Good Riddance to CalPERS’ Bill Slaton; Board Changes May (Finally) Lead to Staff Serving Beneficiaries, Not Its Own Interests

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Last week, CalPERS announced that one of the gubernatorial appointees on the CalPERS board, Bill Slaton, who served in the Local Government Elected Official seat, was being replaced by Lisa Middleton. A CalPERS announcement highlighted that Middleton was the first transgendered person elected to a non-judicial office in California. This section of her official bio seems more relevant to CalPERS:

Ms. Middleton retired after serving 36 years with the State Compensation Insurance Fund of the State of California. At her retirement she was the Senior Vice President of Internal Affairs with executive responsibility for Internal Audit, Fraud Investigation, Public Records and Governance. She was a member of California’s Fraud Assessment Commission. In 2010, she chaired the Commission.

This change suggests that Governor Newsom wants individuals capable of providing oversight on the CalPERS board. That orientation was notably absent in departing board member Bill Slaton, who was a loud, aggressive, and reflexive defender of staff.

Slaton also had no regard for proper process or legal rights, as evidenced in his shameless attack on fellow board member JJ Jelincic at an offsite, where Slaton demanded Jelincic’s ouster (impossible for the board to implement) and offered no substantiation of the vague allegations he made against Jelincic. As former general counsel, now law professor and white collar criminologist Bill Black wrote in CalPERS Seeks to Destroy Its Most Effective Director:

Slaton provided no specific charges, making it impossible for Jelincic to respond with any specific denials.

The transcript reveals other important facts. First, while Slaton provided zero evidence of any wrongdoing by Jelincic, he demanded that that the board act “as soon as possible” to consider Slaton’s demand that the removal of Jelincic from the board. (A director that cannot take part in the closed board meetings cannot function as a director.) Without any showing by Slaton of anything remotely approaching an emergency, the board appears to be expediting its effort to muzzle Jelincic.

As a general counsel, I would have responded immediately to Slaton at the board meeting. First, I would have emphasized that Slaton had presented nothing to warrant the board considering such a drastic sanction against another director. Second, I would have stressed that Jelincic’s request that Slaton notify Jelincic of the specific charges was an absolute necessity before the board should even consider holding a meeting to sanction a director. Third, I would have called attention to Slaton’s refusal to provide any facts supporting his conclusory claims of misconduct when Jelincic requested that he do so. The fourth point I would have made is described below.

We know is that CalPERS’ general counsel responded in a very different manner – a manner that reveals the terrible culture at CalPERS that Jelincic has labored to fix. The transcript reveals that the Rob Feckner, President of CalPERS board and his general counsel are reinforcing rather than fixing CalPERS’ failed culture.

Matt Jacobs, the General Counsel did speak up, but solely to implicitly support throwing Jelincic under the bus. His statement ignored the three points I would have made, and then merely read the board of directors’ sanctioning powers. Jacobs failed to note that the board did not have the power under the powers he had just read, to impose Slaton’s proposed sanction. That is the fourth point I would have made to the board.

The transcript then records [board president Rob] Feckner’s response to his General Counsel’s legalese. He too failed to point out that the board had no power to impose Slaton’s proposed sanction. He told the board that “Matt and I have had many discussions about” Slaton’s desire to sanction Jelincic. Jelincic knew about Slaton’s desire as well and in conversation with Feckner requested that the board meeting where Slaton was going to request that the board hold a “trial” and sanction Jelincic be public and on the record.

Feckner’s revelation proves that Slaton had zero excuse for not providing Jelincic with the specific charges so that he could respond and refute any pretext for the board holding a “trial.” Slaton’s attack on Jelincic was planned, not impromptu. It was a serious charge that Slaton knew could do grave damage to Jelincic and CalPERS’ reputations. If Slaton had not done his homework and determined the specific charges he intended to make against Jelincic, all Slaton had to do was wait until he had done so, put Jelincic on written notice of the specific charges so that he could respond, and then the board could decide whether to consider the charges and the defense.

There’s more, and I encourage you to read this post in full, but you get the drift of the gist. Black correctly described this proceeding as a kangaroo court.

