CalPERS Engineering Board Resignation: Underhanded, Dishonest Plans to Cut Investment Meetings of Poorly Performing Fund by More Than 50%, Shrink Investment Committee

CalPERS’ staff is seeking to complete its de facto takeover of the board through a set of measures initially presented at a board offsite last month. Not only is the substance of these proposed changes contrary to the US and California constitutions, as well as the statute governing CalPERS and fiduciary law, but also consistent with these proposals being the governance equivalent of a coup, the staff has advanced the plan in an underhanded manner, designed to minimize the ability of stakeholders to protect their owninterests and block these initiatives.

Even though these proposed measures are dramatic and obviously intended to utterly thwart board oversight of CalPERS’ staff, they build on a foundation of staff userpation and board dereliction of authority dating back almost ten years.

Despite the diligent efforts of a minority of pro-transprency board members who have sought to claw back the board’s authority to conduct oversight, the CalPERS board is already zombified.1 The complacent majority of the board sits stupefied as the staff regularly and brazenly engages in rank insubordination, such as refusing to provide documents and agendize items when requested in public meeting by the board president and committee chairmen; giving evasive and even demonstrably dishonest answers when asked simple questions; ignoring e-mails; and usurping board member authority by intercepting their letters and even sending replies without board member review or approval.2

In this post, we’ll discuss the underhanded manner in which staff is trying to vitiate the formal and informal routes for beneficiaries to have a say on these schemes, as well the two “easy to see why they are wrongheaded” plans, that of greatly cutting the number of board meetings, and reducing the number of board members who sit on the all-important Investment Committee.

The short version of why fewer board meetings is a terrible idea is that CalPERS is already a visibly poorly functioning institution and is clearly in need of more rather than less supervision. On top of that, it is not only much larger than other public pension funds but far more complex, running over 2200 pension plans and managing vastly more investment activities in house. In addition, unlike any other large public pension fund, CalPERS also runs the 2nd largest health insurance system in the US (only the federal government’s is larger) and a sizable long-term care plan.

But if CalPERS manages to get the board to agree to give up the last of its power, we will launch an ongoing campaign to put in Public Records Act requests for the all reports that the staff prepares for the purpose of keeping the board and public informed in lieu of the foregone board meetings. The need to review this information does not go away even if the board goes largely dark. We will publish these reports on our site to promote transparency and accountability. (CalPERS claims it will launch a new “tool” called Insight that will provide the needed transparency. If you think CalPERS plans to provide the same level of disclosure that it does now through the documents presented at its board meetings, I have a bridge I’d like to sell you).

If CalPERS fails to provide these documents, asserting that they no longer prepare this sort of information, it would be concrete evidence of gross negligence by staff and ultimately by the board. Various reports on investment-related matters have been presented to the board for years, and in many cases, decades, demonstrating that the board and staff deemed reviewing these items to be necessary to manage the fund prudently. The board remains responsible for the management of the system, no matter how much it delegates to staff, so they will be on the hook if the staff decides to slack off.

In a separate post today, we’ll explain why another major component of this power grab, that of a mislabeled board “Code of Conduct” which is designed to put board members in a veal pen,3 violates the US and California constitution, and on its face also violates the board members’ fiduciary duty.

CalPERS Guilty-As-Hell Looking Effort to Hide Its Power Grab

CalPERS first presented its planned changes to board meetings and a noxious “Code of Conduct,” a vehicle to hamstring the board, at an 8:30 AM meeting at a board offsite last month without posting any of the documents beforehand. The draft code of conduct was not posted on the Internet in advance, as is CalPERS’ long-established practice when taking action; it was not even posted at 8:30 AM or after the meeting. Instead, only paper copies were handed out.

This was deceptive because:

The board historically has not made decisions, particularly important ones, at offsites. No stakeholders had any reason to think something, much the less something of critical importance, was going to be discussed and voted on at the July meetings.

