The Sacramento Bee appears to have broken the story that CalPERS CEO Anne Stausboll announced she is leaving as of June 30. From its article:
Anne Stausboll announced her retirement Thursday as chief executive of CalPERS, ending a tenure during which she guided the nation’s largest public pension fund through a bribery scandal and the financial markets crash.
Stausboll, 59, said she will leave June 30, when the fiscal year ends.
“I’m really ready to explore the next chapter of my life,” she said in an interview. After taking some time off, she said she’ll be “looking for new opportunities to serve the public.”…
“It was definitely a time of turmoil,” Stausboll said, referring to the early years of her tenure. “It was a challenge. I think we’ve really landed in a good place.”
The few people I’ve spoken to about this who know CalPERS and do not have inside knowledge were surprised, as I was, and perplexed. Stausboll is retiring only from CalPERS, not from professional life. In fact, her “looking for new opportunities to serve the public” says that she’s putting herself on the market, but wants a good long holiday before she takes a new post. And at 59, having secured her position well by neutering the board, there’s not obvious reason for her to be leaving….or is there?
It came to me a few hours later, and former North Carolina chief investment office flagged the probable cause in a December post. CalPERS is underfunded, albeit not severely so. However, the Fed tightening, even if it has worked out as the Fed had planned, with an attenuated rise that Mr. Market would hopefully digest well, would still hurt investors that responded as the central bank wanted them to and piled into risky assets. CalPERS is overweight equities and other comparatively high-risk investments like private equity.
Silton fingered management, meaning Stausboll above all, for trying to evade CalPERS’ thorny investment issues. His dim view of CalPERS’s recent behavior means he would almost certainly disagree with Stausboll’s PR that she is leaving CalPERS in fine fettle. From his post, From “Leading the Way” to “Losing its Way”: CalPERS. I’m taking the liberty of quoting Silton at length because the nuance of his observations is important:
I’ve been listening to recent committee meetings conducted at CalPERS. I suppose it’s a way of connecting my former professional life with my art. I’m listening to these sessions and perusing some of meeting materials because the nation’s largest pension plan is completing a sad transformation from “leading the way” to “losing its way.”
As I’ve written before, I frequently called upon the senior staff at CalPERS when I ran the North Carolina pension plan in the early 2000s. They were the leaders in formulating investment policies, hiring capable staff, and exploring new investment opportunities. As they shared their experience and expertise, more than one investment professional warned me not to go too far in borrowing from the CalPERS’ model. They cautioned that a portfolio could become too complicated, the range policies and procedures could become too detailed and cumbersome, and the staff and consulting relations could become too numerous…
Meanwhile the finance and administration committee has tacitly acknowledged that the pension’s investment assumption is unrealistic by adopting a formula to lower the assumption in years when the capital markets are ebullient. For example, if the CalPERS portfolio earns 4% more than its 7.5% assumption in any given year, the future assumption would be reduced by .05%. If the portfolio beats its assumption by 7%, the assumption would drop by 0.10%.[2] The idea is to use some of the “surplus” to fund a move toward a more realistic investment assumption. Unfortunately, excess performance in a given year isn’t a surplus; it’s just a random result that will be followed at some point by performance that falls short of the assumption. CalPERS is adopting this policy because they know that their portfolio (even with its unwavering commitment to private equity) can’t earn 7.5%, and because they know that state and local government are either unwilling or unable to increase the contribution required to meet the obligation to the beneficiaries.
To be clear, CalPERS faces a daunting challenge. When a pension plan becomes underfunded, the way forward is intimidating. The current board and professional staff didn’t create the central problem (liabilities significantly greater than assets). This problem has been building for more than a decade. However, they’re doing a poor job of confronting and addressing the problem.
Within the hours and hours of committee meeting videos, I’ve seen all sorts of troubling signs. For example, the governance committee is grappling with potential new policies to limit inquiries by board members and prevent board members from using the public records law to obtain documents when they aren’t furnished in the normal course of business. When I was CIO I didn’t particularly like pointed questions and public records requests. No one enjoys having their recommendations questioned or producing reams of documents. However, I recognized that tough questions and inquiries were a necessary part of the process. Instead of stifling inquiries, the professional staff at CalPERS needs to grow a thicker skin.
At the governance committee meeting, the members also considered reducing the number of board meetings. I think this is a sensible step, except for one big problem: the professional staff hasn’t earned the trust requisite to reducing the frequency of meetings..
