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.