There was no indication on the offsite agenda that the board would be undertaking a so-called “first reading” of this secret code of conduct. This is a violation of the Bagley-Keene Open Meetings Act, which requires that state bodies post agendas of public meetings at least ten days before the session. The agenda was patently false:

CalPERS’ staff gave a dog-ate-my-homework excuse for the tardy delivery of the draft code of conduct. Making up reasons for why the materials were presented to the board at the latest possible moment diverted attention from the bigger sins: the dishonest failure to alert the public to the plan to hold a “first reading,” which is a board decision, and the failure to upload the draft to the public website. These “failures” were clearly deliberate; they are consistent with the dishonest agendizing of the session.

That “dog-ate-my-homework” excuse serves to justify a further ruse to strip power from the board. Anne Simpson, who is a direct report to CEO Marcie Frost, tried saying it was oh so hard to upload documents to the system that CalPERS uses for the board to access materials, called Diligent Boards. A search on “Diligent Boards” and “complaints” shows no mention of the sort of difficulty Simpson says she was having.4

But rather than have Simpson and other staffers get more training in how to use the software, or if there is really an issue, switch to another third party program like Convene, BoardBookit, or BoardAdvantage, she instead proposed having CalPERS develop its own board software. That idea is a obvious waste of beneficiary funds given that boards all over America are using these programs and CalPERS does not have unique requirements.

Or does it? It turns out, contrary to how Diligent operates, CalPERS would be able to spy on whether and when board members viewed specific documents. Diligent deliberately does not keep tabs on what documents board members have reviewed at to reduce exposure in litigation.

In other words, CalPERS plans to put a target on individual board members’ backs. Being able to prove conclusively that certain, and likely most, board members blew off even looking at particular documents prior to making decision would make it far easier to win breach of fiduciary duty lawsuits against the board for failure to act with diligence and care. It’s not hard to surmise, based on the failure to participate and the too-frequent-cluelessness of most board members, that they have not read most documents before board meetings. This program would enable third parties to prove in discovery that board members were failing to do even the basics of their job.

The draft deliberately gave pride of place to the staff proposal, as opposed to the version the subcommittee had approved. Needless to say, the original staff version was egregious and the revisions were an improvement. As former board member JJ Jelincic put it, “Going from terrible to just very bad is progress.”

But as you can see from the embedded document at the end of this post, there is no way any board member could possibly have turned the half-assed work product that Simpson presented to the board into the actual version reflecting the board subcommittee edits without manually retyping the handout and then making the edits shown in the Appendix. Even putting aside the fact that the “first reading” had not been agendized and therefore never should have gone forward, rather than having a Keystone Kops show, the staff should never have tried to hold the discussion when it had so clearly dropped the ball.

Needless to day, it’s revealing to see CalPERS staff spend so much effort on conniving rather than on doing their jobs.

The only good news is this plan backfired. Even this board was not about to attempt to discuss a non-existent draft. They decided to hold the “first reading” this month, as in this very afternoon, when the Board Governance Committee was originally not scheduled to meet this month.

But that brings us to the next layers of staff chicanery. They seem unable to operate in an above-board manner.

CalPERS is openly having staff override a board subcommittee. This is a concrete example of the insubordination we discussed earlier. And that’s before, as we’ll discuss in our companion post, the proposed change is outrageous and in any functioning organization, would be grounds for firing.

This is at the bottom of the second page of the current draft document:

This note makes clear that the referenced section flouts CalPERS’ long-established subcommittee practices. A document presented by a subcommittee to a full committee has to be approved by the full subcommittee. In this case, it was a subcommittee of only two, Rob Feckner and Jason Perez. Thus both would have to approve of any changes to the draft.

Not only does the “a workstream member” make it clear that the subcommittee did not approve of this change, it also tries to dignify the falsehood that anyone other than the subcommittee has the authority to edit the draft. The “workstream member” is almost certainly Anne Simpson, whose only bona fide role in this process is clerical and research support to the board members on the subcommittee.

CalPERS again rushing to press the board to make critically important decisions with inadequate time and external input. CalPERS originally did not have a Board Governance meeting scheduled for this month. Rather than stick with its original calendar, staff scheduled an extra Board Governance committee meeting for this month.5 As you can see, the plan is to cover a huge amount of governance changes in a very short period of time.

