By way of background, Tony Butka was California’s Presiding Conciliator of its State Mediation & Conciliation Service and is now a CalPERS beneficiary. That means he is well qualified to judge the competence and propriety of the actions of state officials, since he had the opportunity to observe disputes across a large range of agencies and activities in his role as arbitrator.
Butka has issued a second blistering critique the (mis)conduct of CalPERS’ CEO, Anne Stausboll, mere months after he wrote Treasurer John Chiang, who is a CalPERS board member, to alert him that the Chief Investment Officer, Ted Eliopoulos, the head of private equity, Réal Desorchers, and private equity professional Christine Gogan had been so dishonest with the board that they all have should have received a notice of intent to discharge. As Butka tartly observed then:
Almost worse, elected Board members at the meeting were evidently too busy defending staff members to remember that when they were running for office, there was a little thing called ‘fiduciary duty’ which goes with becoming an elected CalPERS board member. Maybe they should read up on it.
And that missive followed an earlier, less exasperated objection to how CalPERS was acting in bad faith in its handling of Public Records Act requests.
Butka eviscerates Anne Stausboll’s latest power grab, this in the form of a detailed analysis of how the processes for selecting the sensitive role of fiduciary counsel, was made through a slipshod, self-serving manner. We’ve written separately and at considerable length as to how the winner, Robert Klausner, has been mired in scandal for over a decade, has refused to produce records and is now ducking a subpoeana in Jacksonville, Florida, where he has been accused by the city of helping set up an illegal super-lucrative pension fund for top employees of its Police and Fire Pension Fund. Even worse, that “Senior Staff” pension fund, which was kept secret for ten years, effectively loots the regular police and fireman pension fund.
Since it’s hard to fathom why CalPERS would choose such a tainted lawyer in the critical role of fiduciary counsel, the most charitable assumption one cam make is that CalPERS’ staff wanted the most pliant attorney possible in the role. A previous story on Klausner’s brief tenure in San Diego in the early 2000s reported that Klausner told clients what they wanted to hear (which should in and of itself disqualify a lawyer from serving as fiduciary counsel). Another attorney, looking at the Klausner opinion that he wrote to support the Jacksonville Police and Fire Pension Fund’s creation of a the “Senior Staff” pension fund, said via e-mail:
This sort of “opinion letter” [justifying the creation of the Senior Staff fund] has no legal effect except to make ignorant Board members comfortable doing patently illegal things. There is no good reason to for them compensate an employee so generously. Ironically, the Attorney General Opinion from the mid-90’s doesn’t really say much at all – and it’s the only colorable “authority” relied upon by Klausner. It can be read to support the opposite conclusion as well – that employees of the Jacksonville Police & Fire Pension Fund are employees of the City covered by their plan.
So there’s good reason to be concerned about the results of this flawed process, which Butka examines at length. With permission, we are reproducing his story at CityWatch, CalPERS: A Betrayal of Public Trust. At the end, he calls for California citizens to take action by contacting public officials and CalPERS board members.
To Butka’s article:
Recently the folks at Naked Capitalism posted a damning article about CalPERS hiring a sleazeball outside fiduciary Counsel, based on the staff recommendations carefully crafted by its CEO, Anne Stausboll. (Photo)
This got my attention, so I started to give the issue a closer look.
First, you should understand that for the majority of classifications in a big state system like CalPERS, selection of employees is governed by the California State Personnel Board. That system is designed, however imperfectly, to put the public service in charge of our hiring process instead of the folks on top being able to hire their buddies, or worse. That’s why we have a civil service examination process; that’s why we have the requirement that agencies can only hire from those on a ranked examination list.
The fly in this ointment, however, is exempt jobs — such as the outside fiduciary counsel to CalPERS. For these types of jobs, there is no statutory requirement to go through the State Personnel Board, nor is there much specific legal criteria for hiring, other than the requirement that the CalPERS Board must take the final vote to hire.
At the same time, this is an immensely critical job — in fact, many of the very problems of corruption and manipulation which got Anne Stausboll her job in 2008 had to do with exactly this kind of issue — fiduciary responsibility. In the prior case, then CEO Fred Buenrostro wound up charged and convicted of fraud and manipulation when he played footsie with Board member Alfred Villalobos, as they manipulated the pension fund’s investment decisions. I should note that Villalobos committed suicide in 2015 as he was about to face trial.
