necessity for CalPERS to keep key terms of debt deals secret, which was particularly disturbing given CalPERS’ history of private-equity-related malfeasance.

Even though the bill had made its way through the Assembly, it got an unusual bit of pushback in the form of a highly critical analysis by the Assembly Judiciary Committee staff. Recall that this bill required more review than most legislation because the CalPERS ask to have private debt terms shielded from disclosure goes beyond the current statutory protections for “alternative investments,” which carves out only private equity, venture capital, hedge, and absolute return funds.

The fact that CalPERS and CalSTRS are already in the top 20 private debt investors worldwide demonstrates that CalPERS can’t possibly need more secrecy to make more investments.

In other words, AB 386 effectively calls for a waiver from the California constitutional mandate that the public’s business be conducted in public, which is why the bill needed to be approved not just by the public pension committees in each chamber, but also their Judiciary committees.

The Assembly analysis called out CalPERS’ fiduciary duty breaches:

While the public (especially those who are public employees and retirees) would like to think that the CalPERS Board abides by its fiduciary obligations, recent scandals have unfortunately shown that it has not always done so. Just last year, former CIO Yu Ben Meng suddenly departed after an anonymous ethics complaint to the Fair Political Practices Commission alleged he approved a $1 billion deal with the New York financial firm Blackstone Group while personally holding as much as $100,000 in the company’s stock. (Finch, “CalPERS ahead of earnings goal with absence at top. When will investment chief vacancy hurt?,” Sacramento Bee (April 19, 2021), available at https://www.sacbee.com/news/politics-government/the-state-worker/article250732564.html.) It was another embarrassing chapter for the agency. In 2018, a blogger revealed exaggerated claims on the resume of newly-hired chief financial officer Charles Asubonten, prompting him to resign. (Ibid.) Two years prior, former CEO Fred Buenrostro was sent to prison for taking bribes from former CalPERS board member Alfred Villalobos.

Ouch.

Shortly after that, the influential Sacramento columnist Dan Waters also criticized the CalPERS bill in scathing terms. Key sections:

Assembly Bill 386 sailed through the Assembly Judiciary Committee last week…

Given its cavalier handling, one might think that AB 386…is just another minor change in law. In fact, however, it would allow the financially shaky California Public Employees Retirement System (CalPERS) to semi-secretly lend out untold billions of dollars by exempting details from the state’s Public Records Act.

Potentially it opens the door to insider dealing and corruption in an agency that’s already experienced too many scandals, including a huge one that sent CalPERS’ top administrator to prison for accepting bribes…

Direct lending by CalPERS means that its board members, administrators and other insiders would be making lending decisions on their own without outside scrutiny.

CalPERS’ rationale is that using alternative investment partners is costly because of their fees, and that direct lending could potentially result in higher earnings. However, it says, disclosing loan details would discourage many would-be borrowers from seeking CalPERS loans, thus limiting potential gains…

[Ben] Meng was brought aboard to juice up investment strategy but shortly after reporting disappointing 2019-20 results was forced to resign because he failed to reveal his personal investments in a New York financial firm, Blackstone Group, with whom he had placed $1 billion in CalPERS funds.

The Meng situation illustrates the perils should AB 386 become law and CalPERS officials be allowed to loan money to corporations and individuals without having to disclose all-important details.

The problem with this is even if you put aside CalPERS’ record of corruption and the potential for self dealing, its claims about its private lending plans have never added up.

If CalPERS were serious about launching an in-house private debt operation, it should have presented an economic rationale to the board and a business plan showing the projected staffing needs and other costs and show how beefing up would result in improved net returns. Nothing of the kind has occurred. Instead, CalPERS has misled the board by talking up private equity fees, when private debt fees are much lower.

The absence of any evidence of planning and budgeting suggested that CalPERS was attempting a re-run of its failed “private equity new business model.” CalPERS’ initial scheme was to hand off the whole kahuna to BlackRock. In other words, the plan to save fees would be by getting a theoretical bulk discount. But even then, as we documented, the “fob it off to a big brand name” scheme would have actually led to higher fees.