The optics of this rushed schedule are particularly bad, since the Board Governance Committee meeting will be held at the same time as CalPERS’ ice cream social, in which CalPERS executives and board members serve ice cream to employees. This means, in a massive upraised middle finger to beneficiaries and California taxpayers who backstop the pension system, the top staff members and board members not on the committee (worse, possibly even ones on the committee) will be flitting in and out of the meeting or even skip it entirely, when they normally would be there.

The staff has also put the hot-button items, the reduction of the number of board meeting and the “first reading” of the code of conduct, late in the afternoon agenda. This is likely to be designed to deter beneficiaries from attending. Many go to the morning Pension & Health Benefits Committee and then stay on for any afternoon committee, but those afternoon sessions are typically less overloaded than this one, It is quite possible that the Board Governance meeting will go well after 5:00 PM, and not many beneficiaries will be able to stay that late.

Staff’s Intelligence-Insulting Big Lies to Justify Reducing Board Oversight by Cutting Meetings

CalPERS staff can’t even be bothered to make a credible-sounding defense of its self-serving idea of treating the board as a nuisance that needs to be kept well away. The documents supporting the radical idea of cutting the Investment Committee meetings (now nine a year) and the Pension and Health Benefits Committee (now eight a year) is basically that staff thinks it’s working too hard. This comes after CEO Marcie Frost engineered herself and quite a few senior staff members hefty pay increases. California taxpayers should be outraged.

The thin and not-even-remotely credible rationale offered for this big change is yet another sign of open disrespect for to the board and CalPERS beneficiaries. I’ve attached the Powerpoint for this agenda item at the end. Yes, sports fans, the Powerpoint doesn’t even pretend to say why the board should get out of the business of supervising staff.

To find that, you must look at the agenda item summary, which is embarrassingly poorly written and as a result, unclear. One has to be pretty far down the curve of CalPERS insider baseball to have a reasonably good guess as to what is intended, which also means most reporters have missed what is afoot.

The big change is to revamp the Investment Committee from a committee of the whole to what amounts to subcommittee, which would reduce the number of meetings from nine a year to four, as well as reducing the size of the committee. This is a ludicrous idea, since all board members have a fiduciary duty and are responsible for investment decisions whether they sit on the committee or not.6

An almost-as-significant change is the almost as large reduction frequency of meetings of the Pension and Health Benefits Committee, from eight to four.

The barmy justifications? One is consistency, as if the work of overseeing investments should be cut down to conform with that of subcommittees that meet less often, like Performance & Talent Management, because their are legitimately far fewer issues to review. Yet staff would have the board believe down is up:

Establishing a consistent structure will provide the full board withimproved due diligence through a deeper level of review before recommendations are presented to the board for approval.

Oh, come on. What about “You can’t do as much in four meetings as you can in nine full day meetings” don’t you understand? This is patently about finding an excuse to have this already weak board completely castrated.

The staff literally has no justification for shrinking the size of the Investment Committee except that misguided consistency looks better to them. This resembles former Wells Fargo CEO John Stumpf’s rationale for setting the unrealistic cross-selling target of eight products per customer that lost him his job. He liked the sound of “Eight is great.”

The likely real basis is with an Investment Committee of six, they can keep JJ Jelincic, who actually knows something about investments, unlike the rest of the board, off the Investment Committee were he to win his board seat bid this fall.

The second rationale is that the staff deems reporting to the board to be a nuisance, as if they have the right to dictate to the board. The staff’s position is reminiscent of the bus company that said it couldn’t meet its schedule if it had to pick up passengers. From the agenda item summary:

Approval of the recommendations set out by Workstream 3 will allot more time for CalPERS management to focus on their core duties while ensuring strategic oversight by the board in exercise of its fiduciary duty.

This section effectively says that dealing with the board is interference with the oh-so-important work of the staff. In fact, the staff exists to serve the board, not vice versa.

Staff didn’t regularly miss long-established lead times for posting board meeting information for public nad board member during Anne Stausboll’s tenure. Under Marcie Frost, the board meeting documents have been posted on the Internet much later than in the past, and it’s likely they are getting to the board late too, undermining sound governance. So what are the likely causes? Note these are not mutually exclusive:

Frost is a poor manager and/or way out of her depth. CalPERS is over ten times larger than the back office operation she headed in Washington.

