In earlier posts, we’ve used the term “cynical” to describe how California Treasurer John Chiang announced that he planned to sponsor path-breaking private transparency legislation, AB 2833. The resulting bill is now so weak that a private equity expert described it as a set back for the cause for reform.
The reason for examining how CalPERS’ staff and Chiang’s office, in particular his designee to CalPERS board, Grant Boyken, duped CalPERS’ board to back the bill, isn’t simply to show that Boyken lied. It is also to illustrate how CalPERS’ board has become so weak as to be unable to take even basic steps to protect CalPERS’ beneficiaries and California taxpayers.
And we hope readers will also take interest how AB 2833 was made pointless as a case study in political sleight of hand.
The Bait and Switch Request for “Support if Amended”
At the CalPERS May board meeting, CalPERS’ staff asked the board to support Chiang’s private equity transparency bill, but on a qualified basis, “support if amended”. Bear in mind that CalPERS’ staff had already exceeded its authority in 2015 by saying it supported Chiang’s proposed legislation immediately after his announcement. The retirement system’s position on legislation is in the sole purview of the board.
CalPERS staff gave the board the usual briefing documents: the current text of the bill, staff’s analysis and commentary, the legislative history, and list of parties that officially supported and opposed the bill. The staff asked CalPERS to “support if amended” while showing only in very general terms what those changes might amount to. They did not give the board the text of the changes they were seeking.
This might be seen incorrectly by those unfamiliar with how CalPERS’ board has operated for long periods of time (as in when the board was far more active and effective) as underhanded, since the board was asked to endorse the bill blindly and approve amendments that were not specified.
However, this sort of delegation of authority for pending legislation is well established, since staff is presumed to be acting in good faith. And normally, that is a reasonable assumption.
The reason for needing to hold staff to a much higher standard here is, as we’ve documented repeatedly over the last two years, is that CalPERS’ staff is so badly captured by private equity that it gives priority to minimizing friction with the industry over serving the best interests of beneficiaries and California taxpayers.
But as we will see here, another impediment to the board serving as a check on staff when needed is that many members of the board are also effectively carrying the water of the private equity industry. Today, we’ll look at a revealing interaction with Treasurer John Chiang’s staffer, Grant Boyken, from CalPERS’ May board meeting, and next week, one with Bill Slaton from a June session.
CalPERS’ staff and Chiang’s designee Boyken depict it as an unfortunate accident of timing that the bill’s author, Ken Cooley, had not yet filed the latest round of amendments had not been filed prior to the May CalPERS board meeting. While we cannot know for certain, there is reason to doubt this benign interpretation. If that were really the issue it would be simple enough to postpone the decision to a board meeting after the amendments had been made.
If you watch the May 16 board video starting at 4:55 , you’ll see several things happen. The first is that JJ Jelincic makes some suggestions. One is a minor change to the definition of related parties. That does not meet any opposition. Next, he mentions that the original bill imposed the fee reporting requirement on all new funds or any funds that were amended. Including amendments is important because CalPERS has billions in existing funds that will take years to roll off. It is the general partners who ask for these amendments, so including them in the bill is a way to pick up many (and eventually pretty much all) current private equity investments over time.
Staff’s defense was that this requirement would prevent CalPERS from approving amendments that were in its interest. This is unpersuasive, since given the compliant nature of limited partners, CalPERS is very unlikely to be a swing vote. Moreover, amendments are proposed by the general partner, and are therefore will be in his interest, which may not always be in the limited partners’ interest. Thus the times when a vote is likely to be of concern is when CalPERS would want to withhold consent in any event. In fact, nearly 10 years ago, CalPERS adopted this precise practice of withholding consent from fund amendments to force transparency in another situation, which was when it “discovered” that politically connected insiders were collecting millions of dollars in “placement agent” fees for selling funds to it. So there is direct precedent for Jelincic’s proposal.
Finally, the theoretical loss of influence needs to be weighed against the tangible benefit of much greater insight into fees and costs on current funds, as well as having that disclosure impeded abuses. That tradeoff would seem to go heavily in favor of using amendment requests to force disclosure on current funds. But it does not appear that board member (save Boyken, the point person on AB 2833) had the acumen to even grasp what JJ was talking about.
But here is the key section, starting at 26:22. The speaker is Michael Flaherman, and we’ve mentioned him repeatedly as a key party on AB 2833.