The Judiciary Committee Fiasco

We’ll skip over some chapters to get to the fatal Judiciary Committee hearing on Tuesday. One major mistake that CalPERS made was having the head of its Legislative Affairs Division, Danny Brown, be the only party dealing with the legislature and key constituent groups.

Keep in mind that CalPERS was petitioning the legislature for a major carve-out from the constitutionally-mandated Public Records Act disclosures. Brown’s role is to help shepherd routine CalPERS bills (every year, CalPERS needs to do clean up that requires legislative approval) and present CalPERS’ views on other bills which might affect the giant fund.

Given the magnitude of the CalPERS request, as well as the investment/governance issues, it flagrantly disrespectful to the Legislature not to send other officers, particularly from the investment office, both to answer technical questions and to signal that CalPERS understood that the bill was a big ask and was operating in a serious, good faith manner. Brown was over his head and it showed. That was not his fault; he should never have been expected to go solo.

Recall that the concerned beneficiaries at RPEA had gotten some amendments when the bill went to the Labor, Public Employment and Retirement Committee, designed to give CalPERS less of a blank check (you can read the entire legislative history, including those amendments, here).

Brown’s testimony is maddening because is stuffed full of falsehoods, starting at the top (at 4:26:20 from the video archive):

It is also important to note that the CalPERS board is fully briefed on investment deal flow, beginning to end, and more importantly, the investment team has a fiduciary responsibility to inform the board if an investment is problematic or out of compliance with policies and overall investment strategy.

That is utterly bogus. reality is CalPERS has delegated investment authority for commitments of up to $2 billion with no review or input by the board; the board only found out ex post facto about the Ben Meng $1 billion commitment to a Blackstone fund that led to his hasty exodus. Similarly, the board found out only about severe dilution (as in a big economic loss) from an investment in Silver Lake and in an investment in forestland gone bad from the press (the board was notified of the loss on trees only shortly before the Financial Times story about it went live).

Sources close to CalPERS say it is likely that Brown had no clue as to how the investment process works, as opposed to chose to lie.

California Special Districts, California State Association of Counties, and the League of California Cities, and California School Employees said they supported the bill, with no substantive commentary.

David Soares of RPEA offered an opposing comment. You can find the full text at the first footnote. The short version is Soares charged CalPERS with:

1. Dealing in bad faith by agreeing to amendments as a condition of approval by the last Senate committee, yet apparently stripping them out for this committee (there was no analysis of them by staff, as would normally be required)

2. Misrepresenting their reason for proposing the bill. CalPERS had repeatedly told the board that it wanted to pursue high risk, high return loans. Yet as Soares indicates at a high level, CalPERS was instead significantly if not primarily out to provide low return loans…and why? There’s no plausible investment rationale, so we are force to consider bad motives. To curry favor with private equity general partners? More specifically, to improve the career prospects of senior CalPERS investment staff?

Danny Brown had told RPEA in a meeting with three of its officers after the Labor, Public Pensions, and Retirement Committee had voted through the amendments, CalPERS’ investment staff was ripshit. The staff saw RPEA and its amendments, designed to protect beneficiary interests, as interfering with their ability to provide subscription line loans. These are loans not to companies, as CalPERS had professed it was going to make, but to private equity funds themselves to enable them to game their returns and/or achieve even higher levels of leverage. None other than the esteemed distressed debt investor Howard Marks has criticized the use of these loans.

3. Having a history of playing fast and loose with private equity titans, implying there is no reason to give CalPERS the benefit of any doubt

4. Failing to meet the high legal bar for a waiver to the California constitution.

Soares either graciously or due to time constraints did not mention CalPERS’ continued, bizarrely close relationship with private equity fund Apollo even after it laundered placement agent fees, aka bribes, through former board member Al Villalobos to the eventually convicted felon, former CEO Fred Buenrostro. Apollo was extremely tardy in making required restitution and did so only under some duress. And now CalPERS looks set to suffer more embarrassment over Apollo’s long-standing and recently deposed chief Leon Black’s unseemly personal and business ties to serial child rapist Jeffrey Epstein. How does CalPERS ‘splain itself when more shoes drop>?