Frost and the staff are deliberately providing information late to give the board and beneficiaries the mushroom treatment. Board members are unlikely to have the intestinal fortitude to say they received information too late to review it properly and ask that a decision be postponed. Conditioning the board to make decisions without adequate review sets up further power grabs by the staff.

Frost has assigned low priority to making sound managerial decisions. Bear in mind that the work involved in board meetings is the same work as would be required to meet CalPERS’ fiduciary duties; the necessity of preparing information for review does not change even if staff succeeds in pushing the board aside.

Frost clearly places high priority on managing the press and having lots of face time with stakeholders, including expensively and elaborately produced events. It isn’t just that all this image-burnishing consumes resources; it also sends a bad signal as to what is considered to be important.

Frost has stumbled from controversy to controversy; blaming board meeting work for the resulting burden on staff is scapegoating. Let’s name a few of the scandals: the hiring of Charles Asubonten; Frost’s misrepresentations of her educational background before and after she was hired; the decision to implement an unconstitutional, non-secret ballot; the new private equity scheme fiasco, which chewed up tons of cycles; the ouster of Elisabeth Bourqui. This isn’t a complete list, but you get the picture. CalPERS has become a much more tumultuous place under Frost than it was in the two years before former CEO Anne Stausboll resigned.

Again, it’s obvious that the real reason for asking for these changes is not that employees are overworked. If that were the case, the solution would be to ask for more staffing.

Why CalPERS if Anything Need More Frequent Board Meetings

CalPERS is legitimately more complex and therefore requires more oversight, which ought to translate into more board involvement. That means more board meetings, since the Bagley-Keene Open Meeting Act does not allow the board to deliberate or even share much information outside the formalities of board meetings.

CalPERS runs more investment operations in house than any other major US pension fund. It also runs a huge health care insurance program and a long-term care program. Comparing it to any other US pension fund is wrongheaded.

The environment in which CalPERS operates is only going to become more difficult. Staff ought to be seeking out more input from the board and key stakeholders, not less. Investment valuations are at nosebleed levels, which means that there is a great risk of investment performance falling short, making CalPERS’ poor funded status even worse.

Similarly, the challenges of managing heath insurance and health care are not getting any simpler as costs continue to skyrocket. CalPERS is also faced with a crisis in its long term care insurance program, which is almost certain to become acute. A state judge has effectively told CalPERS that is likely to lose a class action suit, and urged CalPERS to seek a bailout from the legislature. That is pretty much certain to be a non-starter. The plan would then be deemed insolvent, and it’s not at all clear that CalPERS has the foggiest idea of what to do then.

CalPERS is not a corporate board, which makes comparisons to corporate board meeting schedules misguided. Over the years, numerous supposed “governance experts” have told the CalPERS board that they should model their behavior on that of large company corporate boards.

The irony of this advice, of course, is that CalPERS first made a name for itself as a financial actor in corporate America by criticizing many corporate boards for being asleep at the switch. The CalPERS board long pushed back at this advice, based on clear distinctions between corporate boards and itself, but is now acquiescing.

The most significant difference lies in the fact that, as a government body, CalPERS is prohibited by law from making decisions that involve the board in any kind of “offline” fashion. In other words, in a corporate setting, the CEO might send out an email to the board saying, “I’m planning to make a small acquisition. Unless anyone raises a concern, I’m going to proceed.” In the private sector, this is a completely kosher governance approach. However, for purposes of a public body, California law recognizes it as a “serial meeting,” which is illegal. This is why city councils and school boards meet often as frequently as weekly. They understand that they must, by law, convene as a body in order to even discuss or deliberate about issues, even if they take no action.

CalPERS’ staff does not deserve a longer leash. While there are no doubt some groups within CalPERS that are performing well, the institution as a whole is not. It exhibits a toxic culture of casual lying as part of a not-terribly-successful effort to divert attention from the fact that it has underperformed its investment benchmarks and has no realistic path out of its underfunding save hitting the state and local bodies with hefty contribution increases that are their straining budgets. And if investment returns fall short, which as we pointed out is a likely scenario, this bad dynamic will only intensify.