The effort to sanction Jelincic fell apart, with CalPERS unable to show that any of Jelincic’s supposed leaks exposed bona fide confidential information. The matter was resolved without any sanction but with a mere negotiated agreement with Jelincic, who signed up for a conference he would have asked to attend had he known about it.

Slaton has engaged in other extended “put foot in mouth and chew” exercises. We commemorated one this January in CalPERS’ Bill Slaton (Again) Embarrasses Himself and the CalPERS Board which we also urge you to read in full.

While it’s way too soon to know what sort of board member Middleton will be, it would be hard for her to be worse than Slaton, who vigorously opposed legitimate questions about dodgy staff proposals. Slaton once told a board member that if they knew anything of relevance to their CalPERS role that hadn’t been told to them by staff, they should forget it.

Slaton was a major enforcer of the bad norm at CalPERS of lack of substantive discussion at board meetings, which stands in stark contrast with board meetings at CalSTRS, which show a healthy give and take between the board and staff. Middleton’s extensive background in audit and fraud investigation suggests she will have a sharp eye for self-serving arguments and will see brush-offs of well-founded questions as a red flag. In other words, any advanced training like a CFA or an MBA, or previous experience in accounting, audit, or the law should be checked at the door because staff knows better.

More generally, the tide is finally shifting against CalPERS’ executives for their failures to operate in the best interest of beneficiaries and California taxpayers. For years, the dynamic was that of isolated vigorous watchdogs, first Jelincic and later Margaret Brown, outnumbered by board members who were either unwilling to do their jobs or cowed by the dominance of the “power” faction that toadied to staff.

Brown’s defeat of California School Employees Association’s former president Michael Bilbrey could be seen as a fluke, as largely due to how Bilbrey imitated a potted plant at board meetings. But Corona Police Department Sargeant Jason Perez’s ouster of the charismatic, high profile (for both good and bad reasons) board president Priya Mathur ought to have been a huge wake-up call to the staff. Perez’s win, following Brown’s, was strong evidence that beneficiaries were unhappy with the board’s lack of meaningful oversight and staff’s failure to engage honestly with the beneficiaries’ biggest concern: CalPERS’ serious underfunding.

The staff has also unwittingly pushed the board into flexing atrophied supervision muscles by pushing so hard and so ineptly for an indefensible, shape-shifting private equity scheme that look like an industry enrichment plan rather than anything that could conceivably help beneficiaries.

Last May, the board authorized staff to discuss more details of the scheme publicly. When CEO Marcie Frost attempted to falsely depict that step as an approval of the half-baked plans, board members Betty Yee and Richard Costigan took the unusual step of publicly disputing claims made in a CalPERS press release. Margaret Brown even issued a “correcting the record” press release of her own. That forced Frost into a retreat. At the following board meeting Frost confirming that the board had not given a green light, walking back what she, then Chief Investment Officer Ted Eliopoulos, and Investment Committee chairman Henry Jones had told the media.

Betty Yee has continued to ask serious questions about the private equity scheme, expressing her shock and disappointment last November to be given critically important, negative information late in the game. Specifically, CalPERS ‘fessed up that one of the two major funds it wants to create that would take a “Warren Buffett” long-term ownership strategy, was expected to deliver lower returns than CalPERS’ current methods of private equity investing.

This March, staff suffered another major setback that went unnoticed by the press (and we’ve been tardy in highlighting this development).

Staff had asked the board to approve a motion that would authorize them to continue to explore their new private equity business model. This would seem to be a nothingburger, since the board had already given a similar approval. But CalPERS staff was trying to turn its weakness to its advantage. CalPERS was getting deservedly critical press coverage of its hare-brained and too-often-changing plans. A supposedly largely symbolic board expression of support was depicted as necessary to shore up CalPERS’ flagging credibility. As we wrote shortly before the March board meeting:

It’s not hard to discern that Frost is trying to get the board to commit to the project even as more and more routine business stories contain evidence that shows that CalPERS’ private equity plan is off base. For instance, by happenstance, the Wall Street Journal recently confirmed our observation that CalPERS is proposing to pay double the market rate in fees for its “Warren Buffett” style vehicle, when Buffett himself has consistently stressed how critically important it is for investors to minimize fees and costs.