Had the fiduciary counsel to the Board been doing their job back then, (or for that matter had key staff employees stepped up,) the fraud and manipulation would have been much more difficult to conceal. Moreover, the Board might have been able to take affirmative action in a timely manner, avoiding hundreds of millions in damages to the fund and over a decade of litigation. In fact, since Ms. Stausboll was the Chief Operating Investment Officer from 2004-2008, she can’t very well claim that she doesn’t understand such issues.
So, within this context, let’s see how CalPERS handled the selection of their new fiduciary board counsel Robert Klausner, whose claim to fame would seem to be that of a “pay to play” scheme with Jacksonville’s Police and Fire Pension Fund. In addition, he represented the Louisiana State Employees Retirement System, home to such paragons of governance as the infamous Huey ‘The Kingfish’ Long. And just to put the icing on the cake, Mr. Klausner is not even licensed as an attorney in the State of California!
Back to the analysis. First, I asked myself, how would a topnotch CEO handle the hiring process of such a key position for a Board of a $300 billion agency with over 2700 employees? Normally, you would go out and find a reputable consultant who manages these types of employment decisions as their main job function, and who have a proven track record. In conjunction with staff, they would prepare a list of minimum qualifications and desirable qualifications, reference lists, and outreach methodology.
From there he or she would develop a pool of at least 10-20 potential consultants, and set up an interview panel of people who are knowledgeable in the subject matter, but who do not work for the agency in any capacity. That interview panel would then meet and score the potential consultants, usually with face-to-face meetings. There would be a scoring sheet process used to limit the final list of candidates to three or four.
From there, the CEO would present a final list of candidates to the Board, answering any questions, and have the Board conduct the final interview process to determine the ultimate hire for outside fiduciary counsel. Typically an appointment such as this would be for a three year period, which guarantees a timely and periodic review process.
Notice that such a process keeps the staff out of the hiring decision, insulating both themselves and the Board from any hint of impropriety, and providing a timely feedback loop.
Now let’s see how Anne Stausboll handled it. First, CalPERS Interim General Counsel Gina Ratto sent out with a memo in March 2014 to “All Interested Parties” regarding the search for an Outside Fiduciary Counsel. The stated purpose of the search was to find someone who would “advise the CalPERS Board of Administration on questions of fiduciary duty.”
However, three paragraphs later, the position was redefined as “CalPERS outside fiduciary counsel respond to opinion requests from the CalPERS Board and staff, directed through the System’s General Counsel.” (Emphasis added) My reading of this language is that the fix was already being put into place, giving the outside fiduciary counsel a de facto dual reporting relationship — with everything going through or vetted by the CalPERS General Counsel. You know, the one the CEO controls.
We next discover in an August memo that the General Counsel and Deputy Counsel have signed off on an analysis that carefully sidesteps how bad the selection process has been. For example, we discover that outreach has been negligible — they report that in looking for fiduciary counsel for the largest public pension plan in the United States for a five year contract, only ten firms have provided bids. And yet “staff” seemed to be overwhelmed by this number and had to set up a special Interview Panel!
Buried in this document is the fact that “staff”, whoever they are, had winnowed down the overwhelming number of 10 applicants to five who would be eligible to be interviewed by this special panel. There is absolutely no explanation as to what process, if any, was used to cull out half of the applicants.
Even better, let’s see who was on this interview panel: Anne Stausboll and a large subset of her executive management team — Chief Financial Officer, General Counsel, Deputy General Counsel, and Senior Investment Officer for Real Estate, virtually all of whom had been hired by and/or report to CEO Stausboll. This panel interviewed the five firms and then, based on their internal “consensus”, wound up recommending two firms for Board consideration.
I wouldn’t be this harsh except that this hiring process was hardly the “open and transparent” new CalPERS that the CEO promised when she took over from her indicted predecessor in 2008. And note that the staff recommendation was for only two, not the traditional three, firms to be considered by the Board — with a throwaway line in the memo that, if the Board really wanted to be bothered with three firms, they could consider the other of the two current fiduciary outside firms.
At the Board meeting, the Board was given a push by staff to hire the bright and shiny new Florida law firm of Robert Klausner — instead of the old and boring incumbent firm, Reed Smith. I should point out that Robert Klausner is not even licensed to practice law in the State of California, yet the minimum qualifications for the position clearly require attorneys who are licensed in California.
The staff response to such quibbles is that Mr. Klausner employs attorneys who are licensed in California. How reassuring. Just like their glossing over Klausner’s scandal ridden past, as reported in the Naked Capitalism article, even though the solicitation document required the following:
Please provide a description of legal proceedings (including grand jury proceedings) brought against the firm, any of its business entities, or persons or entities providing services to, or on behalf of the firm or any of its business entities as part of the proposal…
C’mon folks. This process was embarrassing — just read back to how an actual honest to golly neutral hiring process should work. And then note how staff slid this mess over on the Board without much push back — except for JJ Jelincic, one of the two system wide Board Members, who stood out by pushing back against this travesty of a hiring process. Kudos to him.
