Prominent CalPERS Beneficiaries Send Forceful, Savvy Objections to the Proposed Private Equity Scheme; Contrast With Canned Letters CalPERS Pressed Allies to Submit

Normally, CalPERS stakeholders, even important ones, hew to a ritual level of deference in interacting with the CalPERS board, even when protesting against the giant fund’s plans. That posture has always bothered me, since it seems to go beyond famed California nice, as well as the upper class norm of hewing to standards of discourse, and that includes not making too much of a fuss about anything. For a society that prizes the appearance of egalitarianism, it’s awfully reminiscent of subjects petitioning a monarch.

So it is refreshing as well as revealing that two prominent retirees sent blunt letters that object strenuously to CalPERS private equity plan. The fact that they felt compelled to send forceful and well-documented missives says they are alarmed. They see CalPERS intending to act in a way that is almost impossible to square with the obligation of the pension fund to put the interest of beneficiaries first. Moreover, most finance and business-savvy would see their concerns as well warranted.

We are including one letter from former prosecutor David Soares, sent as an e-mail, in the body of this post; the other, by Al Darby, the president of the Retired Public Employees’ Association, is embedded at the end.

We are also embedding three all-too-obviously-generated-by-CalPERS letters sent on the letterheads of unions in CalPERS’ orbit. A former employee who is concerned about private equity sent them to me.

Note the contrast between the detailed arguments made by Soares and Darby versus the repeated text that appears in all three of the union pieces.1

It’s one thing to try the canned letter trick with mass market “save the whale” petitions and quite another to resort to it on letters intended for the CalPERS board on its biggest initiative in recent years. It says that CalPERS staff was too lazy to generate a unique letter for each cats paw. It also says the union officials who signed these letters sent them back with only a mild revision as a matter of form. We’ll show how this confirms that they lack an independent or informed view

Not only are the arguments in these letters handwaves, but CalPERS’ can’t even make an honest case through its proxies. All letters argue based on absolute returns, when any finance student who tried that on an exam would fail. What matters is risk-adjusted returns, and CalPERS and a considerable majority of investors in private equity have not gotten returns in private equity high enough to offset the risks over the last decade. Top executives in private equity have been warning since 2016 to expect even lower returns going forward.

The letters also create a straw man by acting as if the choice is between committing to CalPERS’ scheme or giving up on higher returns. First, as JJ Jelincic has said, what CalPERS needs is not private equity per se but higher-return strategies. CalPERS has presented nothing to demonstrate that it’s reasonable to expect this scheme to do that; in fact, it’s admitted that its “Warren Buffett” strategy will deliver lower returns than conventional private equity. CalPERS has yet to offer a coherent reason why it is refusing even to consider the most obvious way to get better returns in private equity, the one recommended by Dr. Ashby Monk (and before that, endorsed by McKinsey) of bringing private equity in house.

The three union letters also claim that CalPERS has done serious research, when that is false. We did a PRA of what CalPERS’ research amounted to. They interviewed Big Names who for the most part were too removed to give any insight, and the few who might know something had glaring conflicts of interest. We found out that one of the supposed interviewees, Professor Ludovic Phalippou, was asked out for a drink with a CalPERS guy and was shocked to learn that 45 minute chat was depicted as an interview for CalPERS’ planning purposes. I also got the documents CalPERS said it used in its “research”. As a former consultant who regularly did strategy research, I can confirm that there was no there there. I suggest that these three authors get the results of my PRA #3286 and see for themselves.

The letters also contend that the plan is well thought out. The fact that CalPERS, after nearly two years, has admitted it has only a concept and keeps changing major features at virtually every board meeting, demonstrates otherwise.

And the places where the letter authors apparently did try to add their own ideas just shows they don’t know enough to have an informed point of view on this plan, even if they actually had tried to make an independent assessment. Get a load of this howler from the California School Employees Association letter, signed by Executive Directors Dave Low and Keith Pace:

Given CalPERS fondness for telling Big Lies, it should come as no surprise that their allies are taking a page from that book. As anyone with an operating brain cell knows, private equity has been a major force in cutting jobs, breaking unions, and cutting retirement benefits. In our review of Eileen Appelbaum’s and Rosemary Batt’s landmark book Private Equity at Work, we pointed out:

One of the most striking is the authors’ discussion of an extremely extensive series of analyses on the employment impact of private equity ownership, conducted by Stephen Davis and his colleagues. The papers (a series produced from 2008 to 2013) rely on data from 5000 target companies and roughly 300,000 target establishments (an “establishment” is a single work location, such as a store or factory). For some of the papers, smaller subsets were used. But in each case, Davis et al. developed controls by matching PE owned establishments with ones that were as similar as possible in terms of size, industry, age, and other key factors.

