In the last year, we have had more and more current CalPERS employees contact us about disturbing issues they see on a day-to-day basis, including what they describe as widespread cronyism and featherbedding. While many of these reports are troubling, we have held off on posting on them due to not (yet) obtaining sufficient levels of verification.
However, these sources have regularly volunteered dim views of CEO Marcie Frost. For instance, one called Marcie “exceptionally incompetent”. These assessments by CalPERS employees strike at the heart of the defense made by some board members and Frost’s external allies, that Frost is supposedly doing a fine job.
It is not difficult to identify examples of Frost’s deficient leadership in her less than two year tenure as CEO. Consistent with the rising level of employees leaking to us, fiascoes also appear to be far more frequent than under her predecessor, Anne Stausboll.
We’ll start with how despite having worked as the head of Human Resources at Washington’s Department of Retirement Services, Frost has presided over a series of HR debacles. That suggests she either wasn’t much of an HR manager or forgot most of what she learned.
In a second post today, we cover how Frost has sat pat while a critically important control function, Audit Services, has become crippled by understaffing, poor morale, and staff perceptions of cronyism in promotions.
Next week, we’ll turn to IT and other operational issues, which were supposed strong areas for Frost, as a former IT manager, a self-proclaimed expert in lean management techniques, and the head of the processing side of Washington’s state pension system.
One incident, that of the alleged theft, alteration, and illegal dissemination of an employee’s personnel records, is so significant and also raises troubling issues, such as Matt Jacobs instructing the Information Technology department not to report the crime (hacking) as required, that we will discuss that matter in a stand-alone post.
Charles Asubonten Hiring, Defense, and Dismissal
Frost’s effort to hire a new Chief Financial Officer was a multi-chapter debacle. The giant fund burned the first candidate Frost chose while using the services of search firm Heidrick & Struggles. Board member Richard Gillihan had not only accepted the offer but CalPERS had announced he was joining, only to have to go into Emily Litella “Never mind” mode a week later.
The reason? As we explained in April:
Before CalPERS announced Gillihan’s appointment, former board member JJ Jelincic pointed out that Gillihan had what is called a “1090 problem.” California Government Code Section 1090 prohibits government officials from having a financial interest in any contract they made. Gillihan had been involved in the wage-setting for the CFO position, which meant in taking the job, he would have benefitted from his previous action.
Even though CEO Marcie Frost and General Counsel Matt Jacobs initially waved off Jelincic’s warning, other lawyers confirmed his concerns, leading to further investigation of the issue. Gillihan decided he did not want the legal exposure and withdrew his acceptance.
This is worse than it looks. Gillihan had told CalHR of his intention to leave and had to grovel to be reinstated. Although Gillihan almost certainly could have landed another senior government job or lobbyist post, he was at real risk of suffering a period of unemployment thanks to Frost’s and Jacobs’ cavalier attitude.
The next phase of this train wreck occurred when CalPERS brought the search in house and hired Asubonten. Without belaboring the point, it should be obvious that CalPERS did a grossly inadequate job of vetting. Our series documented many misrepresentations by Asubonten that could and should have been caught. Two examples: a ruling by a South African labour court showed that Asubonten had violated the terms of a separation agreement by lodging the suit and had gotten poor performance reviews for the last two years of a three and one half year posting. Asubonten also provided a phony reference, falsely presenting an individual who had been a mere colleague at one of his jobs as the CEO and his boss.
But the most stunning part is what happened next. Frost put her ego ahead of what was best for CalPERS.
It should have been obvious that having a perjurer1 in a senior role should be unacceptable from a risk management and behavioral vantage, and that understanding which if any of our charges were accurate should be her top priority.
But rather than decline to respond to press inquiries and launch an investigation of Asubonten, Frost took the selfish, reckless and amateurish step of trying to brazen the scandal out. She joined Asubonten, implicitly putting her name on everything he said, on a call with Pulitzer Prize winning reporter Mike Hiltzik of the Los Angeles Times. That did not go well.
Hiltzik’s article forced CalPERS into a retreat, with the pension system finally investigating Asubonten and dismissing him shortly thereafter.
Before we go onto the other incidents, it is key to understand that this fiasco alone raises major doubts about Frost’s sense of priorities and her competence as a manager. She was apparently so loath to admit error and so deeply invested in Asubonten as a hire that she doubled down and did more damage to herself and CalPERS in the process. But even more serious is that if a reporter of Hiltzik’s stature had not taken interest in this story, CalPERS would have kept on a documented liar and perjurer in an executive position that, among other things, handled banking relations.
