Dan Walters, Dean of Sacramento Columnists, Blasts CalPERS’ Corruption-Friendly Secret Lending Bill

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CalPERS likes to think that all that matters is if it can control perceptions in Sacramento. If Dan Walters’ latest column is any indication, CalPERS is losing that battle.

For those of you outside California, Walters has been the most influential commentator in Sacramento for decades. His view skew somewhat conservative, but he regularly calls out politicians on both sides of the aisle.

His latest object of disfavor is the CalPERS-sponsored bill AB 386, which he lambasted forcefully in his latest column, Pending Bill Opens Door to CalPERS Corruption. Walters criticizes the Assembly Judiciary Committee, which just passed the bill with no discussion at all.

Walters’ piece has been picked up by the Mercury News and other in-state papers. Since the bill has yet to go to the Senate, his intervention will make it much harder for Sacramento insiders to simply waive the legislation through and pretend they didn’t know about its rancid features.

We wrote up last week in part because the Judiciary Committee staff took the unusual step of sharply questioning whether CalPERS could and should be trusted with the powers it would provide. CalPERS wants to make loans and be exempt from disclosure…including who got the loan, in what amount, what the terms were (such as interest and collateral). The latter is important not just to determine if CalPERS is making proper credit judgments but also to see if it is handing out sub-market loans to cronies. There’s a proud history of this sort of thing. Remember, for instance, the “Friends of Angelo” scandal, when Countrywide gave out mortgages on extremely favorable terms to powerful politicians including Senate Banking Committee chair Christopher Dodd (D-CT), and Senate Budget Committee chair Kent Conrad.

Similarly, the reason yours truly has not been an advocate of public banks is they were tried in the US and virtually all failed. Most states and even some cities had them. All save North Dakota’s were eventually shuttered due to large-scale corruption and losses. I have not seen any of the proponents of public banks in the US demonstrate any awareness of their history of becoming piggy-banks for local notables, much the less recommend how to stop that from happening again. What CalPERS is proposing is an even more degraded version of the old, crooked, insider-controlled public banks.

As we pointed out, these secrecy provisions are utterly unnecessary for CalPERS to make debt investments, as opposed to engage in shenanigans. CalPERS is already one of the biggest private debt investors in the world. So is its Sacramento sister CalSTRS, who has not joined CalPERS in pushing this bill. The industry publication Private Debt Investor show the New York City pension system as a much larger private debt investor than CalPERS, yet it has no super secrecy shield.

The private debt initiative follows in an over-long series of dubious CalPERS schemes that looked at best as if CalPERS had been sold a bill of good by a huckster, and at worse, that staff members were hoping to get payoffs, if nothing else in the form of revolving-door-style career advancement. For instance, CalPERS tried hard and ultimately failed to hand off its private equity program to Blackrock (which was particularly dodgy since CalPERS would have paid even more fees!) when it looked like the most likely beneficiary was Ted Eliopoulos, who looked to be setting up his next gig.1 Next came the Four Pillars scheme which collapses under its own contradictions, but again looked like a way to give money away with clearly deficient controls and oversight (as opposed to invest it prudently).

Back to AB 386. As David Soares warned in his testimony to the Judiciary Committee last week,

Imagine if CalPERS were to loan trust assets to a company called “Plumpjack,” but could refuse to disclose under the California Public Records Act that “Plumpjack” was owned by Governor Newsom — as well as the terms and the collateral for that loan….this is exactly the sort of thing that AB 386 would allow.

Unlike currently exempt “alternative investments” which are regulated by the SEC, these loans would not be subject to federal oversight.

The Staff analysis prepared for today’s hearing correctly states that this bill had to be withdrawn in the last session when CalPERS Chief Investment Officer Ben Meng suddenly resigned.

I’d like to focus the committee’s understanding on what a gross failure of governance and fiduciary duty lay behind Meng’s resignation….