One of the most widely publicized findings out of this extensive body of work was that employment shrank at private equity owned establishments at a greater rate than in the controls over comparable two-year periods.

It’s been striking to see public pensions help fund anti-worker, anti-union players and blinker themselves to how this weakens public pensions, both by lowering employment and incomes, which hurts state and local tax revenues, and by shortening private sector job tenures and weakening their rights, which leads voters to see public sector workers as pampered, which then generates calls to cut their pay and benefits, particularly pensions.

A former union official was so upset about this section that he sent it to the AFL-CIO national officials, and they aren’t very happy about it either.

But this is par for the course for what we’ve seen for the effort to design and sell CalPERS unorthodox private equity scheme: ignorance leading to abject misrepresentations.

Now to the letters. Have fun and circulate them widely!

* * *

My name is David Soares.  I am a licensed attorney and a CalPERS beneficiary, having retired at the end of 2016 after serving for 32 years as a prosecutor for the County of Santa Clara.  During my career as a prosecutor, I also represented over 300 prosecutors and public defenders in collective bargaining for 12 elected terms on the board of the Santa Clara County Government Attorneys Association.  I currently serve as a board member of the California Retired Public Employees Association, although I write to you today in my individual capacity as a CalPERS beneficiary and a taxpayer.

I am extremely concerned about the propriety of approving Agenda Item 8a of the March 18, 2019 Investment Committee Agenda, entitled “the Action Item — Total Fund.”  I have followed with great interest the moving target that has been variously called “CalPERS Direct” or more recently, “Private Equity Pillars III and IV.”  I’m very concerned that CalPERS has left the position of managing investment director for Private Equity unfilled for the past two years, that the current Chief Investment Officer has only been on the job for two months, yet staff are asking for a board vote on a vaguely-defined “concept” on an “unknown” timeline with unidentified “partners.”  The only document offered in support of this requested delegation of authority is Attachment 1, a 12-slide PowerPoint presentation which contains a few aspirational platitudes but no specifics at all.

To vote in favor of a vague “concept” as is set forth in Item 8a would be the very definition of a violation of fiduciary duty by a member of the CalPERS board.

California State Constitution Article XVI section 17 mandates that the individual members of a public pension board act as the sole fiduciariesresponsible for providing benefits, minimizing contributions, and defraying reasonable expenses of the fund.  The Constitution goes on to require that the members of the board, “…shall discharge their duties with respect to the system with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with these matters would use in the conduct of an enterprise of a like character and with like aims.”

As a lawyer who has served on various boards, I feel that it is important to remind each member of the CalPERS board what it means to act as a fiduciary — especially the meaning of a fiduciary’s Duty of Care.  The Duty of Care most importantly encompasses the Duty of Inquiry — to go out and seek information about the wisdom of proposed actions.  In exercising the Duty of Inquiry, a fiduciary must follow the Business Judgment Rule, which requires making Reasonable Inquiry, entertaining a Good Faith Belief in the prudence of a course of action, and having No Personal Interest in the outcome.  In addition, a prudent fiduciary investing assets must avoid speculation and avoid waste.

I am especially concerned that the board exercise its Duty of Inquiry as to the claims being made in Attachment 1 about Private Equity performance as an asset class.  The CalPERS 2017-18 Comprehensive Annual Financial Report (CAFR) lists Private Equity investments at “Net Asset Value” (NAV), often simply leaving as a blank space the field “Profit Sharing Paid” (Carry).  One must question the claims being made about the astounding recent performance of this asset class, especially considering that this occurred during a period of divestment from the class as a whole.  While a fiduciary may rely upon the opinions of experts, these claims raise serious questions about the expertise of the staff urging adoption of this “concept.”

The only proposed benefits emanating from board approval of the so-called “concept” are “increasing the scale” of the Private Equity asset class, and “fostering an improved alignment of interest with the partners.”  I note that the CalPERS board and investment staff spent the period 2009 through 2015 reducing the scale of Private Equity investment from approximately 15 percent of assets to the current 8 percent, largely because the board had found that this investment class was the source of corrupting influences that led to the current imprisonment of the former CEO of the fund, the suicide of a former board member, and the resignations of several board members who were under the cloud of a criminal investigation.  There is nothing in the current transmittal or supporting attachment which addresses how to correct this troubling history of mis-alignment of interests between the partners and the members and beneficiaries.

