Is the Sacramento Bee in the Business of Protecting CalPERS?

Something is rotten at the Sacramento Bee. Two stories in the last week were jiggered very much to favor CalPERS. One will take more unpacking, so we’ll start today with the more obvious case.

Eileen Appelbaum, co-author of the landmark book Private Equity at Work, took note of the pending private equity benchmark change at CalPERS that we wrote about last week. She is a member of the Center for Economics and Policy Research, and CEPR pitched having her write an op-ed for the Sacramento Bee. She submitted a draft, which was edited and scheduled to run in the print edition Monday morning, which meant it would appear online at the worst at the same time, more likely the evening before. It was important, as the SacBee editors knew, for the story to run before the Investment Committee meeting on Monday. The story links to the Investment Committee agenda, clearly showing that the public session started at 9:00 AM, Monday November 13. The agenda item in question, 6a, was covered before 10:15 AM.

The reason this article was important is the only things CalPERS is, or was, afraid of is the Sacramneto Bee and the state legislature. Having the Sacramento Bee call attention to the fact that the proposed private equity benchmark change was an anti-beneficiary, anti-taxpayer move with no precedent (indeed, it runs counter to the advice of every independent expert) had the potential to embarrass the normally shameless staff and board.

So what happened? The article didn’t run Monday morning as scheduled as of last week. It went online Monday afternoon, only after CEPR cleared its throat and politely asked WTF happened?

And that means the article effectively went from appearing at the time when it would have most impact, right before the relevant Investment Committee meeting, when it would have put CalPERS staff and board on notice that experts strongly disapproved of this change, to being irrelevant.

In combination with the other story I will post on in the next few days, it looks as if the Sacramento Bee is no longer operating in an independent manner and either as a matter of policy, or by virtue of certain insiders knowing how to manipulate the process, to now be in the business of protecting CalPERS instead of reporting on it.

I provide the contact details for the relevant editors at the end of the post and strongly urge California residents to write and tell them it is obvious that they have become too close to powerful interests in Sacramento.

Key sections of Appelbaum’s short piece, Private equity isn’t a good investment for CalPERS (she was given only 400 words, down from the already-tight 600 words she was given in her last op-ed. In retrospect, that was a tell):

Median returns for private equity funds launched since the financial crisis have failed to beat the stock market by enough to compensate for increased risk. Pension plans know that high prices paid to acquire companies today mean lower future returns.

So does the pension giant plan to reduce its $26.2 billion allocation to private equity? Is it going to outsource management of these investments, pay fees and risk even lower returns?

nstead, staff is asking the California Public Employees’ Retirement System board this week to lower the bar. This may make private equity investments look better, but will do nothing to assure that these investments earn adequate return….

Does the staff believe that investing in private equity has become less risky? Or is this an admission that returnswill be lower? Perhaps the staff is just looking for an easy “A.”

CalPERS is now engaging in Trump-level intellectual dishonesty and brazen disregard for beneficiaries’ and the public’s interest. At this Monday’s Investment Committee meeting, staff will present its plan to use a measurement gimmick to pretend that private equity is much less risky than it actually is. No independent finance-literate professional would endorse such a move. 1 The apparent motivation is so that the giant public pension fund will hopefully no longer keep falling short of its private equity benchmarks, as it has done regularly over the last ten years.

Despite the technical sound of this change, it has huge practical significance. First, CalPeRS is admitting that it expects private equity returns to be significantly lower in the future.

Second, this is finance malpractice. This is tantamount to a doctor getting a EKG that shows his patient is at risk of getting a heart attack, but telling his nurse to recalibrate the machine and run the tests again so that it gives a normal reading. And worse, in this case, the doctor is fixing the results because he’ll make more money from the false results, and the patient is, say, running for President and plans to release the deliberately misleading medical records to present himself as being in good health when he isn’t.

The fact that CalPERS has consistently underperformed its private equity benchmarks since 2014 and its own consultants have projected that CalPERS will continue to do so over the next decade means that CalPERS is not making enough in private equity to justify the additional risks.2 That means CalPERS needs to stop investing in private equity or radically revise its approach. Because the fees and costs of investing in private equity funds are so mind-numbingly high, CalPERS has sound alternatives, such as bringing much more of its private equity program in-house (which would admittedly take time) or going to a public markets replication strategy, which several studies have found gives net returns higher than investing in private equity3 (which might only work for a few years since other funds would no doubt copy it but that would give CalPERS some transition breathing room).

But rather than do the right thing, which would be work, CalPERS is instead sticking doggedly with a failing status quo. And as we’ll discuss further below, the only big change it is planning to make, that of moving some or all of its private equity program over to Blackrock, will only make its underlying performance problem worse by introducing another layer of fees and costs.

Specifically, CalPERS plans to make private equity look better than it is by understating its risks and changing its stock market component of its custom benchmark to one that is also more flattering. So CalPERS is cooking the books to favor private equity every way it can.

