STUMP » Articles » Calpers Governance Watch: Fallout from ex-CFO Meng Resignation » 8 September 2020, 17:40

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Calpers Governance Watch: Fallout from ex-CFO Meng Resignation  


8 September 2020, 17:40

Okay, summer is over. Time to get back into the pension posting grind.

Continuing saga of Calpers governance problems

As a reminder, Calpers long has had governance issues, some of it dipping into criminality in the past.

The most recent round involves issues surrounding the ex-CFO, which I covered in this post. Let’s see what made it into the regular press (so far).

NYT: After CalPERS Investment Chief’s Abrupt Departure, Trustees Talk Next Steps

CalPERS said in a statement after the resignation that it had been aware of questions regarding Mr. Meng’s personal investments, but considered them “private personnel matters” that “already have been addressed according to our internal compliance protocols.”

CalPERS’s deputy chief investment officer, Dan Bienvenue, is serving as the interim investment chief while trustees search for a successor. Their discussions on Monday were held in a closed-door session.

“We are committed to strong compliance protocols,” Marcie Frost, the chief executive of CalPERS, said in a statement on Monday. “At next month’s meeting, we will bring to the board specific policy options for their considerations.”

CalPERS is sensitive to even the appearance of conflicts of interest, given its visibility and outsize role in the economic life of California, its cities and its taxpayers. For the past two decades, the fund has operated with far less money invested than it will need to cover all the benefits it must pay. Taxes around the state have gone up as CalPERS has billed local governments for larger and larger mandatory annual contributions.

Bloomberg: Calpers Chief to Face Trustees Questioning Over CIO’s Exit

California’s giant pension fund is preparing for what could be a fraught emergency board meeting Monday, called to discuss the sudden exit of its chief investment officer.

Marcie Frost, chief executive officer of the California Public Employees’ Retirement System, will face questioning from trustees after it became public that former CIO Ben Meng was under investigation for a conflict of interest. Frost hadn’t told the full board before Meng stepped down on Aug. 5 from his position managing the fund’s $400 billion portfolio.

California state controller Betty Yee, an ex officio board member, has said she wants to examine Frost’s role overseeing and implementing the fund’s policies on conflicts. In a statement, Yee urged her colleagues to contemplate “any additional safeguards necessary to ensure this does not happen again.”
Of Calpers’s 13 trustees, six are elected by pension plan members, four are ex officio, two are installed by the governor and one is appointed by the state senate.

And something from “industry” press: ai-CIO: CalPERS Retirees Call for Board President to Resign

A group of California Public Employees’ Retirement System (CalPERS) retirees is calling for the resignation of CalPERS Board President Henry Jones, saying he concealed ethics violations levied against former Chief Investment Officer Ben Meng.
The 24,000-member Retired Public Employees’ Association of California (RPEA), in a Monday [August 31] letter to Jones, accused the CalPERS board president of participating “in an apparent cover-up of unlawful behavior,” and said the retirees “fear that this cover-up is ongoing.”

“Our demand is precipitated by your poor judgement and inappropriately secretive manner in the handling of the apparent Political Reform Act violations by Ben Meng while he was the CalPERS chief investment officer,” the letter said. “We view your actions in this instance as a continuation of your long-standing posture of openly opposing transparency and accountability on the part of the CalPERS board and staff.”

At an Aug. 17 CalPERS investment committee meeting, Jones blocked California State Controller Betty Yee from discussing the conflict-of-interest charges against Meng publicly, pushing the matter to a closed session.

Yee, a CalPERS board member, had called for a public emergency meeting to discuss the “CEO’s oversight and implementation of these [ethics] policies, and any additional safeguards necessary to ensure this does not happen again,”

I will come back to Betty Yee later in this post.

The letter by the retirees also takes aim at Jones’ refusal to support an investigation into “false statements” concerning the educational credentials of CEO Marcie Frost and to support a second investigation into “similarly false credentials” of former CalPERS Chief Financial Officer (CFO) Charles Asubonten.

Oh, I will definitely be linking to old posts about this.

When Frost was hired in July 2016, a CalPERS press release stated she was pursuing a dual bachelor’s and master’s degree in public administration from Evergreen State College in Olympia, Washington.

It was later disclosed that Frost only had a high school education. Frost and the CalPERS public relations office said the press release was a mistake and that Frost had never misled CalPERS about her lack of a college education.

Several CalPERS board members, including then-California State Treasurer John Chiang, had called for an investigation, but Jones, who was then the pension system’s investment committee chairmen, did not support the probe and the matter died.

Asubonten was forced to resign after portions of his resume were determined to be fabricated. Jones did not support an investigation that was called for by several other CalPERS board members.

Yes, I remember this quite well.