The only “concept” that appears to have been put forward in Item 8a is that there is no concept.  To vote in favor of such a non-existent “concept” would be a willful abandonment of fiduciary duty by the board.  There is no urgency.  The February 24, 2019 edition of the Wall Street Journal reports that CalPERS partner BlackRock has been unable to raise funds for their “Warren Buffett Strategy,” and we know that Warren Buffett himself has announced that he has no plans to deploy funds in the coming year.  For CalPERS to embark on such a course without a formal managing director of Private Equity in place is the height of imprudence.

David Soares

Santa Cruz, California

Cc: Hon. Gavin Newsom; Hon. Betty Yee; Hon. Fiona Ma; Hon. Jerry Hill; Hon. Freddie Rodriguez; Hon. Mark Stone; Hon. Bill Monning; Hon. Ro Khanna

Cc: CalPERS BoA: Rob Feckner; Eraina Ortega; Adria Jenkins-Jones; Henry Jones; Ramon Rubalcava; Theresa Taylor; Bill Slaton; Dana Hollinger; David Miller; Margaret Brown; Jason Perez

Cc: Michael Hiltzik, Los Angeles Times, Susan Webber, Naked Capitalism

Cc: Santa Clara Co GAA, RPEA


1 The inclusion of typos, like “75%” as opposed to “7%,” does not count.

00 Al Darby RPEA Letter to Henry Jones and CalPERS Board
00 SEIU PE letter
00 CalPERS Board private equity letter CSEA
00 CalPERS - Investment Committe -private equity 2-19-19 CPF
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  1. vlade

    It’s good to see that someone is starting to wake up. It would be good if some “normal” media would pick it up though.. So I would encourage all Cal readers to send this not just to their friends, but also to any local media they can contact.

  2. The Rev Kev

    Thought that I would just make an initial comment to add some information on the email that former prosecutor David Soares sent to CalPERS. I noticed that he mentioned his former background in opening this email as if to say ”Hey jacka***s, this is no ordinary bozo writing you but someone that has experience prosecuting crims. Get it?” Anyway, one of those ‘Cc’ sections had a collection of Honorable people named so dug into the names themselves to see who they were as most people reading this, including myself, wouldn’t know them from a bar of soap. Here are those names and their present positions-

    Gavin Newsom; Governor of California
    Betty Yee; California’s chief fiscal officer as California State Controller
    Fiona Ma; California State Treasurer
    Jerry Hill; California State Senator (13th Senate District)
    Freddie Rodriguez; California State Assembly representing the 52nd Assembly District
    Mark Stone; California State Assembly representing the 29nd Assembly District
    Bill Monning; California State Senator (17th Senate District)
    Ro Khanna; U.S. Representative from California’s 17th congressional district

    That seems a lot of high powered people that and I am guessing that some of the names of the people on that list are major players in Californian politics. If and when something blows up, it is now on record that they were warned. Saw another ‘Cc’ section called ‘Santa Clara Co GAA, RPEA’ so I dug into that to see what it was about and came up with the following-

    GAA; Government Attorneys Association
    RPEA; The Retired Public Employees’ Association

    Hope this is of help to fellow commentators.

    1. Yves Smith Post author

      To add:

      Betty Yee and Fiona Ma are both on the CalPERS board as ex-officio members. Ma joined this year.

      Freddie Rodriguez is chairman of the Assembly committee on public pensions.

  3. Clive

    One of the biggest problems with unions is their willingness to either plain-vanilla sell out their members or, more subtly, make the right kinds of noises about furthering their members’ interests but in reality doing the exact opposite.

    The motivations are mixed. Sometimes it’s not wanting to be seen as being too militant lest they be portrayed as out to undermine business or, as with public employees, management. At others, it’s perhaps a misguided approach whereby the unions think that by somehow cosying up to employers, they’re going to get some quid pro quo in future negotiations.

    Suffice to say, the former is always self-defeating. Unions are there for their members. End of. How they are perceived is irrelevant, unless it is being perceived as supine which if flat-out counterproductive.

    And the latter is doomed to failure. Unless you’re entering into a contract with the employers whereby you give up something to get something else, you’ve simply set yourself up to be shafted, along with your members.

    I was going to beseech the unions concerned to do better, but it’s a waste of time and I wouldn’t be practicing what I preach. I left my union and took out a litigation insurance policy which will fully fund any proceed-able litigation against an employer for breach of contract or violation of labour laws which has a greater than 50% prospect of success. I’d trust that — and an ability to seek redress through the courts — far more than a typical union. Behaving like the CA public employee’s unions makes me even more convinced that I was wasting my time and money on union membership. I hope the unions concerned in the state think long and hard about being so cowering and bought in the face of CalPERS’ incompetence.