At the most recent governance committee and investment committee meetings, the trustees heard from CalPERS’s outside fiduciary counsel. Naked Capitalism[3] and others[4] have documented that the pension plan’s fiduciary counsel, Robert Klausner, has a history that does not inspire confidence in his opinions. I am also troubled by the fact that the fiduciary counsel doesn’t report directly and exclusively to the trustees. Instead Mr. Klausner’s practice appears to be yet another consultancy constructed on conflicts of interest, spending too much time mediating potential rifts between the staff and board.
When pension plans, or for that matter any organization, face big challenges its board needs to be very active. At CalPERS, we have a lot of video evidence that only one trustee is asking probing questions and that the staff and governance committee would like to limit his inquiries. In my view, all of the trustees should be asking tough and probing questions. The board and committee meetings should be interactive and at times even raucous. After all they’re facing tough problems. Moreover, the trustees should have an independent and unbiased fiduciary counsel who exclusively advises them on their role as fiduciaries.
I doubt CalPERS will change because they’ve lost their way.
While Stausboll stabilized CalPERS after its pay to play scandal and was at the helm during the crisis, that falls far short of dealing with underlying problems and striving to adapt to a changing environment.
Not only has Stausboll created a culture hostile to open discussion, she does not appear to have done an adequate job of succession planning. That raises the question whether she had planned to stay on longer and recently changed her mind.
Stausboll is leaving with a top team with far too many recent hires and promotions for it to be likely to be stable or cohesive. The Chief Operating Investment Office, Wylie Tollette, has been at CalPERS less than two years. Ted Eliopoulos, the Chief Investment Officer, has a much longer tenure, having joined CalPERS in 2007, but he’s a protege of former state treasurer and CalPERS board member Phil Angelides (as was Stausboll). He’s a lawyer with limited investment experience prior to becoming the head of real estate investing at CalPERS who got a battlefield promotion in September 2014 when the former CIO, Joe Dear, died unexpectedly. The general counsel, Matt Jacobs, joined less than a year ago. I’m not familiar with the track records of the other investment strategy heads, but Réal Desrochers, who has been at CalPERS since 2011, is at least 67, and therefore can’t be assumed to stay in his post much longer.
In other words, Stausboll is leaving with insufficient seasoning among her leadership team. The person in the spot that would normally be the best position to replace her, the Chief Operating Investment Officer Wylie Tollette, doesn’t look like he would be ready to take the reins, although given Stausboll’s unexpected retirement, he may be included in the race. But that also assumes he wants the job. Tollette is already rich, with a net worth rumored to be $20 million. And the CEO job is very political, requiring lots of face time with the legislature, unions, and other constituencies. He might not like the job description.
As much as we and other close observers have been critical of Stausboll’s tenure, it is difficult to find good public pension fund executives. While CalPERS has the opportunity to, and in fact would very much benefit from getting someone willing to confront the issues that Stausboll has found more convenient to finesse, the odds are not trivial that CalPERS could wind up in worse hands and continue its decline as an institution. The flip side is an energetic candidate might relish the challenge of reinvigorating the organization.
But what is most troubling about the timing of Stausboll’s departure is that it looks like a market trade. Leaving when the going is about to get tough is not a sign of leadership. It’s opportunism.
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Do you have a mirror, Yves? I doubt if Silton would have got much attention without your groundwork.
My guess is that we’re due for a reprise of the Great Recession – she sees this as well, and is getting out before her risky decisions come home to roost. She and her successor will blame each other for the inevitable losses, and will both continue earning large paychecks.
Here’s hoping her replacement takes fiduciary duty seriously.
Thanks for your continued reporting on CalPERS and PE.
Yves, thanks for your analysis and for sharing Silton’s feedback. His recommendation that the Board have their own independent fiduciary counsel is a great suggestion.
It’s amazing how relatively recent much of the CalPERS executive staff are, not to mention poorly fit for their job going on the basis of the meetings and other events richly documented here on NC.
It’s worrying to think it might be hard to find executive staff with suitable experience and integrity (i.e., not already captured by PE/revolving door dreams, etc.).
I bet you could train some Guatemalan lawn boys and 10 years from now nobody would know the difference.
Take the lawnmower guy and put him through a few night-school classes on beta leveraging and dinner parties.