Four other parties voiced opposition, including Fossil Free California and the Peace and Freedom Party.

Senator John Laird then questioned the bill author, Assemblyman Jim Cooper about whether Soares was correct, that the amendments had been taken, as the analysis suggested, but now seemed not to be taken [4:34:40]. Cooper tore into Soares with ad hominem attacks [4:35;00].

What is telling about this response is that either Cooper or CalPERS’ spokesman Brown could have shut the controversy down by saying the amendments were still in. The fact that they didn’t say that either Soares was spot on with his accusation of bad faith by CalPERS, or both were so out of the loop that they didn’t know.

Laird shut Cooper down by saying of Soares [4:36:31), “He’s a constituent and I know him. If he said they [RPEA] offered amendments, I believe him.”

After posting another question to Cooper, Laird says that he was concerned in the prior committee that there be accountability to PERS [4:37:25]. If there’s not public disclosure, that privately the board would be able to be on top of them. Laird had asked CalPERS about that at the last committee meeting and had not gotten a satisfactory answer. Laird referred to a “subsequent statement” which was not from CalPERS or its lobbyist (?!?!) making the false claim that staff reports on all pending investments to the board and board members can request more documents.². Laird asked if someone from CalPERS could confirm the accuracy of this statement.

Brown fields the question [4:30:38] and gives a vague apple pie and motherhood statement.

Laird comes back and says that he is re-posing a question to which he didn’t get a satisfactory answer in the last committee. It’s all well and good to say that board members can ask more more information about a pending investment, but how do they know it’s under consideration in the first place to ask about it. “4:41:20: How do they know without them having to guess that there’s a problem?…How do we know that there’s accountability with the board in these transactions?”

Brown effectively said it was up to the staff to bring issues to the board. That didn’t make Laird happy. And he was right to be concerned. The “advocate’s” statement he’d received asserted that the Board was informed about all transactions as they moved through the underwriting process. Brown made clear the board only found out what staff decided they should know.

Laird how the legislature could be sure problems didn’t fester before the board learned about them. “We’re being asked to take a leap here…in exchange, we want to know that there’s accountability, an ability to get on a problem in short order.”

We’ll spare you further details, since Brown too obviously continued to handwave. But you can watch at 4:43:40.

CalPERS’ Board Shows Its Ignorance and Capture in Reacting to the Loss

CalPERS board predictably lashed out rather than consider that they were the authors of this failure by refusing to engage even in minimal oversight of deals in process. And the board clearly does not being to appreciate that RPEA did them a huge favor by ferreting out that staff had lied shamelessly about the sort of loans that they wanted to make. Investing in subscription lines will dilute rather than improve CalPERS’ returns; the usual interest rates (depending on the tenor of the loan and other terms) range from 3% to 6%.

But the clueless board would rather blame anyone than themselves for years of negligence and ignorance finally coming home to roost. From the rush transcript:

Theresa Taylor: We have to get this through the legislature, right? We’re asking for something specific so that we can do this work, and it’s hard when the legislature decides they know how to do the work better.

Taylor seems incapable of comprehending that the legislature’s concern is lack of board oversight, which has become far too evident over time (the failure to act on Marcie Frost’s resume fabrications, staff not being held accountable for covering up Ben Meng’s conflict of interest for month, for starters).

Rob Fecker: I can guarantee the rank and file members of that organization have no idea what was done to them. Shame on them, RPEA.

Let us not forget that Feckner defended the now imprisoned former CEO Fred Buenrostro up to the bitter end, so his assessment of what is actually in the best interest of CalPERS has been poor.