There was an additional tweak to the benchmark that I missed: that CalPERS, in a not-clearly-described manner, was going to change from using an arithmetic average to a geometric average. No matter how this is done, it will again have the effect of making the benchmark more favorable to private equity.

Again, if you are in California, please write the relevant Sacramento Bee editors and asked why they neglected their duty of journalistic independence by moving the op-ed back, which clearly was a favor to CalPERS. And if they don’t know why, it’s high time they found out who pulled strings on behalf of CalPERS.

Gary Wortel, President and Publisher,

Dan Morain, Editorial Page Editor,

Shawn Hubler, Deputy Editorial Page Editor,

Thanks again! Our experience shows that letters from Naked Capitalism readers make a difference.

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  1. The Rev Kev

    A renown newspaper failing to do its public duty and siding with moneyed interests? You could be talking about the New York Times, the Washington Post, CNN or any other of the main stream sources today. The only real question is whether this was done of the level of its editors or whether it was further up the food chain by the McClatchy Company who purchased the Sacramento Bee about a decade ago. This company is working to make the transition from traditional news outlets to a digital-only presence in the news so perhaps they did not want to rock too many boats or make too any enemies unnecessarily while doing so.

    1. Yves Smith Post author

      Ahem, you are making excuses for the SacBee which don’t apply here.

      The usual rationalizations for journalist capture boil down to the effect of strained budgets:

      1. Not enough staffing to do the job right, particularly in light of accelerated news cycles, hence clever corporate or political spin-meisters tell a plausible story, and it’s hard to do more than follow their lead and at best get The Usual Suspects on the other side to give a quote.

      2. Per the Times and Post in particular, a long history of being close to the center of power and seeing their role as shaping mass opinion. See this from Carl Bernstein in the 1970s:

      Among the executives who lent their cooperation to the Agency [CIA} ere Williarn Paley of the Columbia Broadcasting System, Henry Luce of Tirne Inc., Arthur Hays Sulzberger of the New York Times, Barry Bingham Sr. of the LouisviIle Courier‑Journal, and James Copley of the Copley News Service. Other organizations which cooperated with the CIA include the American Broadcasting Company, the National Broadcasting Company, the Associated Press, United Press International, Reuters, Hearst Newspapers, Scripps‑Howard, Newsweek magazine, the Mutual Broadcasting System, the Miami Herald and the old Saturday Evening Post and New York Herald‑Tribune.

      By far the most valuable of these associations, according to CIA officials, have been with the New York Times, CBS and Time Inc.

      The CIA’s use of the American news media has been much more extensive than Agency officials have acknowledged publicly or in closed sessions with members of Congress. The general outlines of what happened are indisputable; the specifics are harder to come by. CIA sources hint that a particular journalist was trafficking all over Eastern Europe for the Agency; the journalist says no, he just had lunch with the station chief. CIA sources say flatly that a well‑known ABC correspondent worked for the Agency through 1973; they refuse to identify him. A high‑level CIA official with a prodigious memory says that the New York Times provided cover for about ten CIA operatives between 1950 and 1966; he does not know who they were, or who in the newspaper’s management made the arrangements.

      The entire piece is a must read.

      3. Capture by virtue of the particular news source (a government agency, an important business) generating enough news that it can dole out favors by giving access and hurt reporters by cutting them out. Corporations would do this to financial analysts decades ago, where if they don’t get to participate in the earnings calls, they are useless to investors (with a few exceptions like Mike Mayo); someone figured out this would be a very powerful practice used more broadly. So those bodies dole out favors like interviews with top execs/agency heads and leaks to favored journalists who give them flattering coverage

      4. Capture by virtue of being a big advertiser that the publication dares not cross (as in they might not fell compelled to flatter them but they will be very careful not to roast them).

      None of these apply here.

      1. CalPERS is not a regular source of stories, No need to curry favor for news flow.

      2. CalPERS generally gets roughed up by the press. It’s not popular, it’s not particularly well liked thanks to its underfunding and having repeatedly alienated journalists by the way it handles Public Records Act requests

      3. CalPERS does not advertise

      4. CalPERS does not engage in political spending, ergo, it can’t lean on people to lean on the press indirectly

      5. This was an op-ed, not a reported story, where the point is to have a diversity of views.

      So this looks like CalPERS managed to work some personal connections. Hence readers should write the Sacramento Bee and ask why CalPERS was able to get a favor done for them.

      1. The Rev Kev

        I have read what you wrote and agree with your conclusions from my own understanding of the facts. My comment was based on the fact that so many newspapers have been centralized into a few major corporations that I was wondering aloud if the story was deep-sixed by the Sacramento Bee itself or whether it was done on a higher level. The Murdoch press, for example, is notorious for having the editors for each controlled newspaper write articles that never disagree with the top boss – or else.
        As an aside, you might be interested to know a story that I read. A west-coast writer went to work for the New York Times. He found that whereas his old newspaper compiled the news and printed what they saw most of interest, the New York Times received what was called the ‘narrative’ from one of the top floors. It was the job of the editors to make the stories they had fit the ‘narrative’. Such is how things work with the New York Times.