He could do it!
down in the west texas town of el paso
I found a dude with teeth white as a pearl
all the day long would he push the lawnmower
His shoulders were strong and his biceps would curl
$50 per day was his fee for a mow job
that looked quite cheap from what I could tell
I could double his rate if he could pull a snow job
Wining and dining while stocks rose and fell
I bought him a suit and a tie that was shiny
As shiny as gold and he looked like a king
Gave him an office o’erlooking the highway
Gave him a staff who could do everything
Why pay a $million for someone to sit there
handing out money is easy you see
$100 a day without all the hot air
I just lowered our cost then he’ll lower our fees
I told him to think like a man cutting grasses
trimming them down so they’re stubby and clean
A lawnmower’s not trained to kiss any asses
He thinks its unmanly and rather obscene
Shocked as he was at the money we paid out
Oh so much more than a lawnmower earns
quickly he learned how so many had made out
wining and dining while portfolios churned
After a year he had saved us oh million$
After two years we were doing quite well
I paid him a bonus of $10,000 dollars
Then he went back to Mexico from what I could tell
He left us a note saying thanks for the money
The easiest money that he’d ever made
but wining and dining it stopped being funny
he missed the blue sky and the wind and the shade
With the help that he gave us we’re good for a year now
we’ll figure it out over time, that I know
$100 a day, oh now we can see how
you can pay for performance or pay for a show
(this isn’t great but I donn’t have all day)
Pretty good for a rush job Craazyman.
I suspect, you being ‘smarter than the average bear,’ that there is a subtle dig at the ‘Uberclass” in the ditty. After all, the narrator, singerator??, of the original tune has been shot and is dying as he sings. Your Guatemalan lawn mower is smarter than everyone else. He’s got what he needs and is quitting while ahead.
Kudos C.
OK OK I’m exaggerating. It’s just a fake cartoon song. It’s not that easy in real life, I will admit, as the song makes it seem. you can’t believe everything people write in songs
But seriously, I’ll do it for only $500,000 per year! But only if there are no meetings.
D. Tremens, Chief Executive and Chief Investment Officer and Chairman and Analyst of all Things Quantifiable and Also of Things that Defy Quantification
Magonia Capital Manaagemenet
10 Bagger Tower, Magonia Center
PO Box 8
Magonia
I’m torn between “if you can’t stand the heat stay out of the kitchen” and “get while the getting’s good”
I’d put my money on “get while the getting’s good”.
My best guess is that she sees that the sh*t is about to hit the fan & she does not want to be on board when it does.
Would anyone be surprised if Stausboll’s next act is to become a PE “consultant”?
Unlike in private financial institutions, she’s not expected to know about the nitty-gritty of investing. That’s the chief investment officer’s job.
Despite her statement that she was interested in another public sector role, I do agree she is more likely to wind up in the private sector. Via e-mail from an informed contact:
From the perspective of a CalPERS member hoping soon to be an annuitant, the foregoing analysis is simply chilling.
I’ve been watching a clueless and passive Board being bullied by a couple of thug lawyers who have no qualification in finance — an ugly picture for an under-funded system in a contracting economy. Staussboll appears to have been a master of placating politicians and stakeholders with “happy talk” who has now decided to “get while the getting’s good.”
Could her timing be related to the recent calculation of the actual assets and fee structure of CalPERS’s trebled exposure to risky Private Equity investments over the past seven years?
I sincerely hope for her sake that her resignation is unrelated to her predecessor CEO’s ongoing cooperation with the FBI in his attempt to avoid a 5-year prison sentence. His admitted corruption was, of course, directly related to the fund’s greatly expanded exposure to PE.
I’m with Chuck. Congratulations Yves!
I’d offer a slightly different perspective on the team she’s leaving behind. The problem is not that they are too inexperienced or unqualified or something along those lines. They possess excellent Serious People resumes and backgrounds. Rather, I’d describe the problem more like they are overpaid bureaucratic technocrats who have neither interest in nor intellectual capacity for exploring actual solutions to the increasingly difficult social conundrum of how to fund public pensions in an era of widespread inequality and fraud. They are there to cash their paychecks and enjoy the various perks of being Important and In Charge in their neck of the woods.
Let me be clearer on the issue of experience: I meant working together as a leadership group. Too many are comparatively new to CalPERS for them to be a stable and cohesive team. For instance, most of the C-level people at JPM Morgan have worked with Dimon for five years, and a key to Goldman’s success is its strong culture and how people rise from within to top positions. People who grew up in different environments have different assumptions about priorities, style (how open to be about conflicts, what is acceptable in terms of bureaucratic infighting). For instance, on those rare occasions that I’ve been asked to work with other consultants on projects and they were lucrative enough for me to consider it, I found I could work well only with other ex-McKinsey people. We operated from enough of the same playbook that we could work out differences quickly. When I worked with people who had grown up in other consulting environments, the differences in reflexes about how to do the work and communicate with the client were so large as to create a lot of friction.
As for particulars, the one whose expertise I question most is Ted Eliopoulos.
My 2¢ from the peanut gallery:
If the board is too new to have mentally cohered around a specific policy/entity-culture-identity then Stausboll’s successor will have an opportunity to shape the fiduciary culture/environment for the board. This could be a critical juncture for the board.
