Effort to require CalPERS private equity disclosures stalls in Capitol
.JPG "The California Public Employees’ Retirement System, or CalPERS, headquarters buildings in downtown Sacramento are photographed on Sept. 16, 2021.")
On Monday, the board overseeing California’s $624 billion pension fund was scheduled to meet and adopt a stance on a bill that posed, in the staff’s position, a major threat to the retirement system’s future.
But that meeting was cancelled because the powerful Senate Appropriations Committee axed the measure, which would have required the California Public Employees’ Retirement System to disclose information about its investments in private equity, before the board even had to consider publicly opposing the bill. Lawmakers in that committee decided to hold Senate Bill 1319 on the committee’s suspense file last week, meaning the legislation is effectively dead.
Sen. Dave Cortese, D-San Jose, one of the authors of the now-stymied “Private Equity Sunshine Act,” said it was disappointing that CalPERS was opposed to transparency measures he sees as necessary to ensure private equity investments are performing well against public markets.
“What’s more disappointing is for appropriations to kill the bill this early in the process,” Cortese said. “It really cheated people out of the debate.”
Ahead of Monday’s meeting, the pension funds staff outlined the potential fiscal impacts of this legislation on the state, local governments and members. CalPERS CEO Marcie Frost said the pending bill would prevent the fund from investing in private markets and put the massive retirement system at a disadvantage compared to other pension systems, noting that over long periods of time, private equity has been the highest-returning asset class.
“I hope we were heard about our concerns about the financial impacts of the bill as it was currently written,” Frost said in a Monday interview. “I’m happy it’s not moving forward.”
The bill’s demise comes as various stakeholders continue calls for more transparency around how much CalPERS pays external fees to managers and its reliance on private equity assets.
One of those transparency pushes is a new documentary about the growth of private equity investments in public pension funds. That movie is being premiered on Tuesday by the Retired Public Employees’ Association of California, a retiree group that both supported Cortese’s legislation and has paid for a third-party investigation of CalPERS’ investment strategies.
The cost of transparency
CalPERS staff prepared a lengthy presentation to convince the board to take a public stance against the bill. By the investment staff’s assessment, requiring CalPERS to disclose information about fund managers and detailing comparisons between private equity investments compared to public markets would have had a significant, negative impact on the massive pension fund.
“This is estimated to reduce the total funded status of the system by 5% and increase employer contributions by $6.1 to $6.8 billion annually,” reads a document prepared by the retirement system.
The legislation, CalPERS staff said, could lead to higher contribution rates for members too. For state workers who have a salary of $80,000, they could pay $900 more a year to make up lost investment returns if California passed such a measure, according to the estimates.
The bill threatens CalPERS’ future because it would push private equity funds to look for other investment pools outside of California, rather than give up trade secrets, the pension fund’s staff wrote. The retirement system’s warnings also stated that “many innovative startup companies will be reluctant to consent to the public disclosure of confidential and proprietary information.”
Cortese said these estimates were overblown.
“They really, in my opinion, took what I call a ‘chicken little’ kind of posture: ‘The sky is falling,’” he imitated. Cortese said he didn’t believe that “massive amounts of investment opportunity” would disappear from the largest pension fund in the country.
RPEA President Margaret Brown echoed those concerns. She said that the bill may have died due to “wildly overstated fiscal implications.” She said that the information the bill would have required CalPERS and other pension systems to disclose is already collected, maintained and reported internally. The measure is a reasonable step to maintain public confidence and ensure retirement assets operate with transparency instead of asking stakeholders to simply “trust the process,” Brown said.
“Additionally, the bill may have failed because of powerful private equity interests and their allies that continue to resist even modest transparency measures involving public pension investments,” Brown said in a statement.
Frost said the fiscal impacts of Cortese’s legislation were put together by investment professionals at CalPERS who work in this area every day.
“The other thing I would say is the markets are cyclical. There are going to be times the public markets will outperform private markets, or there will be times that private markets will outperform public real, estate, etc.,” Frost said. “What we try to do is really diversify to assets, and we see private markets as a diversifier.”
Though the measure is effectively dead for the remainder of the session, Cortese vowed to run the bill next year.
Pension Fight Club
The bill’s demise came just days before a filmmaker plans to release a documentary on the topic of private equity’s investments in pension funds.
The film, titled Pension Fight Club, features CalPERS but does not focus on the massive California retirement system. In a release describing the premier, RPEA described the film as “a powerful national event focused on transparency, accountability, and protecting the retirement security public employees earned through a lifetime of service.”
Director Doug Orchard said he was drawn to producing a film about pensions after talking with several sources across the country about their experience trying to push for more transparency around these types of investments, but found that these stakeholders were sidelined.
“All they seem to be asking for is more transparency, and I think it’s a fair ask,” Orchard said. “The film shows what happens when you’re a board member and … you try to ask for more transparency, what happens to you, and without question, you become targeted.”
He pointed to two former CalPERS board members, Brown and RPEA Director of Health Benefits JJ Jelincic, as examples of this phenomenon occurring in California.
Brown and Jelincic were both CalPERS board members who lost their seats in 2021 and 2019, respectively, after unions spent hundreds of thousands of dollars to support their opponents. Prior to his loss, Jelincic was accused of harassing women who worked for CalPERS and encouraged to drop out of the race by several state officials.
Both have been vocal skeptics of the retirement system’s investments and what they see is a lack of transparency afforded to the public. Jelincic said that both pensioners and board members deserve to know more about private equity investments. Private equity investment managers have made claims that the lack of transparency is part of what makes these assets more lucrative.
Jeincic also rejected CalPERS claims that the now-defunct transparency bill supported by RPEA would have significantly hampered the fund.
“The argument staff is making … is that the private equity industry will just walk away. But they will take a lot of abuse before they say I won’t take your half billion dollar check,” he said.
The topic of how to continue the push for more transparency is likely to surface during the Q&A portion of Orchard’s film after its Tuesday showing.
Pension Fight Club premiers at 6:00 p.m. on Tuesday, May 19 at the Crest Theater in Sacramento.