      2. Wisdom Seeker

        I wonder, just a little, about #4 here:

        4. CalPERS does not engage in political spending, ergo, it can’t lean on people to lean on the press indirectly

        CalPERS doesn’t have the same political interests as your typical corporation, but it certainly spends (or invests, which is the same thing in many ways) an enormous amount of money. People who might, or might not, be on the receiving end of that spending would have a strong interest in CalPERS’ policy choices.

        If someone were on the receiving end of, say, a large “private equity” investment, and that investment were to be jeopardized should CalPERS be forced to withdraw from the PE sphere (and likely creating waves that would lead others to withdraw as well), someone might have an interest in seeing that CalPERS doesn’t receive any negative press.

        McClatchy is publicly traded, and most of the shares are “institutionally” owned, but apparently it also still has a strong family ownership stake. Who are the McClatchy family’s friends, would any of those friends have an interest in CalPERS’ policy, and would any of these parties have influence on editorial decisions?

  2. Sinecure in Sac

    Well now that Teddy has fully shirked his investing responsibilities I’m sure he fills his time with attacking his opponents, demoralizing the staff and operating in a Stasi-like fashion.

    How long til Teddy is a President at BlackRock “overseeing” private investments?

  3. diptherio

    We’re talking big, big money involved here. Which means pretty much anything is possible. I wouldn’t be at all surprised if money were directly changing hands, or if there were some sort of plata y plomo (or, as the maf put it, “the gold or the lead”) business going on.

    The crookedness in CalPERS’ leadership has gotten rather obvious. Anyone who doesn’t want to end up covered in (metaphorical) poo would do well to stay well away. The Sac Bee has already gotten splattered….

  4. flora

    So, Sac Bee spiked the original, forward looking time slot for a rear-view mirror time slot with reference to the board meeting. This looks like Sac Bee has decided to make itself a player. Why is the Sac Bee ‘painting a picture’ for CalPERS benefit?

    This seems to show that NC’s reporting and Appelbaum’s work are having an effect that is discomfiting someone.

    Thanks for your continue reporting on CalPERS, PE, and pensions.

    1. flora

      All this reads like there may have been communication between Sac Bee editors and CalPERS/Eliopoulos regarding the Appelbaum piece. If so, it indicates to me that Eliopoulos and board cannot answer the critical points made by Appelbaum. Usually what happens, if arguments against a proposal can be answered by good reasons for, is that the information is released in a timely manner so proponents can put the questions to rest before proceeding. That’s great PR. It also usually means the proponents have done their homework.

      That’s exactly what did not happen here. This suggests to me that Eliopoulos and board know they cannot answer Appelbaum’s points in a way that would let the board take the action it’s bent on taking. So, get Sac Bee to spike the questions and counter points until after the board has met. Very convenient.

  5. Tom Stone

    The SacBee is an integral part of the power structure in California and deeply invested in the corrupt status quo.
    I’d be much more surprised if they did do some real reporting on Corruption in our State Governement, their ostensible job.

    1. Adam Eran

      The Bee is a paper with a history of labor troubles, and a multimillionaire management…so it’s “liberal,” right? Its latest editorial foray into healthcare, for example, published 5 – to – 1 articles opposing single payer (which we can’t afford because it’s half as expensive as what we’re already paying, doncha know…)

      Believe it or not, this is what passes for “liberal” media now.

  6. John k

    There is a runoff election to the Calpers board, Michael Bilbrey vs Margaret Brown. I pass some NC posts to a few Calpers voters at SDSU… does NC have a position on this election?

    1. Yves Smith Post author

      Bilbrey has said nothing substantive at board meetings for years and always votes for staff’s proposals. You might as well have a potted plant siting in his chair. Brown is feisty and has worked on many capital budgeting projects, so she isn’t afraid of asking questions about numbers and wouldn’t be intimidated by staff.

  7. Sluggeaux

    Eliopoulos appears to be a Flexian on a grand scale. This is just good old corruption on his part.

    Why the Bee editors chose to run Applebaum’s op-ed by him and then chose to delay it when he couldn’t organize even a weak response likely comes down to this:

    Stock·holm syn·drome
    feelings of trust or affection felt in certain cases of kidnapping or hostage-taking by a victim toward a captor.

    We mustn’t anger our overlords.

  8. Harry Cording

    I’ve been forwarding a good friend of mine all the Naked Cap CalPERS coverage to share with his wife, a recently retired California state employee. Months go by and finally he tells me that she says yes but the Sac Bee says everything is OK.
    In her mind that means it must be OK.

    This is….

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