What really has the board’s goat is that they were outmaneuvered by a comparatively small group. And what they will remain incapable of admitting is that that occurred strictly because RPEA has a better grip of how CalPERS is run than the board does, which is a disgraceful state of affairs.

RPEA is not standing pat. Their press release, immediately below, not only corrects the record with respect to board member smears, but throws down a gauntlet: RPEA is pushing for hearing on the board’s abdication of duty via delegation of authority that is so extensive that the board has no clue as to what is going on, and more important, can’t influence decisions before they are made.

Pass the popcorn. This will be fun.

* * *

CalPERS Secret Lending Bill Fails Under Scrutiny by Senators

The California State Senate Standing Committee on Judiciary has declined to move forward with AB 386, CalPERS attempt to revive their disgraced former Chief Investment Officer’s failed 2020 attempt to remove “Private Lending” from the California Public Records Act. Only three of the committee’s 11 members voted to move forward with the bill after the author and a CalPERS representative were unable to respond to Senator John Laird’s (SD-17) straightforward questioning about CalPERS Board oversight of the proposed lending program.

The bill had already struggled in the Senate, after Senate Standing Committee on Labor Public Employment and Retirement chair Senator Dave Cortese (SD-15), joined by Senators Laird and Josh Newman (SD-29), had required that CalPERS accept amendments originally suggested by the Retired Public Employees Association requiring disclosure of the constituent ownership of any borrower and the collateral pledged to secure any loan of public funds.

The proposed secret lending program ran into further trouble when CalPERS staff were forced to admit that the program, rather than providing financing to help struggling businesses, was in fact intended to secretly funnel low-interest financing to private equity firms to whom CalPERS already pays hundreds of millions of dollars in fees and profit sharing each year — the same private equity firms with whom CalPERS had covered-up their ex-CIO’s serious conflicts of interest, still under investigation by the state Fair Political Practices Commission.

“The CalPERS Board has abandoned their fiduciary duty of oversight to staff who are funneling hundreds of millions of our pension dollars to shadowy outside managers that only give back a tiny percentage of overall returns to the trust fund,” said RPEA President Rosemary Knox. “We are asking that the state senate conduct hearings on this delegation of authority by the Board, along with the long litany of governance failures documented by legislative analysts who looked at this secret lending bill.”

______

¹ Soares’ full testimony:

I’m David Soares with the Retired Public Employees Association of California, retired after 32 years as a prosecutor in Silicon Valley where I also represented prosecutors and public defenders in collective bargaining.

Today I’m wondering what I’m going to tell my 24,000 members about the bad faith and lack of transparency that CalPERS has used to bring their Lending Secrecy bill before this committee. CalPERS stood before the last committee and agreed to take RPEA’s amendments — but those amendments (which are still in print) have disappeared today; a change not even mentioned by CalPERS representatives when we met with them after that last committee hearing.

What we did learn in that meeting is that a strategy that had been presented to us as high-return loans to distressed-borrowers is actually intended to steer low-interest loans to billionaires who already collect hundreds of millions in fees that are projected to exceed CalPERS entire operating budget in the next fiscal year.

These sweetheart loans of public trust funds to billionaires will be exempt from any disclosure of collateral or of terms allowing the proceeds to simply be pocketed.

The CalPERS CEO and Board President recently admitted to covering-up their Chief Investment Officer’s unlawful conflicts of interest with those same billionaires; their imprisoned former CEO admitted to literally taking shoeboxes full of cash that originated with these same billionaires.

When I studied Constitutional Law 40 years ago, I was taught that there must a narrowly-tailored basis for overriding an express constitutional right like California’s Article I section 3 “right to know.” What should I tell my 24,000 members is the compelling interest in lending public trust funds on secret terms to billionaires that outweighs the public’s right to know how their government conducts the people’s business? 

² Laird is astute enough to recognize that this was planted by CalPERS and that something was clearly amiss in CalPERS not making the statement in its own name.