Mr. Meng disclosed all of these conflicts of interest with private pquity firms in his Form 700’s when he was hired in 2019 and again in 2020 — but Meng was allowed to direct billions in trust fund investments to funds in which he continued to hold a significant personal financial

Rather than require divestment as has been required by FPPC rules for the past 40 years, CalPERS CEO Marcie Frost and Board President Henry Jones covered-up his conflicts from the majority of the Board, the FPPC and the public…Frost and Jones then tried to make it sound as if divestment of conflicted investments was some crazy new concept that had just occurred to them — and not the official policy under the Political Reform Act since its inception….

These serious governance and fiduciary failures are not past history. Just last Monday CalPERS announced that an employee spent the last four years openly embezzling from beneficiary accounts — $685,000 and counting. Was this person arrested? No. Has she had to post a bond like any other common thief? No. CalPERS sued her.

Despite other critical (and favorable) testimony, the committee didn’t even deign to discuss the bill, passing it at the end of the session as if it were an afterthought. As Walters put it:

Assembly Bill 386 sailed through the Assembly Judiciary Committee last week…

Given its cavalier handling, one might think that AB 386…is just another minor change in law. In fact, however, it would allow the financially shaky California Public Employees Retirement System (CalPERS) to semi-secretly lend out untold billions of dollars by exempting details from the state’s Public Records Act.

Potentially it opens the door to insider dealing and corruption in an agency that’s already experienced too many scandals, including a huge one that sent CalPERS’ top administrator to prison for accepting bribes…

Direct lending by CalPERS means that its board members, administrators and other insiders would be making lending decisions on their own without outside scrutiny.

CalPERS’ rationale is that using alternative investment partners is costly because of their fees, and that direct lending could potentially result in higher earnings. However, it says, disclosing loan details would discourage many would-be borrowers from seeking CalPERS loans, thus limiting potential gains.

Underlying that rationale is that CalPERS’ $440 billion in assets are, by its own calculations, only about 71% of what’s needed…It has ratcheted up mandatory “contributions” from its client agencies to close the gap, but it’s also been chronically unable to meet its self-proclaimed investment earnings goal of 7% a year…

[Ben] Meng was brought aboard to juice up investment strategy but shortly after reporting disappointing 2019-20 results was forced to resign because he failed to reveal his personal investments in a New York financial firm, Blackstone Group, with whom he had placed $1 billion in CalPERS funds.

The Meng situation illustrates the perils should AB 386 become law and CalPERS officials be allowed to loan money to corporations and individuals without having to disclose all-important details.

The potential pitfalls were pointed out in an extensive analysis of the bill by the Judiciary Committee staff. It mentioned the Meng case as well as the scandal that sent chief executive Fred Buenrostro to prison for taking bribes…

One might think that members of the two Assembly committees that rubber-stamped AB 386 would have at least discussed those scandals and the potential downside. But they couldn’t be bothered to do their jobs.

As Walters intimates, Sacramento has become too complacent about corruption and its denizens act as if they believe the mopes aren’t on to how much looting goes on. Lambert reports that it’s been difficult to get much of a reading as to how California Democrats are responding to the Newsom recall campaign, but the attitude he gleans that it’s a big nuisance they are having to stoop to swat back. Yet the Democrats seem to forget that they are are likely to start out about a half a million votes down due to the number of people who still haven’t gotten their unemployment checks due to state indifference and incompetence. The not-wonderful Maine governor Le Page was voted in on what was largely a “Fuck the incumbents” vote. Many choose to overlook how many Trump voters voted for Obama in 2012 and Sanders in 2020 primaries.

If unhappy California voters take out their wrath on Newsom, CalPERS may find itself much less well protected than it is now. Yet the giant pension fund seems incapable of caring about beneficiary interests for its own self-preservation.

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  1. Larry

    Great that this gets wider attention and thanks for your efforts covering CALPERS Yves!

  2. Robert Hahl

    The term corruption seems to always involve only rather shady but friendly business relations among cronies, but I would be worried about extortion if I could arrange secret loans. “We know where you daughter lives” is all it would take for most people. Why doesn’t this subject ever come up except when some banker falls out of a Hong Kong tower?