Jelincic’s reward was to be marginalized. If history is a guide, the “go along to get along” faction of the Board, as well as staff, will be looking to try and get rid of him for actually doing his job as a Board member.
On that note, I was personally surprised at the tepid questioning of this process by Richard Costigan, the designated representative of the California State Personnel Board. If SPB staff tried to run an examination or hiring process as inherently fixed as this one was, they would be hammered and rightly so.
Just in case you think I’m being an alarmist, one of Mr. Klausner’s first acts was to suggest that the Board meets too often — that they should consider quarterly meetings. You betcha. While it is true that some things work best in the dark, this is a startling position for someone who purports to be the brand new fiduciary counsel of the new “open and transparent” CalPERS.
If you are a beneficiary of CalPERS, or part of the 1.7 million folks who are a part of the CalPERS family, you should be worried. These are our pensions, and we — and ultimately the taxpayers of the State of California — are on the hook for these monies. If the Board and staff are going to ignore their fiduciary responsibilities as they have in the past, we are potentially in a world of hurt. Consider sending an email, picking up a phone, or (gasp) even writing a letter to the Board and/or your elected State officials.
This series on CalPERS highlights such an accumulation of problems — what appears as conflicts of interest, dereliction of duty, employees formally unqualified for their jobs, etc — that I am wondering: is there already a basis to raise a judicial complaint against some of the CalPERS officers? And would any pensioner covered by CalPERS have standing to sue?
. . .Consider sending an email, picking up a phone, or (gasp) even writing a letter to the Board and/or your elected State officials.
That won’t do the job, but pitchforks might. At this point, the sleazeball characterization can be applied to the top staff as well.
Is there any pension fund that is fully funded, other than Keane’s of Jacksonville’s Police &Fire Pension Fund, or is each one, to varying degrees, short of money?
Didn’t some of the Pirate Equity deals funded by public pensions result in portfolio companies pensions being raided and destroyed by the pirates? Why are public sector pension funds giving money to Pirate Equity, knowing the result will be the wholesale destruction of the portfolio companies? This destroys the existing tax base, which will be tapped for any public sector pension shortfall.
Are there enough 10 baggers out there so that pension funds can “earn” their way out of the hole?
Compound interest – eats the world.
Oh no, you have that wrong! The two things CalPERS is afraid of are:
1. The state legislature
2. The Sacramento Bee
Getting state legislators on CalPERS would be highly productive, and it’s way easier than with your representatives at the Federal level.
Is there any pension fund that is fully funded, other than Keane’s of Jacksonville’s Police &Fire Pension Fund, or is each one, to varying degrees, short of money?
Yes, the Wisconsin Retirement System is fully funded due to a provision that requires benefits to be cut (but not below original pension level) if returns are poor. In recent times, this has caused some serious difficulty for older retirees living on their pensions because newer retirees could only have pension payments cut to their original level whereas pensions of old-timers could be cut a lot more. (WRS pensions are inflation-adjusted but that is contingent on available funding.)
Pew says S.Dak is also fully funded:
When we wink about the “Republican Clown Car” I don’t think that it’s fully understood how un-serious California’s capitol of Sacramento became when the voters threw out their governor and made a knuckle-headed, steroid-abusing, philandering, millionaire Austrian body-builder and action-movie star their Man on a White Horse. The return of Jerry “Gandalf” Brown looks statesman-like in comparison — but he has not returned gravitas to Earl Warren’s golden dome.
We are North Argentina.
Mr. Butka’s story is a damning indictment of Stausboll and the CalPERS’ staff. The board doesn’t fair much better. At a minimum, the loophole in the State Personnel Board’s job list exempting the outside fiduciary job from civil service merit based hiring needs to be closed. All important CalPERS jobs, including Stausboll’s should be non-exempt jobs. That might go some way toward making them accountable to the state and the CalPERS beneficiaries and prevent this sort of cozy insider dealing.
Klausner’s hiring looks like the fix was in and the board supinely went along.
Thanks for another great PE, CalPERS post. This information is important to all pension funds.
I got news for Butka. “Fiduciary duty” is based upon the “prudent man rule.” Recent changes to the “prudent man rule” allow much more discretion to trust board members in their duties than in the past.
