The State Worker

Can an investment pro persuade state workers to let him manage their pensions?

Michael Flaherman, who has drawn attention to hidden fees that investment funds pass on to public pensions, is running for a seat on the CalPERS Board of Administration. He served on the board between 1995 and 2003, before he launched a career in private equity.
Michael Flaherman, who has drawn attention to hidden fees that investment funds pass on to public pensions, is running for a seat on the CalPERS Board of Administration. He served on the board between 1995 and 2003, before he launched a career in private equity. Photo courtesy of Michael Flaherman

Michael Flaherman calls his eight-year stint on the board that manages the nation’s largest public pension fund “glory days” for him and the California Public Employees’ Retirement System.

Back then, CalPERS was considered “over-funded” because it had more money than it needed to pay the pensions it owed to California public workers and retirees. Flaherman, a former BART planner, left the board in 2003 and launched a career at a private equity fund that did business with public pensions.

Today, CalPERS is underfunded and Flaherman wants another shot at guiding the board as it navigates its way out of its recession losses. The question is whether his experience as an investment manager will help when he makes his pitch to the 1.4 million CalPERS members who will begin voting next month in an election for an open seat on the fund’s board.

“I have a set of experiences and a demonstrated commitment which I think you’d be hard-pressed to find among anybody who has ever served in the capacity of a public pension board,” said Flaherman, who now is a visiting scholar at UC Berkeley’s Goldman School of Public Service. “I worked in the investment business for more than 10 years in a very senior capacity, so I understand investing billions of dollars in a way that can only come from actually doing it.”

But the labor groups that are the muscle in CalPERS elections are leery to embrace him after he left civil service for what they call a Wall Street firm.

They’ve lined up to endorse his opponent, biochemist and state scientist union leader David Miller. Miller casts himself as a stalwart defender of public pensions from the kind of political campaigns that would cap benefits for current workers and leave future state employees with 401(k) plans.

He’s been sounding that alarm since 2011, when he participated in the labor-backed “pension truth squad” that countered reforms proposed by Gov. Jerry Brown’s administration.

“CalPERS is continually under attack,” Miller said. “It’s the biggest challenge facing CalPERS. It’s the biggest challenge facing us as CalPERS board members, to push back against the attacks on our pension system.”

Flaherman and Miller represent a stark contrast in their race for a seat on the 13-member CalPERS board that unexpectedly blew wide open after incumbent J.J. Jelincic changed his mind and opted not to run for re-election.

Jelincic has been an outspoken voice on the board for the past eight years – known for his criticism of his colleagues’ choice of a chief investment officer, his efforts to spotlight hidden investment fees and his recent tussling with his peers after they accused him of leaking confidential information to the media.

Jelincic is behind Flaherman because he thinks CalPERS would benefit from Flaherman’s investment experience. They worked together to expose hidden investment fees two years ago.

Flaherman “has been very helpful to me in understanding part of what’s going on with the private equity business, where we’re getting ripped off,” Jelincic said. “David, I like him. I just think Michael would make 10 times the board member.”

So far, public employee unions are making plans to run campaigns for Miller. They have not committed to spending money on the race, but they can contact their members to drum up votes for him.

They’re in his corner because his message about threatened pensions resonates with public employees and retirees who’ve seen occasional municipal and statewide initiatives that would trim benefits for public workers, said Terry Brennand, pension director for SEIU California.

Miller is “a tireless advocate for retirement security,” said Brennand, whose SEIU affiliation represents about 500,000 CalPERS members.

In the background, the two candidates have needled each other in their drafting of candidate statements that CalPERS will include with ballots that go out to members on Sept. 1.

Miller took a swing a Flaherman in his statement, writing that “Flaherman parlayed his previous CalPERS board experience into a lucrative Wall Street career managing hedge funds and profiting off of our public pensions. Do you trust foxes to guard the hen house?”

Flaherman pushed back.

He wrote to CalPERS to challenge Miller’s criticism, arguing that he had been an investment manager at a private equity firm, not a hedge fund manager. Flaherman did not want his campaign to be blemished by public perceptions of hedge funds, the high-risk investment pools that have been blamed for contributing to the 2008 housing market crash and recession.

“The work I do now is a fundamental piece of proof that I’m not some kind of shill for the investment industry,” said Flaherman, who has used his recent posts in academia to research ways that investment firms take advantage of pension funds. “Nobody from the investment industry is enthusiastic about what I’m doing,” he said.

Miller prepared to rebut Flaherman’s appeal with a packet of documents and transcripts that showed Flaherman at times describing himself as an executive in a firm that manages private equity and a hedge fund. But Flaherman dropped his challenge on July 24, before an administrative judge had an opportunity to read the material.

Flaherman says he still does not want to be thought of as a “hedge fund manager.” But, he also says Miller’s criticism could benefit him.

“I was in general appreciative of Mr. Miller pointing out in his statement that I had gone into the private sector and managed investment capital, because my sense is that people think that’s a virtue,” he said.

Miller, who is making his fourth run for a seat on the CalPERS board, thinks the distinction between his and Flaherman’s backgrounds that he highlighted in his candidate statement will help him. “There’s a lot more to this job than insider information about the financial industry. This job entails a lot of decisions that are commonsense, ‘What are CalPERS members’ interests and what are their values?’”

Separately, CalPERS Board of Administration incumbent Michael Bilbrey is seeking re-election this fall. He drew three opponents: retired legislative staff member Bruce Jennings, Garden Grove Unified School District business services director Margaret Brown and retired Redondo Beach engineer Wisam Altowaiji.

Adam Ashton: 916-321-1063, @Adam_Ashton. Sign up for state worker news alerts at