* * *

Any board members that go along with this staff coup need to resign. Their vote says loud and clear that they aren’t willing to do the work that goes along with their responsibilities.


1 If you really must know, like this:

To find the world’s most sinister examples of mind control, don’t look to science fiction. Instead, go to a tropical country like Brazil, and venture deep into the jungle. Find a leaf that’s hanging almost exactly 25 centimeters above the forest floor, no more and no less. Now look underneath it. If you’re in luck, you might find an ant clinging to the leaf’s central vein, jaws clamped tight for dear life. But this ant’s life is already over. And its body belongs to Ophiocordyceps unilateralis, the zombie-ant fungus.

When the fungus infects a carpenter ant, it grows through the insect’s body, draining it of nutrients and hijacking its mind. Over the course of a week, it compels the ant to leave the safety of its nest and ascend a nearby plant stem. It stops the ant at a height of 25 centimeters—a zone with precisely the right temperature and humidity for the fungus to grow. It forces the ant to permanently lock its mandibles around a leaf. Eventually, it sends a long stalk through the ant’s head, growing into a bulbous capsule full of spores. And because the ant typically climbs a leaf that overhangs its colony’s foraging trails, the fungal spores rain down onto its sisters below, zombifying them in turn.

2 Board member Margaret Brown did halt the hijacking of the mail and identity theft in replying without permission, but that was an exception that proved the rule, in that she had to embarrass staff publicly to get them to halt this abuse; private protests got nowhere.

3 Jane Hamsher of the then-influential site Firedoglake may be the first to have used “veal pen” in a political context:

Someone asked me over the weekend to be more explicit about what the term “veal pen” means:

The veal crate is a wooden restraining device that is the veal calf’s permanent home. It is so small (22″ x 54″) that the calves cannot turn around or even lie down and stretch and is the ultimate in high-profit, confinement animal agriculture.(1) Designed to prevent movement (exercise), the crate does its job of atrophying the calves’ muscles, thus producing tender “gourmet” veal…..

About 14 weeks after their birth, the calves are slaughtered. The quality of this “food,” laden with chemicals, lacking in fiber and other nutrients, diseased and processed, is another matter. The real issue is the calves’ experience. During their brief lives, they never see the sun or touch the Earth. They never see or taste the grass. Their anemic bodies crave proper sustenance. Their muscles ache for freedom and exercise. They long for maternal care. They are kept in darkness except to be fed two to three times a day for 20 minutes.

Soon after the election, the Administration began corralling the big liberal DC interest groups into a variety of organizations and communication networks through which they telegraphed their wishes — into a virtual veal pen.  The 8:45 am morning callco-hosted by the “liberal” Center for American Progress, Unity 09, and Common Purposeare just a few of the overt ways that the White House controls its left flank and maintains discipline.

4 This set of reviews specifically asked for what users disliked, and there were no complaints about uploading documents. In fact, one user said, “If I had a difficulty working with this application, it would surely be due to mishandling on my part.”

5. See that the May version of the CalPERS Board Committee Rolling Calendar shows that there is no August Board Governance committee:

A June version of the CalPERS Board Committee Rolling Calendar similarly shows no items for August:

Yet oddly, an “updated” June Board Governance calendar showed no meeting in July but added the innocuous-sounding, bafflebaggy “Update on Board Self-Evaluation Workstreams”:

6 One assumes that the decisions of the Investment Committee, which would now be a subcommittee, would need to be brought to the full Board of Administration for approval. This would be more work, not less, for the staff. Clearly the real intent is to use a reduced number of meetings as the pretext for having the board delegate even more authority to staff. Gah.

00 CalPERS Draft Code of Conduct July 17
00 Agenda Item 7c, Attachment 1 - Recommendations of Workstream 3: Meeting Materials - item7c-01_a
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  1. The Rev Kev

    You know, I keep on staring at CalpERS Organizational Chart and I just can’t see the bit where the staff, who presumably are at the bottom somewhere, get a veto on what the Board can and cannot do while overriding subcommittees. I’ll have to study it more.

