CalPERS and the "Oh, no, we're not fully funded!" canard

Poor CalPERS can’t catch a break. First the Board of Administration lurches through a months-long controversy about its newfound embrace of risky, and secret, private equity (PE) investments. Then the fund loses the architect of the PE strategy, its newish Chief Investment Officer Yu Ben Meng, to yet another conflict of interest scandal, compounded by sloppy financial reporting. And then syndicated columnist Dan Walters (late of the Sacramento Bee, now with CalMatters) hits ‘em again with the favorite trope of defined benefit pension opponents (CalPERS’ Immense Pension Dilemma, CalMatters, August 10), “…The California Public Employees Retirement System has scarcely two-thirds of the money it needs to pay benefits that state and local governments have promised their workers."

I can’t do anything about the weakness of the Board, the perfidy of the staff, or the trend toward less and less transparency that seems part and parcel of the move to increased reliance on private equity and private debt. I can, though, debunk the notion that CalPERS is nearly insolvent because it is “70 percent funded.” (Actually, 70.1 percent, which is more than “scarcely two-thirds.”) What that means is that CalPERS has, in its many portfolios, 70.1 percent of what it would need to pay off all current and future pension obligations—at once. While being 70 percent funded is not ideal, the possibility of running out of money to meet obligations to retirees is remote. In 2018, CalPERS’ income (from employer contributions, employee contributions, and returns on investments) exceeded its outlay to retirees and beneficiaries.

True, CalPERS was “fully funded,” at 101 percent, before the 2008 recession. It’s also true that decisions made by unions, municipal governments, Governor Jerry Brown, the courts, and the voters over the past couple of decades have contributed to the current state of the fund. There are many dials and levers that all the interdependent players can push and pull in attempts to increase the funding rate—but perpetual handwringing and oversimplification of the issues don’t help anyone—they just reinforce the public’s politically driven resentment of public employees’ pay and benefits. I refer Mr. Walters’ readers to the estimable blog, www.calpensions.com, for education.

Unfortunately, CalPERS' reputation is in tatters at least partly because of the continuing drumbeat about its funded rate. Institutional investors, California taxpayers and CalPERS' own members are confused and uncertain about the fund’s solvency .If anything is needed to restore public trust and respect for this giant public institution, it is a combination of effective leadership and enhanced transparency regarding staff and board interactions and decision making. In fact, a 70 percent funded rate is a pretty good cushion. Fund managers who know what they’re doing have plenty of time to make adjustments in the portfolio, and even in the employer/employee contributions structures. And they should be able to sell needed changes to members and constituent agencies...if the members and agencies trust them to do their jobs right.

Yet in recent months, in the midst of persistent controversy over a private equity strategy that shields investment details even from members of the Board of Administration, the Board’s committee composition and meeting schedules have been changed to limit both public participation and scrutiny of its decision processes. At the same time, under former CIO Meng’s leadership, CalPERS sponsored AB 2473, one more assault on the public’s ability to follow—let alone comment on—the fund’s investments in public debt. (Public equity investments, including in venture capital and hedge funds, were shielded from public scrutiny in 2005, via SB 439.) That bill died in committee this month, but CalPERS staff have told stakeholders that they intend to bring it back in 2021.

The problem, at this moment, isn’t the funding level. CalPERS is in extreme disarray, and that’s really bad for the largest and most influential public pension system in the nation. With the shocking resignation of the CIO, a CEO under continuous fire for falsifying her resumé and generally not being up to the job, and a largely staff-captured Board of Administration—the problem is lack of oversight and accountability. It isn’t looking like this can come from inside. It’s time for the Legislature to step up and clean house.