Naked capitalism’s coverage of Calpers governance issues

Now, Yves Smith at Naked Capitalism (she’s also known as Susan Webber, but I use her nom de blog) has been a primary source on a lot of the Calpers problems, partly because she’s obviously someone generally hostile to Calpers management so various insiders/outsiders with negative info to share go to her, but also because she knows how to read financial documents and finds out shenanigans herself.

In particular, she will take official documents and compare over different periods – that’s how she found odd things in the ex-CFO’s financial disclosure documents. I may not agree with Yves Smith’s politics (and I don’t), but I do not dispute most of the facts she digs up.

Of course, we can’t have infinite attention, so perhaps a little birdie told her where to look. As a reminder to my readers: I don’t mind anonymous tips (my email:, and I don’t share anonymous/confidential info publicly, but if you tell me where to look in public documents… yes, I have no problem doing that.

Yves Smith on the recent Calpers governance issues:

Man, she’s got a really sharp axe at this point. That’s just the last month, after what she dug up caused ex-CFO Meng to resign.

Prior STUMP posts on Calpers governance problems

24 May 2018: California Crazy: Governance and Management Problems at Calpers

On finding out Marcie Frost, CEO of Calpers, had no college degree:

Look, I’m fine with people not having college degree (my husband Stu doesn’t have any college degree), and definitely fine with people not having a masters degree. Sure, she has experience… in Washington [state].

How big [are] the Washington pension funds? Going by the Washington state page at Public Plans database, I see four different funds overseen by DRS, and it totals $65.5 billion, covering 394 thousand participants.

Calpers is much larger: almost $300 billion, covering 1.9 million participants.
Not sure you want the manager of the largest pension fund in the U.S. just getting around to getting degrees from a hippy-dippy school [Evergreen State College], which is the nicest characterization I can think of.
Again, let me reiterate: CALPERS IS THE LARGEST (non-federal) PENSION FUND IN THE U.S.

That’s a big, juicy target for corruption, and one need not even have the relatively recent outright corruption to demand extremely strong governance and management.

The above post also deals with ex-CFO Asubonten. What is it with Calpers and their CFOs?

12 September 2018: Trying to Deflect the Blame: Calpers and the Catholic Church (and Trump!)

Oh, pointing out that Marcie Frost may have lied on her resume, and may be unqualified to be CEO at Calpers, is attacking retirees?

Seems to me that the CEO of the org can do a lot of damage to the retirees herself. Especially if she isn’t qualified to do the job. Back in May, we had the story of a falsified resume for CFO of Calpers. That guy was booted. [Oh, sorry – he resigned … before he could get booted]

There are some serious dysfunctions in Calpers management, and the Board doesn’t seem to provide much oversight.

Oh, sure, you get an outsider like Margaret Brown or J.J. Jelincic coming in, but generally they’re just one person on the board at a time. They can’t do much if the rest are in lockstep. Also, as Yves Smith points out, they may be getting a highly edited version of facts from Calpers staff.

27 September 2018: Calpers Craziness: A Performance Review… and an Investigation?

Further notes on the fallout that Marcie Frost has no college degree:

So now they are in a position where they have to say one of two things:

1. Yes, we knew she had no college degree or other educational credentials, and we hired her anyway (this is their current line)
2. We thought she had the usual sort of 4-year degree, even if not all that challenging, because people expect that sort of thing for the largest state pension fund top spot…and we’re not firing her because… uh…it’s not her fault that we’re so dumb we didn’t notice that she had no college degree

They are still sticking with the “I meant to do that” argument.

via Imgflip

October 2018: Calpers Quickie: President Pushed off the Board Due to ESG Over Pension Security

My main comment on this particular Calpers brou-ha-ha is that sometimes it takes people losing multiple times before they get the message. There are issues at Calpers, and I don’t mean in terms of internal operations (I have no insight there).

Looking at the numbers from the outside, whenever the next recession/market downturn occurs, Calpers is going to need a lot of credibility. Having the various rinky-dink crap (I didn’t know about Mathur’s sketchy election history – that doesn’t help) bubbling around, I cannot take them seriously as a professional outfit.

The rinky dink crap is an indicator to me that they will not be able to handle bad news, period. And even with relatively good markets, there’s bad news a-coming to the various communities seeing increased contribution rates to try to make up for years of too-bright valuation assumptions.


October 2016: California Watch: Calpers Valuation, Exits, and Governance

I don’t even have an issue with the [Calpers] board being union-dominated. These people have a direct interest in making sure the pensions get paid. That should be the goal of the plan.

But here’s a problem:

What financial knowledge do these people have?

I am not assuming that these people have no relevant financial knowledge, skills, training, etc. But I wonder.

It’s one thing to be on a board, and get the tailored education that management gives the board members. It’s another to have broader knowledge so that you’re not taken in by plausible stories and strategies, like pension obligation bonds.

The more recent issue for me is the “Let’s add leverage!” strategy Meng announced before getting booted.