    If Governor Newson thinks that all the shenanigans over in CalPERS is never going to touch his administration, then that means that he is depending on the good graces of Republicans to never make it an issue at all. I mean, its not like people aka voters, get touchy when the subject of the safety of their pensions when they come up.
    A few numbers. California I believe has some 18 million registered voters out of a population of some 40 million. Now CalPERS serves more than 1.9 million members in the CalPERS retirement system and administers benefits for 1.5 million members and their families in our health program. That is about 3.4 million people and I am willing to bet that they are nearly all voters. That is potentially a big chunk of those 18 million voters.
    But wait, there’s more. Each one of them has family members – partners, siblings, grown kids. Each of them will also be affected by whatever happens with CalPERS. So you can tack on several million more voters here. So if the present Board succeeds in blowing up CalPERS or generating a massive scandal, then I invite people to do the numbers and work out how many Californian voters may be affected in total. It’s Newsom’s call.

  2. Tom Stone

    Newsome’s handlers have clearly dropped the ball on this.
    Newsome has depended on his handlers throughout his career, his severe dyslexia and his well known fondness for cocaine limit his already tiny abilities to deal with complex matters.

    2020 is an election year and this is raw red meat, I’m amazed that no California Politician has picked up on this issue already.

    Unfortunately Attorney General Becerra is tied up dealing with more important matters…like impeaching Trump.

    1. Cal2

      California is the fifth largest economy in the world,
      and its public employees to and including public safety, fire and police, are being shafted? Something’s gotta blow in the rank and file.

      Think Trump would capitalize on this? How about Bernie addressing this topic and harvesting millions of grateful public employees in the upcoming and critical California Democratic Primary?

      1. John Wright

        From what I’ve read, it is not the public employees who are being shafted, which may explain why there is little heat from CalPERS pensioners applied to CalPERS..

        A shortfall in CA public pensions as a result of problems with CalPERS is to be covered by the California taxpayers/ratepayers/special district customers of the entity (or possible multiple entities) the pensioner retired from..

        From previous postings, some backstopping entities CAN get out of their pension obligation to make their CalPERS retirees’ pensions whole, but it requires declaring bankruptcy.

        I suspect these governmental entities will only declare bankruptcy as a last resort.

        A large pension shortfall could take quite a while to ripple through CA, so the short term focus of politicians may explain why they will do little until large pension funding charges are presented to the CA public.

        Now, if the CalPERS retiree still resides in CA after retirement, they could see increased taxes/fees to backstop their and others CalPERS pensions.

        But if one is a California taxpayer/special district customer, when one looks in the mirror one views the potential CalPERS “shaftee”.

  3. tegnost

    This series makes me wonder in what variety of ways this type of strong arming is happening in other venues in the nation, and how much impact this type of behavior has had on citizens everywhere. They’re certainly not used to having their dictates questioned. Go along to get along, I’d love to see marcie frost and matt jacobs do a perp walk, along with whichever board members assist them in breaking the law. That said this truly does expose the untouchable quality of california elites that makes living there unbearable (college admissions scandal anyone). Imagine a board that told members of staff that if the can’t do the job they should quit or be fired so that someone who can do it can be hired. TBH I still can’t believe that in meritocratic california macie frost could ever have been considered qualified, unless it was because she was considered malleable enough to complete the rip off of the pension by whatever nefarious actor is sitting in the shadows. Let there be light.

  4. shinola

    Wow! Three articles about CalPERS today.

    I’ve read these plus many of Yves’ other missives about the strange goings on at that organization over the past months & years. I don’t pretend to understand all the details about meeting rules & such, but I do see that there appears to be something nefarious afoot.

    What remains opaque to me is the “Why?” Who benefits & how? Is it some sort of CYA operation for shortcomings or failures yet to be exposed? Is it a set up to gut fiduciary obligations so future bribes & kickbacks are easier to solicit & conceal? There has to be more to it than petty intra-organizational politics.

    To quote a character from one of my favorite Mel Brooks movies: What in the wide-wide-world-of-sports is a-goin’ on here?

  5. Susan the other`

    I certainly hope Hiltzik is reading this. Zombie ant-fungus indeed. CalPERS staff/management is taking over the fund. It’s kinda in the category of corporate raiding. And when their incompetence is apparent and the State of California has to bail out the fund it will be a financial hardship for the entire state. A very big one.

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