With more than $230 billion in assets to manage and the responsibility to buy health care benefits for 1.3 million people, the taxpayers of California have a tremendous amount of money riding on the people who govern and operate the California Public Employee Retirement System (CalPERS). This week, two events at CalPERS provide taxpayers good reasons to secure their wallets and demand change.
First, the CalPERS board received an investigative report detailing the shameful, corrupt conduct of its former CEO, board members and senior staff. In concert with outside investors and middlemen, these CalPERS insiders rigged investment decisions to benefit friends, paid generous management fees to favored firms and tried to buy political support with pension fund money. Their fates will ultimately be decided in the courts, but voters will need to change the governance of all pension boards to protect themselves.
The report reveals that these public employees were playing in a Wall Street fast lane where $4 million is a small finder’s fee, $5 million is a gambling debt and private jets are used to close billion dollar deals. These unconscionable abuses were perpetrated by the board members, in direct conflict with their fiduciary duty under the state constitution to put the system’s beneficiaries’ and participants’ interests above their own. These were not rogue employees, these were unaccountable CalPERS leaders enriching themselves at the public expense.
Of course not all of the CalPERS board members were corrupt, but perhaps willfully ignorant. They clearly failed to make sure their state agency managing $200 billion in public money had rules, controls and procedures in place to prevent these foreseeable white collar crimes. I am sure the other board members were “shocked, shocked” to discover their colleagues were selling influence over investment and contracting decisions. Californian taxpayers have a right to higher ethical standards than a corrupt cop gambling in a cheap gin joint in Casablanca.
Sadly, these tremendous breaches of the public trust perpetrated in secret are merely parking tickets compared to the serious financial offenses CalPERS is committing in broad daylight. Just yesterday the CalPERS board refused to reduce its projected rate of return from 7.75% to 7.50%, even though its staff report projects just a 7.3% rate of return for the next ten years. Somehow CalPERS board members mistakenly believe manipulating their books to willfully increase unfunded pension liabilities is consistent with their obligation to ensure the competency of assets held in trust for retirees and active members.
By overestimating its investing prowess, CalPERS undercharges state and local government agencies for their current retirement costs and transfers those obligations to future budgets. Of course our children and grandchildren will have their own ideas on how their tax dollars should be spent and paying the unfunded balance of our pension program will take resources away from their priorities.
CalPERS has a long, sordid, expensive history of manipulating actuarial analysis. Back in 1999, they infamously told the Legislature that a 25% retroactive increase in benefits granted during the dot com boom would “not cost the state a dime” in additional contributions. Instead of the $760 million CalPERS predicted for this year, the actual cost of state benefits is nearly $4 billion. Those 32 billion dimes would come in real handy as leaders struggle with the state’s $26 billion budget hole.
In addition, CalPERS has quietly changed its funding strategy to ignore the fundamental pension system principal that pension plans must work towards being fully funded. Indeed, under federal law for private pension plans, employers must make contributions to their plans based upon calculations that assume any deficit would be eliminated within seven years. This is a very prudent requirement that ensures assets will be available to cover retirement promises.
The CalPERS board ignores such a commonsense principle. Its most recent actuarial analysis assumes that none of the state plans they administer will be fully funded for the next 30 years. Again, they are using very generous assumptions to under-charge for pensions and shortchange the state’s pension fund, passing all of these additional liabilities and costs to future taxpayers and the budgets they will depend upon for the government services they will need for decades to come.
So what is the answer? We must change the state constitution to require all public pension boards to have a majority of independent directors with expertise in finance, law and health care who have no stake in the funds themselves. Independent directors will understand their sole fiduciary obligation is to the employees who have a vested right to the benefits and the taxpayers who seek to minimize the long term costs of those benefits. Those key points are clearly lost on the public employee union representatives elected sit on the current CalPERS board.
California Pension Reform is developing a statewide initiative for the June 2012 ballot that adopts the groundbreaking Little Hoover Commission report recommendations, reduces the cost of all public employee pension benefits to private sector norms, requires an equal sharing of benefit costs between government agencies and their employees and replaces employee dominated retirement boards with a majority of independent taxpayer representatives.
This important change in pension plan governance will improve public accountability and decision making. It should also keep anyone from ever again using $230 billion in public money as their own slush fund to reward friends and line their own pockets.