Now that the California Public Employees’ Retirement System has decided to become a lender, it follows that the taxpayers who finance the pension fund have the right to know what types of loans will be made and to whom. The process, though, will unlikely be sufficiently transparent. There is legitimate concern that CalPERS will be making “secret loans.”
The CalPERS board approved in June a plan to make “opportunistic” investments in private debt. Still hurting from $100 billion in losses during the Great Recession, and battered again by the pandemic downturn, the pension fund, which is financed at only 71% of its liabilities, is desperate to close the gap between its assets and obligations.
CalPERS typically holds positions in stocks, bonds, and real estate through institutional investors. Not enough, say its managers. They “want to cut out the middlemen and begin making and holding” loans, CalMatters reports. While some accounts say the fund will move up to 5% of its total value into these loans, the Financial Times says leverage could be “20% of the value of the fund, or nearly $80 billion based on current assets.” Either way, it’s a risky venture.
Given CalPERS’ history of dumping money into “socially responsible” investments that lost hundreds of millions, and directing parts of its portfolio toward political cronies’ financial interests, skepticism is warranted. Taxpayers deserve to be fully informed about the loans made by the pension fund.
But it appears they’re going to be left on the outside. Assembly Bill 2473, authored by Assemblyman Jim Cooper, would block public disclosure of the “investments’” details.
“Private loan agreements, due diligence materials, borrowers’ financial statements and the borrowers’ collateral” would be exempt under the law, reports Buyouts, as would “the owner of any company that borrows from the pension.”
The bill is scheduled for a Tuesday Senate hearing. It had been on the Labor, Public Employment and Retirement Committee’s agenda last week, but the hearing adjourned before it was brought up.
While taxpayers have a lot to lose should the uncertain enterprise fail to produce the expected 7% returns, government retirees also have plenty at stake. They could be facing a future dependent on a hollowed-out pension fund. The Retired Public Employees Association is concerned CalPERS will become “an unregulated shadow bank,” according to the Assembly’s floor analysis.
“We concede that making ‘private loans’ is a matter within the authority of the CalPERS Board, subject to their state constitutionally-mandated fiduciary duty to the members and beneficiaries,” former prosecutor and Retired Public Employees Association activist David Soares, told PRI.
“However, once a ‘private loan’ becomes an asset held in a public trust, we believe that AB2473 goes too far by hiding the terms of the agreement, the constituent owners of the borrower – who could be a mere ‘shell company’ – and the collateral pledged as security for such a loan. The public has a right to know the nature of assets being held in trust for the members and beneficiaries. There is significant potential for corruption if this information is hidden — and CalPERS has a recent history of corruption, the former CEO being sentenced to 54 months in federal prison as recently as 2016 for defrauding the fund by taking kickbacks.”
Based on current bill language, some of the information “shall be subject to disclosure” – borrower names and addresses, loan dollar amounts, principal and interest payments made to CalPERS – but apparently only through a public records request. But that hasn’t inspired confidence across the CalPERS board. Margaret Brown, the only board member to vote against the private debt plan, said she has “concerns when we start messing with the California public records act. I think it’s a slippery slope and it makes us less transparent, not more transparent.”
“Any entity seeking investment of funds held in trust for the public must be willing to subject themselves to a certain level of scrutiny,” Brown wrote in a letter to Orange County Republican Sen. John Moorlach. “Secret investments of public trust funds are never in the public’s interest.”
The effort to keep the program in the shadows goes back at least as far as the beginning of 2020. The lending business first came up in January at CalPERS’ “first-ever stakeholders’ forum.” Then, roughly a month later, the board voted to sponsor a bill that would allow CalPERS to “to keep certain private debt investment information secret,” Pensions & Investments reported in February.
CalPERS can’t afford another potential scandal while trying to convince the Californians that diving into private debt is a sensible idea, and all is above board. Yet it now has to also deal with the curious loss of Chief Investment Officer Ben Meng, “who led a push” to launch the private loan program, according to the Financial Times. He resigned last week during the Senate hearing in which AB2473 was originally on the agenda. CalPERS’ statement announcing his immediate departure made no reference to the loan program.
State Controller Betty Yee, California’s “independent fiscal watchdog,” suggested that Meng’s resignation might be connected to irregularities in office. She told reporters that she was “incredibly disappointed to hear about the former CIO’s lapse in both judgment and adherence to standard conflict-of-interest policies.”
Brown suggested in her letter to Moorlach that “there should be no action taken on a bill that makes shadow banking of trust funds secret” until there is a thorough investigation into “Meng’s actions and the oversight failures by CalPERS staff and board.”
It’s looking as if Tuesday’s hearing will be a lively affair rather than the mere staid formality it appeared to be last week.
(UPDATE: AB 2473 has now been pulled by its author.)