Failed Attempt to Hire an Unqualified Chief Actuary
Frost tried quickly to put her mark on CalPERS after joining on October 2, 2016, and this early move blew up on her. As we wrote in CalPERS Plans to Violate California Constitution, Pave Way for Hiring Under-Qualified Candidate, for Critically Important Job of Chief Actuary:
This Thursday, November 3, the California State Personnel Board is set to approve changes to the job description of CalPERS’ Chief Actuary that are depicted as minor but are anything but. We get to the CalPERS job description shortly, but as Purdue’s mathematics department describes the terrain:
An actuary is a business professional who analyzes the financial consequences of risk. Actuaries use mathematics, statistics, and financial theory to study uncertain future events, especially those of concern to insurance and pension programs.
The proposed changes both amount to a violation of the California Constitution by attempting to end the required role of the board in policy-making, and separately so far reducing the minimum qualifications for the job that they will be lower than that for the most junior actuaries now employed at CalPERS. Needless to say, that makes a mockery of the claim that CalPERS needs to dumb down the job description so severely to fill the post. CalPERS could promote someone from inside by relaxing the requirements less or not at all.
One has to assume that the motivation for allowing a person who would be deemed to be grossly unqualified under current rules to be hired in the Chief Actuary is that the new CEO, Marcie Frost, has someone specific she’d like to bring in. The fact that Frost herself does not have a college degree and certainly does not have the mathematical chops to evaluate an actuary’s professional competence certainly looks like she is giving personal loyalty far too much weight in a role where analytical rigor and professionalism are of paramount importance.
We had a great deal more to say about the matter in that post and encouraged readers to contact journalists who might take up the story.
The next day, we got a message from CalPERS’ head of media relations, Brad Pacheco, saying that CalPERS was no longer pursuing the rule change. Our post discussed why it was reasonable to think that our post played a significant role in the reversal.
Rudderless Private Equity Department
Real Desrochers who left his post as Managing Investment Director of Private Equity in early April 2017, has yet to be replaced. Informed sources tell us that the members of the private equity department are demoralized.
Private equity, as CalPERS Chief Investment Officer Ted Eliopoulos has said with great regularity, is extremely important to CalPERS, since the giant fund believes that private equity is the only investment strategy that can be expected to exceed CalPERS’ return target.2 It is currently 8% of CalPERS’ asset allocation and represents more than half of total investment fees and costs, as well as the majority of total portfolio risk. It is too significant to go unmanaged for almost a year and a half….and yet that is precisely what has been going on, with no change on the horizon.
Culture of Cronyism
In our companion post today, we discuss how something is clearly very wrong in CalPERS’ audit department and why that matters. One of the complaints is that clearly undeserving candidates have been promoted. That is consistent with the reports we have received from current employees about widespread cronyism. Each paragraph is from a different individual, and each works in a different area of CalPERS:
The most senior people inside CalPERS are deathly afraid of outsiders. A bunch of CalPERS MDs are Sacramento local yokels and are concerned about the “cultural misfit” of bringing in talented outsiders who would have the power to disrupt their fiefdoms and shine light on the internal graft. The organization is run like a poorly operated militia – everyone takes their marching orders from the next guy up the chain without ever questioning those orders for fear of rocking the boat. Loyalty is rewarded with promotions and special raises – independent thought and hard work are not. There are employees who literally do nothing all day, collect a paycheck and one day a pension, and are stealing from the state of California taxpayer. The organization is so full of blight you would need external consultants to come in and have everyone interview for their jobs and prove they are actually working and possess some degree of competence….The organization is in dire need of strong independent external voices to fill these positions….especially the CIO. Ted and his predecessor Joe Dear (may he RIP) were grossly unqualified, embarassingly so.
No other organization has done so little with so much, and it’s the grinding, illogical, short-sighted bureaucracy that is to blame.
The atmosphere inside the PERS Office of Audit Services is absolutely horrendous with mismanagement. Many of us have gone to the union for help, and some are pushing for a group grievance on behalf of all of us against all managers. Besides having lost nearly a quarter of the staff on our public agency audit side, the nepotism and favoritism given to people who are not deserving or qualified makes it tough to deal with.
We’ll continue with Marcie Frost’s rap sheet in our post on the red flag of the problems in the Audit Services teams.
1 Asubonten provided false information on two forms signed under penalty of perjury: an employment application and a Form 700, a required disclosure of financial conflicts of interest.
2 We’ve written at considerable length why this claim needs to be taken with a fistful of salt. A few of many reasons:
Private equity funds have not earned enough to justify their higher risks for the last decade
Private equity general partners have warned that private equity returns will be lower in the future
Public market replication of private equity offers somewhat higher returns
A simple five-fund strategy at Vanguard has consistently beaten the performance of 90% of the public pension funds, including CalPERS