CalPERS continues to thumb its nose at the law. The latest example involves its plan to give enormous power and profit to BlackRock, a financial firm that damaged CalPERS in the past by putting it in the Stuyvesant Town real estate deal, in which CalPERS lost its entire $500 million investment.1
It’s astonishing to see an organization refuse to allow for open discussion of fundamentally important policy decisions, as required by the Bagely-Keene Open Meeting Act. That intransigence is made even worse by the fact that CalPERS is seriously considering implementing a strategy that would harm its beneficiaries and California taxpayer. CalPERS plans to introducing another middleman into its most expensive investment strategy, private equity. That would increase already high private equity costs and lower returns.
Mind you, this is the antithesis of the approach CalPERS uses for every other investment strategy, where it correctly fixates on cost reduction, to the degree that CalPERS has misrepresented data to exaggerate how much it has lowered costs.
Later in the post, we reproduce an e-mail by board candidate Margaret Brown to the members of the CalPERS board, along with its CEO Marcie Frost and general counsel, Matt Jacobs, vigorously objecting to how staff intends to discuss this and other agenda items impermissibly in secret.
CalPERS makes no pretense that it has any legal justification for this move. Note that the default position of Bagley-Keene is that all deliberations of governmental bodies are to be held in public; private discussions must be put on the agenda with a citation of the section of law that allows for the discussion to be in secret. You can see there is no such notice:
Contrast this with Item 2, the only one of seven substantive agenda items for which CalPERS did provide the required notice:
Board member JJ Jelincic also views the relegation of this item to closed session as bogus:
I have read the agenda item and can see no reason that it’s in closed session except to save staff from embarrassment.
Needless to say, PR considerations are not a legally valid basis for discussing a major policy item, which is what this proposal amounts to, in secret.
The reason this item is scheduled for this Monday’s Investment Committee meeting is apparently because Bloomberg reported on CalPERS’ interest in outsourcing its private equity operations to BlackRock. The board is not supposed to find out about major plans like that in the press.
We described at length in an earlier post what a bad idea this is. It is made even worse by the fact that it is a bait and switch. It is inconsistent with the “business models” that CalPERS presented to the board at an offsite in July. As we wrote:
CalPERS will pay more in fees with BlackRock and there is no reason to expect improved performance. As the former Chief Investment Officer for North Carolina, Andrew Silton, stressed, CalPERS is such a large investor in private equity that is unlikely to achieve better than index-like returns. And it’s a no-brainer that introducing another intermediary means more fees and costs.
BlackRock would effectively be a dedicated fund of funds manager for CalPERS, an approach that is typically used only by small fry, like high net worth individuals and and smaller institutional investors, or for bigger players, to achieve adequate diversification for small, niche-y strategies (say if CalPERS decided to make an allocation to infrastructure in Latin America).
It is remarkable to see CalPERS consider outsourcing, since going in the direction of increasing its cost flies in the face of prudent investment management. It also contradicts the approach CalPERS takes in all other strategies in which it invests, where it has a strong focus on expense reduction and manages many of its investments in house because it is cheaper.
Private equity expert and board candidate Mike Flaherman estimated that even if CalPERS negotiated “heroically” that it would pay an additional .20% in fees plus a share of the profits. That means $50 million at a bare minimum versus the roughly $5 million of cost for CalPERS’ current internal team. Moreover:
…it is likely that BlackRock’s compensation will rise over time, as CalPERS will likely pay a much lower fee for BlackRock to monitor legacy investments made by the CalPERS team compared to the compensation paid for new investments sourced by BlackRock. Over time, the CalPERS-sourced investments will be harvested and replaced by BlackRock-sourced ones, likely leading to large cost increases.
To add insult to injury, CalPERS staff failed to tell the board that Mark Wiseman of BlackRock, who staff presented as an independent expert at the July offsite, was very much an interested party.