Can any of these people on the Calpers board provide adequate oversight of such a large pension fund?

Betty Yee: stepping up to the plate

Betty Yee is the current controller of California. She followed John Chiang, who was California’s treasurer after leaving the controller position. (Fiona Ma is currently California’s treasurer….and I want to mention in a prior move, Ma was removed from Calpers’s investment committee. That is odd. Ma is on-board for the leverage plan, so she wasn’t removed for being a pain to management. Probably.)

Both Chiang and Yee have been critical of Calpers governance over the years. They’re also both on the divestment train, which is poor fiduciary behavior, but let me leave that for another time.

I want to note that pretty much all the people involved in these brou-ha-has are Democrats. Many/most of the “outsider” Board members have been leaders in California public employee unions or other related organizations (such as retiree groups). There is nary a Republican touching any of this mess.

I checked out Betty Yee’s public LinkedIn profile, which doesn’t go as far back as mine, which is fine (but she is as old as parents). She was involved in the California state budget, the Equalization Board (which is involved in taxes), and now the Controller position. I’m sure she’ll move onto Treasurer next.

[I just want to mention I’m 2 links away from the governor of California Gavin Newsome and Calpers CEO Marcie Frost, and 3 links away from Betty Yee. It is very tempting to send all three a link invite.]

Betty Yee is somebody who at least can read a financial statement.

Here is how the upcoming Calpers Board meeting on September 16 is being reported in industry press: CalPERS to review governance changes at upcoming board meeting

Under the existing governance structure, the board has delegated to the CEO the power to hire, discipline and fire upper management, including the CIO. At CalPERS, only the CEO reports to the board.

Those discussion points were requested by Controller Betty T. Yee in a letter Wednesday to CalPERS board President Henry Jones “to ensure appropriate board oversight.” Board member Margaret Brown echoed these requests in a letter Thursday to Mr. Jones and also asked that the board discuss delegation of investment authority.

Ms. Yee confirmed that all of the discussion items she requested are on the agenda in open session, said Jennifer Hanson, spokeswoman for the controller, in an email.

Within the last 18 months, the board has made sweeping changes to its governance model that included reducing the number of committee and board meetings and stripping its investment committee’s decision-making power. It also increased the amount that investment staff members could invest on their own discretion.

CalPERS spokesman Wayne Davis said that the items requested by Ms. Yee will be added to the open session agenda sometime next week.

Well, I certainly look forward to whatever comes out of the September 16 meeting.

But the following came across as really weird to me:

CalPERS main role is education, Ms. Frost [CEO of Calpers] said, noting that each staff member has a “personal responsibility” to ensure they recuse themselves from participating in activities in which they have a conflict.

I hope that that was just a bad paraphrase of Calpers CEO Marcie Frost.

Because I’m pretty sure Calpers’s main role isn’t education. It’s to safeguard the pension funds and properly manage them.

Okay, let me go to their mission and vision statement:

A respected partner, providing a sustainable retirement system and health care program for those who serve California.

Deliver retirement and health care benefits to members and their beneficiaries.

Okay, that’s perfect. The only line on that page involving education is:

Providing meaningful information and education to all System constituents in a timely manner

That’s fine as one of their eight “guiding principles”.

It’s just a weird statement. Maybe the reporter screwed it up. I’ve been misquoted in the press when it was a spoken statement, as opposed to a written statement.

Some other recent pieces I can find referring to Betty Yee:

Reuters, August 11: California state controller asks CalPERS to investigate CIO’s exit, which recaps what we’ve seen above.

Interesting piece of info — Betty Yee was the only top California official to take a pay cut, though the governor himself pledged to take a cut. Hmmmmm. She’s definitely aiming to be governor.

….buuuut California Only State That Fails To Publish Annual Financial Report Due Last Year — even Illinois got its CAFR for FY2019 in faster. Not sure why the California CAFR is so late.

Missing the point

I haven’t really seen the point being made that Calpers is a huge pension fund, except in Mary Williams Walsh’s NYT piece.

[Yes, I know that info is from some years ago, but it probably is still 7th at $370 billion. It’s out-ranked by: the national retirement plans for Japan, South Korea, China, Norway, and the Netherlands… plus the U.S. Federal Thrift plan.]

And just maybe, it behooves them to have rock-solid governance?

Talking about stuff like Calpers May Force Its Next CIO to Unload Personal Holdings is kind of basic next to that info. (I hold only index funds, myself).

The pension system covered by Calpers itself is about 70% funded, and I am nervous about their leverage plan.

Even with their leverage plan, and trying to keep assuming they can hit their target of 7.5% return… required contributions have been way up compared to prior years:

That’s 37% of payroll. That’s huge.

When localities are being strained to make pension contributions, they are going to want to know that Calpers governance is strong.

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