Around 2003 the State of New Mexico “updated” the prudent man rule in its statutes regarding public employee retirement investment boards. At the time, I read the new proposed rule and the rule on the books. A careful reading using my non-legal eagle-eye assured me that the only way my pension board members could be sued under the proposed “prudent man rule” for untrustworthy behavior was if they were to be seen asleep at public meeting of the board. My bitching and moaning to board members, staff and friends in and out of state and city government in NM went nowhere. The new “prudent man rule” was easily passed into law, doubtless with the full support of the sitting board and board staff. A board, mind you, with no requirements for a background in finance, economics, accounting or simple arithmetic.
So, we have ex-dog catchers from Roswell and secretaries from Albuquerque overseeing our widows and orphans fund. I swear to Christ there is one woman on the board that I know is dumber than a barnacle. As long as they stay awake and keep dumping 10% of the hoard into PE and hedge funds it’s all good. And it’s so much fun to go junketeering to far away places and hear the investment advisors “educate” them with their genius insights.
CalPERS is subject to legislation passed in CA that holds them to ERISA’s duty of care. So your analogy from New Mexico does not apply.
Moreover, New Mexico is one of the most corrupt states as far as the management of its pensions is concerned. Not comparable to California, which actually is less bad than most states. That is why seeing what id going on at CalPERS is so disturbing. They are supposed to be, and not all that long ago (as in 15-20 years) were much better than that.
From my 2013 Book Kentucky Fried Pensions on New Mexico-
Rosen and another Diamond Edge partner, Marc Correra, are being sued for their role as placement agents in New Mexico. ….The Dodd-Frank Act ushered in a new SEC whistleblower program and a placement agent paid by a well known private equity firm for the New York State Common Retirement Fund was an early catch. Former Obama Car Czar (chair of the committee that bailed out the auto industry) and MSNBC celebrity Steve Rattner was fined $6.2 million. Not only was Rattner involved in New York, but in New Mexico as well. “Rattner, for his part, has donated $20,000 to Governor Bill Richardson’s gubernatorial campaigns, $15,000 of that after he nabbed the state retirement fund investment.”
A recent Fortune column lamented that Steve Rattner’s reputation “has been rehabilitated, just two years after settling with federal and state authorities over allegedly participating in a kickback scheme to get public pension fund investments for his private equity firm.” Rattner, rather than being shunned, has become a media darling appearing on MSBC and writing a column in the New York Times. I fear that the SEC has already started to sabotage its own whistleblower program with public pensions in spring 2013 by refusing to fine Illinois officials or related vendors who worked to cover up pension liabilities from municipal bond purchasers.
A placement agent scandal in New Mexico was politically devastating to their governor in early 2009. “Over the span of just three months, Bill Richardson has gone from being on the shortlist for secretary of state to late-night punch line. David Letterman, host of CBS’s “Late Show,” jokingly paraphrased Richardson’s announcement that he was stepping down from Obama’s Cabinet: “You know what, I’ve been doing some stuff that may be too illegal to be in the Cabinet but just about right to keep me as governor of New Mexico. So if you don’t mind, I don’t want any Blagojevich trouble.” The New Mexico saga is still going on in spring 2013. The New Mexico Supreme Court has decided to hear the case filed by Frank Foy, former chief investment officer for the Educational Retirement Board (ERB). Marc Correra of Diamond Edge shared in more than $22 million worth of fees paid to Correra by companies that were awarded business by the State Investment Council and the ERB. Correra has fled the country and is reportedly living in Paris on his spoils. The New Mexico State Investment Council has recovered $24 million from one of the money managers – Vanderbilt Capital Advisors , but the losses were easily in the hundreds of millions.
Buenrostro sentencing delayed again
Is it interesting that Buenrostro pled guilty in July 2014 but his sentencing has been delayed 4 times (most recently 2 weeks ago)? It’s now set for July 2016.
Are they trying to recover funds from Villalobos who was already bankrupt before shooting himself?
Calpers has been such a mind-boggling scandal that even now, reading all about their utter incompetence I almost can’t believe it. Gresham’s Law among the hopelessly stupid. An extended tragedy of faith and panic. That’s what happens when the foundation of the whole rationale is false. 8% returns are impossible. Why don’t we have a way of resolving this stuff? It’s clearly needed – just like the TBTF banks, whose plan for redeeming their own fiasco has now been acknowledged to be a… fiasco.
One might also add, for the sake of clarity, prohibitory standards which would automatically exclude a prospective candidate from being considered, such as failure to answer subpoenas (de facto contempt of court), prior records of scandal entanglement, lack of respective state law licensure, etc. (Like sex-offenders are generally considered ineligible for posts working with youth).