Flaherman is a former CalPERS Investment Committee chairman, later a private equity executive, and currently a visiting scholar at UC Berkeley. He was originally asked by Chiang’s office to help draft AB 2833 and some of his language was in the initial version of the bill. We wrote about how after Flaherman initially supported the bill, he turned into an opponent in June. He submitted written testimony to the California Senate that, as a result of the amendments published after this board meeting, AB 2833 would “set back the cause of private equity transparency for the bill to be enacted as currently written.”
Two weeks after our post, the Los Angeles Times described the growing controversy and led its story with Flaherman explaining how the changes had “gutted” the bill.
Michael Flaherman, Visiting Scholar, UC Berkeley: I have one issue that I just wanted to raise, which is that I’m aware that there have been different versions, different proposed amendments floated around for this bill, some of which are very tricky and are intended to undermine the purpose of the bill.
And I was hoping actually that one of you might ask what I think is actually a very important question, which is are there any other changes to the latest amendment, proposed amendment, that affect the bill relative to last version that has been posted? Because Mr. Costigan has an excellent point, which is that there’s been no public opposition to this bill, but there is certainly a lot of unhappiness in the private equity industry and the effort has been to try to slip in innocuous-seeming language that has the effect of undermining the effect of the bill.
So if I were you, I would want to get reassurance and confidence that there is no other substantive change to the bill other than what’s already been discussed. So that, I just throw myself on your mercy and hope that one of you might ask that question before you vote. Thank you.
Investment Committee Chairman Henry Jones: Mr. Boyken.
Grant Boyken, Deputy Treasurer: Thank you. I’m not sure where that comes from. There’s been no tricky amendments. It’s been good negotiations between the Treasurer’s office and the author’s office. I mean, you’re exactly correct. We’ve seen no opposition on file. Nobody has talked to us. Nobody from industry has gotten to us. There was one point, when legislative counsel dropped our definition of related parties. There were a couple of other things that got amended.
Legislation, you know, sometimes the deadlines come quick. It’s an iterative process. Things aren’t perfect. But fortunately, it’s a long process that won’t finish until late in the summer. Plenty of time for input like we have today for CalPERS to come up with a reasonable though-out plan. So you know, I can assure this board that there’s nothing tricky going on behind the scenes.
You will notice that Boyken jumped in to deny Flaherman’s observation that “tricky amendments” were in play and successfully shut down questions from other board members.
Boyken’s claim was a flat-out lie which prevented the board from making an informed decision.
I had heard about different amendments that were under discussion, both from Flaherman and JJ Jelincic prior to the May CalPERS board meeting. One included “pro-rata” language that, as Flaherman discussed in his June written testimony and to the Los Angeles Times, was destructive to the bill and led him to change his position on the legislation.
Moreover, most of the other substantive comments that Boyken made were misleading. He mentioned “good negotiations” between the Treasurer’s office and the author’s office. Huh? Those two parties are in cahoots. They are not negotiating. They are collaborating. Boyken’s framing diverts attention away from the parties that count and that he denied existed, the opponents to the bill. And even though they were not “on file”, Boyken clearly knew of their views and also withheld that information from the board.
LACERS, the Los Angeles City Employees’ Retirement System, recommended that its board oppose AB 2833. Under California law, the agenda for that meeting was posted prior to the CalPERS’ board meeting on May 16. It is a virtual certainty that LACERS’ staff had already made its unhappiness known to Chiang or Cooley’s office, and that both would know of that view. Even though the position would not be official until the board voted on May 24, it was highly unlikely that the board would overrule staff.
The Los Angeles Police and Fire Pension’s staff similarly recommended that its board opposed AB 2833 at its May 19 board meeting. As with LACERS, the agenda, which included the recommendation to oppose the bill, was published before the CalPERS’ May board meeting. And as expected, both boards did decide to oppose AB 2833.
Similarly, Flaherman was also accurate in describing industry opposition to private equity transparency legislation, including this bill, as Gretchen Morgenson described in a recent New York Times article. One proof is that when he first said he would sponsor a bill, Chiang said that the Institutional Limited Partners Association fee template, which was in an advanced draft, did not go far enough. It was published this January. A grand total of three general partners have endorsed it, demonstrating how much antipathy the industry has for it.
One can point out that Boyken does not have an affirmative obligation to provide this sort of information to CalPERS board members. But it’s quite another matter to snooker them via lawyerly or what Flaherman would call “tricky,” language. If you thought that Chiang was serious about curbing private equity abuses, as opposed to merely getting some positive press to help with his gubernatorial bid, you now know better.