I believe Yves is talking about the executive staff not yet having a sense of shared organizational culture. I don’t know if this is true about the Board as well–there, it seemed like all but 1 had been cowed or otherwise captured by pre-emptive pre-meeting talks with staff. (I.e., the executive staff seem to have prevented the Board from operating with independence to exercise real fiduciary care.) In fact, this tactic may be the predominating aspect of the current CalPERS executive culture, and the new legal hire may fit in just fine.
I hope a new CEO will bring an attitude of genuine commitment to ensuring executive staff focus more on what is in the best interest of CA’s public pension payers.
The Board is the governing body of an institution. The executive staff merely carry out the day to day activities. What you’re suggesting, that a new CEO can change the attitude of the organization, is an inherent (and nonsensical) contradiction. Senior management is simply a reflection of the Board’s (actual) priorities, whether we’re talking a public pension, a public school district, a public university, or a public hospital.
I’ve been thinking about this, and it really bothers me. Not in the sense that ‘you’re wrong’, but rather, in the sense that if you’re right, then it is a much deeper and more severe indictment of public management in our country than most comfortable intellectuals are willing to make. It calls for radical and fundamental reform of how we govern institutions, calling into question the very idea of having large institutions that wield any level of judgment and discretion whatsoever.
Yet in areas like MMT’s job guarantee, academics act like one can just whip up a vague outline of a program and our ruling class will magically implement it for the good of the people. That is a cognitive disconnect of immense scale, to the point of being reckless and irresponsible.
Here is Eliopoulos’ bio, for example. He has been involved in Board and senior management positions for a long time. He has an Ivy degree and a JD. He literally chaired the Board of the Pension Real Estate Association. He was involved in California pensions specifically working at the state Treasurer’s office. To say that this guy lacks expertise to run a large institution is pretty much to say that no one in a position of power today is qualified to run our nation’s institutions. I wouldn’t necessarily disagree with that. Rather, I would point out that this isn’t a limited problem. Management failure is so vast in scope and scale in our society that it is the defining characteristic of what ails our system. None of our major civilian public systems – from law to medicine to education to pensions to banking/finance – has the kind of tight-knit groupthink organizational culture that you are describing. There is constant churn at the top amongst Board members and senior management.
https://www.calpers.ca.gov/page/about/organization/executive-officers/ted-eliopoulos
I am not saying he is not qualified to some sort of bureaucrat. I am SPECIFICALLY saying he is not qualified to be a Chief Investment Officer. He’s not a finance guy by background, and his only experience is managing a real estate portfolio, very late in his career, which despite the CalPERS hype, he didn’t do all that well. Real estate is one of the simplest categories of investment to manage and does not give him the chops to deal with the many other issues involved in dealing with a big, international portfolio.
I appreciate the extended work you have done on the CalPERS saga, so it’s interesting to me finding a perspective where we differ pretty starkly. I just don’t see the value in that kind of formal expertise and experience. Eliopoulos strikes me as exactly the kind of guy being churned out by our system of higher education over the past few decades, the kind of guy you see in a senior role at a wide range of large institutions from CalPERS to JPM.
The problem in finance is that financiers have made it complicated, not that finance is inherently too complicated. Or to say that differently, I would suggest that your concerns about him not being qualified to be a Chief Investment Officer are not an indictment of Eliopoulos. Rather, they are an indictment of widescale central planning. No one is competent to oversee complicated investments of hundreds of billions of dollars. Government should not be in that business, either directly owning private property through pensions or indirectly subsidizing large scale private ownership of such property by supporting the TBTF entities.
How tough? You have stated that “CalPERS is underfunded, albeit not severely so.” How the heck do you know? (I am not trying to be a pest). You have documented that CalPers is heavily into PE which routinely skims money out of the partnership, continuously argue that PE’s gains aren’t as spectacular as they claim, and their fees somewhat opaque. I posit that Stausboll’s new CIO has unpacked CalPers’ financials (you know, the stuff you’d love to see) and it is uglier than even you might have expected. That is, she isn’t so much leaving as she is running away. I very much hope I am wrong.
I think Sluggeaux is onto something, and dont be surprised to see a federal indictment within the next few months, Eliopulos as the new CEO, and a yes-man as the new CIO reducing complexity and implementing retardation.
I think calpers can do better, A LOT better, hopefully no more lawyers will find their way into top positions
Regarding the raise in the federal fund rate, how can recently bankrupt and criminal TBTF’s who loan to each other at this rate be regarded as creditworthy institutions?