  3. Tom Stone

    I started trying to apply for the PUA unemployment in CA at the end of august and finally recieved an application in response to a registered mail letter sent late October ’20 on January 11.
    I mailed it in the following day.
    I started trying to reach the CA EDD March 1st, the toll free # is 800-300-5616, I have it on speed dial and have yet to even get on hold.
    I try it whenever I have a moment free during the day.
    There’s a VM tree that lasts 3 minutes and then “Due to the high volume of calls”..
    Newsome is toast.
    As to AB386 sailing through the judiciary committee despite the Staff report, perhaps there’s a divergence of interests…
    I can see AB386 sailing through the legislature because who wouldn’t like such a sweet piggybank?
    And if Newsome is sacked he can take the blame when there’s a scandal ( But,but, hoocooodanode?) down the road.

  4. The Rev Kev

    Well when you get down to it, a private corporation can do whatever it wants to do and that includes keeping some aspects of its business confidential lest it betray trade secrets. If a private corporation did not have secrecy provisions, why other corporations could steal that knowledge and us it to undercut CaLPERS and we can’t have that. I’m sure that CalSTRS would love to get their hands on CaLPERS secret trade sauce. It is also important that a corporate Board also makes its decisions in private, even if that does risk outstanding corruption but CalPERS is after all big enough to absorb such losses. I mean, they have $444 billion in assets so a billion here and a billion there – does it really matter so long as they are making that investment earnings goal of 7% a year? You have to understand the pressure that people like CEO Marcie Frost and Board President Henry Jones are under. For over a year now they have not been able to go to those business conventions in the Bahamas or do those business consultations in Paris. What else are they going to do with all that spare time on their hands? But when you get down to it, if there was ever something rotten in the City of Sacramento, I am sure that the Californian Attorney General would be all over it.

  5. Sinecure at Morgan Stanley

    “…..when it looked like the most likely beneficiary was Ted Eliopoulos, who looked to be setting up his next gig.1 Next………..”

    You forgot the superscript footnote! We’d like to hear what that brain-trust Teddy is plotting

  6. David in Santa Cruz

    It should be noted that the Republicans on the Judiciary Committee moved the bill for a vote, while a majority of the Democrats withheld approval. Dan Walters is a Republican-leaning reformer against Democratic one-party corruption.

    Newsom won’t just be running against the Employment Development Department’s abysmal record. He will have to defend CalPERS corruption and mismanagement on his watch — and his failure to even take notice.

    There will be many voters casting “F elites and the horse they rode in on” votes to dismantle the state government, even if it means throwing the baby out with the bathwater in terms of governance…

  7. Tom Stone

    California State Government already sold the baby and peed in the bathwater, it is structurally corrupt and I don’t see any way to reform it given our political reality.
    California faces a rough future.

  8. flora

    Thanks very much for this post.

    CalPERS wants to make loans and be exempt from disclosure…including who got the loan, in what amount, what the terms were (such as interest and collateral). The latter is important not just to determine if CalPERS is making proper credit judgments but also to see if it is handing out sub-market loans to cronies. There’s a proud history of this sort of thing. Remember, for instance, the “Friends of Angelo” scandal, when Countrywide gave out mortgages on extremely favorable terms to powerful politicians including Senate Banking Committee chair Christopher Dodd (D-CT), and Senate Budget Committee chair Kent Conrad.

    Your reporting has no doubt kept the issue of CalPERS’ bad decision making alive for NC readers and others. Good to see an esteemed CA reporter now asking questions about CalPERS latest bad idea.

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

  9. Sue inSoCal

    Thanks Yves for your tenacity on this. It reminds me a little of the Orange County crash, but Citron didn’t have any personal gain, as far as I recall. ? This is disastrous and seems openly corrupt. (Someone mentioned structural corruption.) The comparison with Friends of Angelo sure seems apt. Heaven help all these people I know aging out with CALPERS benefits with this stuff going on.

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