And Frost’s “we’re not trying to push this through” is contradicted by her actions. She admits all she has is an empty bag, yet she is doggedly sticking to the schedule she presented months ago of having the board vote on the scheme in February or March….

Yet Frost plans to hang the board out to dry by her insistence on moving forward with none of the normal protections completed. One would assume that if CalPERS’ fiduciary counsel had issued a favorable opinion letter, Frost would have mentioned that to show meaningful progress. She admits that there’s no prudent person opinion with her bafflegab that maybe this will come later. Why the board tolerates a CEO putting them at so much unnecessary risk is beyond me….

But by getting the board to make what Frost pretends is a minimal show of support for her scheme, with no outline as to when staff will deign to let the board weigh in again, they are at risk of falling prey to a trick CalPERS employs regularly with the board: of telling them later that they’ve committed to a policy, and they are therefore duty-bound to sign off on specific later measures, since the staff “merely” implements the policy the board authorized.

Moreover, Chief Investment Officer Ben Meng and John Cole, the staff member heading the private equity initiative, had told the press at a January board offsite that staff already had the ability under their existing “delegated authority” for committing all the funds required under the new scheme without getting a further board approval.

With that context, it’s thus apparent that the staff was resorting to one of its well-established devices, that of getting signoff on a general policy as tantamount to agreeing to a particular plan. 1

However, board member Fiona Ma, who joined this year as the newly-elected Treasurer, was clearly wise to this ruse. Ma suggested an amendment to the motion, which was that staff had to come back to the board for approval to commit any investment funds. The amendment and the amended motion passed.2 So a staff ploy to give them a blank check to go ahead with their indefensible private equity plan was ju-jitsued by Ma, putting staff in a worse position than before they tried to advance their scheme with the March vote by now requiring them to present a specific plan and get board approval before they commit any investment dollars.

On top of that, the accompanying press did CalPERS no favors either. Even though the giant pension fund did manage to get some misleadingly positive headlines, a surprisingly high proportion of the coverage showed the reporter expressing doubts about the plan. Time-stressed trade reporters usually act as stenographers. The uncharacteristic skepticism confirms that CalPERS is losing control of the spin. That’s likely because experts and other public pension fund executives and trustees are telling journalists that they can’t fathom what CalPERS is trying to do.

In other words, staff is so visibly performing poorly that beneficiaries have revolted in the only way that they can, by turfing out incumbents. Beneficiaries may also have gotten an unexpected ally in Treasurer Fiona Ma, who joined the once-powerful Board of Equalization as Jerry Brown stripped it of most of its authority as a result of its board rubber-stamping the actions of an incompetent and nepotistic staff. Seeing the dangers of an asleep-at-the-wheel board likely made an impression on Ma. As staff has doggedly pursued its still-yet-to-be-adequately-fleshed-out-and-justified private equity plans, Betty Yee appears to feel forced to abandon her customary politeness and demand better answers.

CalPERS beneficiaries may find another advocate in Middleton. And the odds look favorable that JJ Jelincic will beat Henry Jones for the retiree seat this year. Jelincic already has the endorsement of the two retiree organizations that matter in CalPERS elections, California State Retirees and Retired Public Employees Association, making Jones the underdog. If Jelincic were to come back to the CalPERS board, staff would find it very difficult to keep up its current level of obfuscation and misdirection with so many other skeptics and independent thinkers who have joined in the last two years.

Memo to Marcie Frost: time to wake up and smell the coffee. Life as CEO is only going to become more unpleasant if you keep resorting to PR as a cover for addressing the real issues that CalPERS faces.


1 One might wonder why staff bothered going to the board at all given the position Cole took on the staff’s delegated investment authority. The short answer is likely that after all the board meetings on the new scheme, going ahead without something staff could later try to spin as authorization would risk a backlash from the board later.