    1. notabanker

      The SEIU letter is astounding, particularly coming off the revelations this week of them outsourcing union work to non-union shops. Just a blatant sell out of the membership.

    2. EoH

      I am gobsmacked at how often unions try the Obamaesque, “we’re all friends here” approach to negotiations with management. They are open and cooperative, they signal what they would most like to have, they rarely walk away from a bad deal. Moreover, they rarely question special deals managers give themselves.

      Meanwhile, management, even in ostensibly low-conflict arenas such as public library systems, approach their unions in the spirit of the Ford Motor Service Department. They lie, misuse statistics, blame the victim, offer straw man options, and refuse arrangements, such as for better high-cost health insurance, even if the unions are willing to pay extra for it. It is as if these managers are all operating off of the same consultant’s handbook. Their boards typically back them to the hilt, as if they were living in different communities and working toward different goals.

      It is not a winning strategy for employees or their unions. It is not even a strategy for survival.

    3. Jerry B

      Thanks Clive. If memory serves, you are in the UK correct? If so what are unions like in Europe? The reason I ask is that there is a folk singer named David Rovics and he also writes articles that get posted on the site CounterPunch.

      In his writing Rovics mentions how difficult it has become to get folk singing work in the US due to the lack of public service funding, etc. Rovics mentions that he can find regular work in Europe as many labor union halls in towns and villages will put on festivals for the townspeople. To me it seems that the unions in Europe are more for their local community than just looking out for themselves. This is from the link above:

      Where I play in Europe, the vast majority of people are in a labor union. Labor unions have active union halls in every city — oftentimes several in one city. The unions have budgets for cultural activities, which they host regularly, through popular adult education programs

      There probably was a time when the US unions were supporters of their local communities but I think that was before my time, like in the 1940’s and 1950’s.

      1. Clive

        Unfortunately there’s mainland Europe’s unions and the shameful mostly totally captured “business friendly” U.K.-variety unions which have been emasculated by Thatcher-era “reforms” and, it has to be said, severe neoliberal infestations from the Blairite Labour years.

        Most European unions, Germany is famous for them, have seats on the board and workers’ councils to shape, if only in a very limited capacity, board decisions. What you say above is completely valid for a lot of non-U.K. European labour organisations.

        Here in the U.K. my former banking employees’ white collar union colluded with management to sign off outsourcing, pension freezes and pension crapification, was toothless in supporting individual employees even in slam-dunk labour law violations and accepted below inflation pay raises. They also made a collective bargaining arrangement for a contract of employment charge that was blatantly unlawful (enough people went to court off their own backs to get it dissolved but no thanks to the so-called worker’s ally but in reality total toady of a union)

        With friends like that…

        So I’m not at all surprised to read that CA public employees so-called unions are absolutely delighted to hang their members out to dry and supporting CalPERS’ get rich quick (for PE General Partners anyway) scheme. U.K. unions bought the same US playbook, in a lot of cases.

  4. Sacramento Sal

    The Calpers board must know that these form letters were demanded by staff and carry no weight as the perported authors clearly do not understand the first thing about staff’s ever changing “concept” for investing $20 billion in private equity.

    Seriously, let’s just throw $20 billion at an idea that changes every other month and see what sticks.

    Do these Unions want Calpers to create companies/billionaires with beneficiaries’ money? And when did Union officials become the puppets of staff?

    To borrow from a frequent commenter…Follow The Money.

  5. diptherio

    Can someone confirm for me that “outperforming the discount rate” is a reference to the Federal Reserve discount rate…That repeated line in the union letters is baffling to me.

    1. Clive

      Yes, I saw that and skimmed over it as obvious gibberish. I’m like you assuming it’s the rate of return on US treasuries at wherever on the yield curve you’re looking at for a particular duration.

      But outperforming treasuries is (or should be) a given in any investment approach where you’re willing to trade risks for rewards. If your investment target is presenting risk — and all investment outside of cash or cash-equivalent like treasuries has elevated risk — then if it doesn’t offer returns which outperform rather lowest risk asset class why the bejesus goodness-to-bollocks are you preparing to put your money there?

      Just as well, he says snarkily, CalPERS are trying to raise the bar. Otherwise they’d trip over it. I’d say “bring it on” but they’d claim consequential losses and ask the beneficiaries or state employers to then bail them out due to unforeseen misfortune.

      Marcie Frost couldn’t get drunk in a brewery.

