Sacramento Bee, 8/16/10
Recently Californians learned that CalPERS, the state’s largest public pension fund, did not disclose material information to the state Legislature before an important vote a decade ago on a bill to materially boost pension benefits for state government employees.
According to veteran reporter Ed Mendel of Calpensions.com, newly discovered documents from 1999 indicate CalPERS staff informed the board that the cost of the pension hikes could skyrocket should Cal-PERS’ investments not perform as expected. But for reasons not yet disclosed or known, CalPERS’ board chose not to provide that information before the Legislature’s vote.
In fact, though the board was informed that a 50 percent reduction in investment yield would result in a 500 percent increase in state pension costs, documents presented by Cal-PERS’ board to the Legislature in support of the pension legislation said nothing about that risk. Instead, it boldly guaranteed that the pension increases would not cost “a dime of additional taxpayer money” and that CalPERS “would remain fully funded.” Shortly thereafter, the Legislature passed the pension boost.
Fast-forward to 2010. Exactly as predicted in the staff document presented to CalPERS’ board but not disclosed to the Legislature, pension costs and pension debt have soared because CalPERS earned less than its expected return over the past decade. Since 2000, state costs for Cal-PERS have been almost $20 billion more than expected, and that’s just the tip of the iceberg. Because the pension boosts were retroactive, non-cancellable and statutory, the state is on the hook for hundreds of billions more in future obligations.
As a result, CalPERS projects it will need $270 billion from the state just over the next 30 years, but even that amount is based on an assumption that CalPERS will earn at high rates that require the stock market to double every 10 years. Anything less and the cost will be higher. No doubt somewhere in CalPERS lies another undisclosed document illustrating how much would be needed from the state should investments not perform as expected.
Needless to say, legislators who voted in favor of the pension boost regularly state now that had they been told of the risks, they would not have voted for the bill.
In the private sector, non-disclosure of material information is a serious offense. Recently Goldman Sachs agreed to pay a fine of $550 million in connection with alleged nondisclosure of material information in a transaction that produced $1 billion of losses. It remains to be seen whether CalPERS’ board will face scrutiny in connection with a transaction that has already cost the citizens of California ten times that much money.
The decision by CalPERS’s board not to provide legislators with critical information about a matter of enormous financial consequence for the people of California is symptomatic of a fundamental flaw in public pension fund governance. Even though those state residents have all the risks, the pension boards don’t represent them. Instead, they represent the interests of parties with nothing at risk (state employee pensions are guaranteed by the state whether or not CalPERS has any money) and others (e.g., investment managers and middlemen) hoping to gain favor with CalPERS through campaign contributions and gifts to board members. As a result, all the incentives are aligned against the party with all the downside (the public) and in favor of parties with nothing but upside.
If and when government employees are willing to give up a state guarantee of their pensions and rely solely upon CalPERS and its performance to make good on pension promises, they should be permitted to govern CalPERS. Until then, the public should govern CalPERS.
Fair and representative board governance must be the next frontier in public pension reform.
Link to full article: http://www.sacbee.com/2010/08/16/2960913/calpers-cant-have-it-both-ways.html