2 Betty Yee, Margaret Brown, and Jason Perez voted against the motion, showing the degree of antipathy to the scheme.

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  1. tegnost

    This seems like good news, Lisa Middleton and her experience seem like a good fit. Wise of Newsom to get get a grip on the situation

  2. The Rev Kev

    Was just getting ready to crash when this article came online. I have to confess that when Ms. Middleton’s qualifications were listed, I broke out laughing. With Middleton coming in, it would be like having a ticking time-bomb on the Board and with this I do believe that the Governor has finally put CalPERS on notice. They are being watched. More likely they have been weighed in the balance and been found wanting. Very wanting. Apparently that Bill Slaton has been there since 2012 but over-wore his welcome. The LA Times came out with a story at about two years ago when he attacked J.J. Jelincic and it did not make Slaton look very good in it. I did find something that looks suspicious though it may be a coincidence. Take a look at the foto at the top in that article when he attacked J.J. Jelincic and see what you notice. See the colour of his sweater which makes him stand out? The article says it is red but to my eye, it looks more like “Marcie Frost” Burgundy. That may not be such a stretch that observation considering how that color & symbolism has been used at CalPERS. Will have to read this article more closely tomorrow morning as there is a lot of material there.

  3. none

    I thought the general counsel’s job was like any lawyer’s, to figure out legal backup for whatever the client wanted. Sort of like the joke where you ask an accountant how much 2+2 is and they respond by asking how much you want it to be.

  4. vlade

    If Frost was any smart, she would be looking for a new job right now, while she still can get a good reference.

    CalPERS board has 13 members. If JJ comes back, there would be up at least three that would be more than willing to stand up to Frost and make her squirm, and quite possibly five (or even six – Middleton, Ma and Yee).

    Meaning that all it would take is one or two board members to see that it’s better late than never (to be on the winning side) and dump Frost overboard with a gusto (if for nothing else than protecting themselves).

    That said, if Frost is turfed out and CP brought to look after its beneficiaries rather than Frost & cronies, the California state taxpayers (and CP current and future beneficiaries) should send you at least a nice thank you letter with a good bottle of wine (or similar, YMMV) for bringing the light into some really dark places, as I doubt it would even start w/o you.

  5. Susan the other`

    Seems like both Newsom and Brown have been too indulgent with CalPERS. Maybe to minimize the real disaster; maybe to hide an even worse one. You just never know when the top official acts like it is not the state’s responsibility to oversee this organization. That means, as usual, that the buck never stops till it hits the taxpayer. It’s a conscious decision.

  6. flora

    Great news. Is the tide shifting at CalPERS? One can hope.

    Lisa Middleton has the expertise and track record to question dodgy schemes staff present to the board.

    New Treasurer Ma is already doing a good job. No more “whatever the staff says is OK, no questions asked.” This para:

    However, board member Fiona Ma, who joined this year as the newly-elected Treasurer, was clearly wise to this ruse. Ma suggested an amendment to the motion, which was that staff had to come back to the board for approval to commit any investment funds. The amendment and the amended motion passed.2 So a staff ploy to give them a blank check to go ahead with their indefensible private equity plan was ju-jitsued by Ma, putting staff in a worse position than before they tried to advance their scheme with the March vote by now requiring them to present a specific plan and get board approval before they commit any investment dollars.

    What a great thing to read. Because CalPERS is a bellwether for other state’s pension decisions, this push back against sloppy and financially indefensible schemes will benefit other states’ pension boards as an example of what not to do.

    Thanks for your continued coverage of CalPERS, PE, and pensions.

    1. Lambert Strether

      > now requiring them to present a specific plan

      And Middleton comes on board just in time to take a look at it! So her first test will come quite quickly.

  7. David in Santa Cruz

    In the past I have worked with both SCIF and the California State Fraud Commission, and I found them to be generally well governed. The appointment of someone such as Ms. Middleton, who was SCIF’s VP of Internal Affairs and is a current council-member in a mid-sized city, bodes well for ending the unlawful culture of cover-ups and secrecy at CalPERS. Unlike Salton, she likely understands that it is a crime under California’s Bagley-Keene Open Meetings Law to improperly participate in a closed session. Once the gross incompetence and lack of expertise at the top are exposed, the corrupting influence of high-fee outside managers can be ended — thus boosting returns.

    Sunshine is the best disinfectant; electric light the best policeman.” Openness appears to be Lisa Middleton’s brand. I hope that she pulls back the curtains and turns on the lights.

  8. Joe Well

    Congratulations on your part in achieving this good news. How many journalists have had such an impact?

  9. Sally

    It’s about time the governor makes a move to help out the CalPERS beneficiaries. Love your last paragraph. <3

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