    2. Sacramento Sal

      Discount rate in this context is the rate set by the board that the investments will earn. It is set at 7%. If the investments do not achieve an overall 7% return, the board may have to lower the discount rate which means employers (city, county, state, schools, local agencies) would have to contribute more $$$ towards employee pensions.

      1. Clive

        Thanks Sal, that makes more sense. Which also then begs another question as to CalPERS didn’t declare that specifically in their correspondence (or the correspondence the unions sock puppet’ed).

        But even then, as we’ve said many times here, anyone can make claims for this- or that- rate of return. But without measures on risk, liquidity and volatility, it’s pretty meaningless.

        And CalPERS staff have no incentive to make any disclosures about the PE proposal compared with other asset classes like exchange traded equities, fixed income or even just plain old treasuries.

  6. David Allison

    With apologies for inserting myself, a non-Californian and non-economist, into this facinating and valuable discussion, I find it interesting that there is no reference to the political/economic theory that seems to drive this CalPERS proposal. That is the neoliberal economic theory that accumulation and consolidation of private businesses is a magic wand for increasing the overall economic welfare of society. The board and staff appear to be saying ‘trust us – trickle down really works’, the same mantra the US has been crucified since the 1960s and 70s recovery of the defeated coup against FDR in the 1930s.

    Privatization of public resources, including human resources, accompanied by austerity for the many and prosperity for the few has led national governments into the proverbial toilet over the past half century. Among the results, an angry populace, a growth of economic inequality, slowing economic growth, and a focus on austerity and debt reduction while rejecting government investment in infrastructure and support for funding of consumption and consumers, especially public sector workers.

    Handing increasing investment to independent parties into an opaque (at best) black box focused on a non-detailed theory resting on an ‘investment’ concept that is in declining approval in the broader US economy seems to be a total abandonment of anything even resembling fiduciary responsibility by the board. Remember: The brokers, like the consultants, always get paid, win or lose, not so, the beneficiaries and clients.

    1. Yves Smith Post author

      Normally that would be a safe bet, but Frost is getting a lot of heat from important stakeholders (see the comment about a pending no confidence vote against the board, which is the result of their acquiescing to staff) and her job is to keep people from complaining to Newsom and the legislature.

      The board is mighty unhappy at the fiduciary duty risks that Frost is making the board take by utterly refusing to follow any of the steps seen as critical: review risks and costs (no budget has been presented, nor a legal structure), have experts review and opine. The “plan” has changed in significant ways pretty much at each board meeting. And the staff has still failed to give a sound justification for why then need to do this and why it would work.

      And the new board members include people who aren’t pushovers, like Fiona Ma, Eriana Ortega, and Jason Perez. And the staff is making a point of being insubordinate. John Cole said publicly that staff didn’t even need board approval, that they could make allocations in chunks small enough under the staff’s delegated authority.

      This high-handedness looks to be (finally) backfiring. I know prominent beneficiaries who are speculating that Frost won’t be CEO at year end. If she wins this vote, she increases the odds of making that forecast come true.

      1. The Rev Kev

        In the context of CalPERS, would a vote of no confidence mean that Frost would have to back off the whole scheme or would that be the sort of vote of no confidence where you find you and your office supplies in a cardboard box outside the building escorted by security guards?

        1. Yves Smith Post author

          No, the message later is just from one of many beneficiary groups. But they are disproportionately visible and connected (academics) and my sense is this would generate serious bad press for CalPERS if they were to approve that motion.

      2. Tom Stone

        Yves, I hope you are right about this.
        I see Marcie Frost strikes me as more clever than intelligent, and as someone whose Hubris knows few bounds.
        Pushing ahead with this plan no matter who opposes it and no matter how idiotic it is seems very much in character.

  7. flora

    How I would love to hear or read Matt Jacobs’ response to Mr. David Soares excellent letter and points raised.

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

    1. flora

      adding: These 2 letters – from Mr. Al Darby and Mr. David Soares – remove any possibility CalPERS staff and board can use the ‘who could’a knowed?’ dodge if sued for failure of fiduciary duties, imo. NC publishing the letters removes any possibility CalPERS’ staff can claim not to have or have seen and read the letters.

  8. Ted Anagnoson

    The California State University Emeritus and Retired Faculty and Staff Association has many members concerned about and opposed to the current plans on private equity, and it will consider a resolution of no confidence in the Board of Administration of CalPERS at its State Council meeting on April 6th. The lack of confidence arises from the hiring procedures used with the current CEO Marcie Frost and from the proposed private equity scheme. I’ll post the resolution on a relevant thread and we will have it on our web site ( if it passes.
    Ted Anagnoson, CSU-ERFSA newsletter editor

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