Even if you were to accept the premise that this outsourcing scheme is a good idea, it is also remarkable to see CalPERS considering only one vendor for it, when many firms would likely be interested in managing the program, and on top of that, a firm that has treated CalPERS badly in the past. The Stuy Town deal was controversial internally when it was under consideration, and there were multiple parties who argued that it was a bad deal .Some people directly involved say that BlackRock had made misleading representations in marketing the deal and also treated CalPERS unfairly as it unravelled. Unless BlackRock has somehow made up to CalPERS for the loss, which seems impossible given its magnitude, it is hard to fathom why CalPERS would be willing to do business with an organization that has dealt with them in bad faith in the past.
Below is the text of board candidate Margaret Brown’s e-mail to the board. If you look at the board agenda, you will see that not only is the item we flagged, the discussion of private equity business models, is missing the required statutory citation(s) for why it is being relegated to closed session, but five other agenda items are also being discussed impermissibly in private.
Dear CalPERS Board Members,
My name is Margaret Brown. I am a candidate for the CalPERS board and I am also a manager in a school district where I administer large-scale capital projects involving the expenditure of million of dollars.
I am writing today to point out that, should you proceed with any items other than item two at your Monday Investment Committee closed session, a serious violation of the Bagley-Keene Open Meeting Act will result. The violation will occur because of a substantial defect in your notice for that meeting. The legally required notice for that meeting is found here:https://www.calpers.ca.gov/doc
I am referencing page four of the notice, which is the agenda for the closed session of the Investment Committee, scheduled to begin at 8:45 am. Item two of this agenda references the statutory authority for that specific item to be considered in closed session. However, none of the other seven items on this agenda cite the statutory authorityfor their inclusion in closed session rather than open session. Failure to cite the statutory authority for including an item in closed session is a serious violation of the Bagley-Keene Open Meeting Act, which states in relevant part:
11125. (b) The notice of a meeting of a body that is a state body shall include a specific agenda for the meeting, containing a brief description of the items of business to be transacted or discussed in either open or closed session. A brief general description of an item generally need not exceed 20 words. A description of an item to be transacted or discussed in closed session shall include a citation of the specific statutory authority under which a closed session is being held.
Should you wish to consider the items scheduled for the defective closed session meeting, I believe that you have no alternative other than to issue a new, compliant notice and wait the legally required period before proceeding.
I strongly caution you against ignoring this substantive defect in your current meeting notice and proceeding in the face of the resulting Bagley Keene violation.
Now that each of you has been put on notice of the violation via this email, you would be engaged in a knowing violation if you proceed anyway, which is a crime:
11130.7. Each member of a state body who attends a meeting of that body in violation of any provision of this article, and where the member intends to deprive the public of information to which the member knows or has reason to know the public is entitled under this article, is guilty of a misdemeanor.
Further, you should know that I have spoken with a journalist who is highly interested in the closed session item related to restructuring the CalPERS private equity program, and who has expressed determination to argue, via litigation if necessary, that the transcript for that item may not be shielded from PRA release because the item was not properly included in closed session.
Also, if your General Counsel want to see a correctly noticed set of meetings, you should consult CalSTRS, where each closed session item cites the statutory authority for such closed session consideration. See here:
Candidate 4 CalPERS Board 2017, Position B
Notice that the remedy for the items that are bona fide closed session items is for the staff to re-do the agenda with the required legal citations and have the discussion later. For instance, personnel matters (which is on the agenda as Item 8) are required to be discussed in private, so the compliance there would merely result in some delay. However, given that CalPERS does not have a board meeting in October, it will be ever more inclined than usual to thumb its nose at the law and proceed willy-nilly. And rest assured, I am going to submit a Public Records Act request for the transcript of the “private equity business models” agenda item. It is a policy matter and unlike specific pending fund investment, is not legally protected, and I am prepared to litigate. CalPERS has been acting like a $300 billion banana republic for far too long and that needs to stop.
1 Please do not fall for the story that Stuy Town was a reasonable deal. Anyone with decent knowledge of the New York City rent regulations could have told you the basic premise was bogus: that the new owners could raise rents rapidly and increase cash flow. The purchase price was so high that the rental income was insufficient to cover debt service, meaning getting income up quickly was imperative. But the apartments were overwhelmingly rent regulated. NYC tenants don’t leave rent-protected, below market apartments readily. And housing court in New York is tenant friendly, so the various tenant harassment strategies by the new landlords were beaten back.