CalPERS, let's talk about the Emperor's New Clothes...

Being a CalPERS employee for many years now, it's time to talk about its "new clothes."

The objective for CalPERS should be to act with integrity and to look out for the good of its members, right? However, being an employee there for years now and being privy to confidential discussions, I began to see the truth of what is really going on behind closed doors. Maybe it's the Age of Aquarius or maybe it's just for the sake of being a good person but it's time to tell the truth. It's time for the emperor's (CalPERS) new clothes to be exposed.

The truth of the matter is that the problem is multi-faceted and multi-layered. We all know about the Pay-to-Play scandal that rocked CalPERS in 2008 and 2009. But that, along with other many unethical situations continue to happen unbeknownst to the public and will eventually contribute to the downfall of the fund.

Many people who worked at CalPERS their entire working career have stated to me, after they submit their retirement papers, "I hope I don't receive a letter in the mail one day telling me I no longer have a pension." Once you've worked there long enough, you develop a six sense of what's to come. It's happened to other member cities such as the City of Loyalton and the City of Stockton, with their pensions being dramatically reduced or evaporated.

Let's talk about what's going on in the inner workings of CalPERS that makes the pension crisis inevitable. Firstly, CalPERS is not dynamic. Changes to the plan take a lot of time. The market moves swiftly, and CalPERS can't make changes to take advantage of the marketplace fast enough. CalPERS is like the Titanic in that respect.

Quantitative analysis is not being performed appropriately. When the market is overvalued, like it has been for the past few years, CalPERS continues to invest large sums of money into the market. Conversely, Warren Buffett, arguably the best investor of all time, has been sitting on a large sum of cash, $300B as of March, waiting for the markets to correct. Intelligent investors know that you buy when the markets are low, not when they're at their all-time high. This may result in significant losses to members.

Another problem is that the CalPERS Board of Administration is a lay board. They are not investment professionals. They are not qualified to make decisions as to what is right for the fund from an investment perspective.

This is another issue-external consultants and managers. CalPERS and its board are nearly 100% reliant on their external consultants and managers, not only for guidance but to perform their actual work. In the Investment Office, many high-ranking managers who are paid hundreds of thousands of dollars per year just manage consultants, do not perform any actual work.

Next comes fees, CalPERS pays millions and millions of dollars in fees as well as millions of dollars for their employees to manage these consultants. They are essentially paying double for services. Pursuant to standard state practices, CalPERS should be competitively bidding services to ensure they get the best pricing from its consultants and managers. However, CalPERS has created loopholes which allows them to get around this requirement which results in higher fees. Further, government code prohibits external consultants from performing civil servant work. But CalPERS has a loophole for that too.

After the myCalPERS project went millions and millions of dollars over budget, the CalPERS Board required the organization to report all contracts equal to or greater than $1M to be pre-approved by them. Subsequently, for every additional $1M in expenses added to a contract, that also has to be pre-approved before staff can continue the work. This is reported to the Board twice per year at the Finance and Administration Meeting and it a public report. However, Investment Managers will often intentionally break up large multi-million-dollar contracts into smaller agreements so as to circumvent the policy and fly under the radar.

Let me pose a question to you-if you were in debt to the point where you would not be able to pay your basic bills, would it be wise to go on a European vacation? Because that's what CalPERS is doing, metaphorically. Although CalPERS is underfunded, meaning it can't pay its liabilities or pension payments it has promised to its members over the long run, the Executive Team and Board of Administration recently approved another $100M+ of spending on unnecessary technology expenses and consultants. How many member pensions would $100M pay for? A lot.

Why would CalPERS do this? It's non-sensical. Doesn't it make more sense to be prudent in its spending to ensure it can pay its liabilities to its members? Isn't it more important to be able to keep your lights on versus buying the latest and greatest tech gadget? The answer is that these decisions are tied to executive and high-level manager's incentive compensation plans. The successful execution of this $100M of additional technology spending will increase their bonus payout. They're out for themselves, not the members.

Once you've worked at CalPERS for an extended period of time, you start hearing managers say, "Oh it's only $5M, just a drop in the bucket." They take the human element out of the fund. For example, assume the average pension is $50,000 per year. $100M dollars would pay for 100 families' pensions for 20 years. The $100M spent on unnecessary spending may result in 100 families not being able to pay their bills in the future. And that's just one initiative CalPERS is working on in present day. These types of large-scale projects are occurring across the organization consistently. Executives and managers see expenditures just as numbers, they don't recognize them as future members' livelihoods.

CalPERS is right, one of their best commodities should be their human capital. However, CalPERS intentionally hires and promotes unqualified persons to meet their DEI target and objectives. This was especially evident in the last 10 years.

CalPERS utilizes a loophole called Training and Development or "T&D" which allows hires, many of them under the DEI umbrella to bypass minimum qualifications. For example, many people in the Investment Office do not meet the minimum qualifications for an entry level Investment Officer I position which requires a candidate to have a bachelor's degree in a related field (e.g., business, economics, accounting, finance, etc.) and work experience in the industry or an MBA (which normally requires six years of study). There are many high-level investment officers and investment managers who do not meet the minimum standard requirements because they took advantage of this loophole.

A T&D essentially states that if you work in the Investment Office for six months, CalPERS deems it the equivalent of having an MBA or a four-year degree in a related field with relevant industry work experience. Does that make sense? If I worked in a doctor's office for six months, should that allow me to bypass going to medical school or passing the medical boards for becoming a doctor? (As a reminder, many positions in the CalPERS Investment Office pay more than what a doctor makes.) There should be minimum qualifications in place for a reason-to ensure qualified professionals are managing the fund appropriately and effectively. However, again, CalPERS has found loopholes to bypass this.

CalPERS now has many hires with degrees in communications or fashion design who are managing the fund. This is not a joke. These hires are often chosen over persons who truly do have MBAs, CFAs, CPAs, etc. with a plethora of experience.

Further, in or around 2017, staff were told there was a directive to only promote women, regardless of experience and education. Therefore, a large number of women, mostly with administrative backgrounds, were handed Investment Manager positions. Many of the most qualified persons are often pushed out of CalPERS, leaving to work in the private sector because CalPERS won't promote them beyond entry level. This is not an attack on women or minorities. I've personally seen an Indian woman with a PhD in Finance be denied a promotion beyond entry level while promotions are being given to other candidates with little to no education or experience. Those hires then needed to hire consultants for millions of dollars to perform their work because they don't meet the most basic of requirements. Luckily, that woman with the PhD eventually left CalPERS to manage a Sovereign Wealth Fund in New York. The most qualified persons leave CalPERS for other funds. This is how CalPERS loses its talent.

In the private sector, if you have an Investment Manager who consistently under performs the market, they do not keep their job. The manager has to prove their skills and provide alpha (or excess return beyond its benchmark) to the fund. At CalPERS, it doesn't matter if management or the executive team even meets its benchmark or creates investment losses, they're not going to get fired. They don't have to prove themselves. There is little incentive to work hard at CalPERS.

In my experience at CalPERS, I have been told directly by professionals who come to CalPERS from the private sector, that CalPERS is not in line with the industry. One Executive in particular told me that CalPERS is "50 years behind." This is true. It also becomes evident quickly to those coming from the private sector, that staff members at CalPERS are not qualified and lack basic understanding of the financial markets.

Another point of contention is that staff often intentionally utilizes race or gender to obtain a promotion regardless of qualifications. One employee in particular claimed racism in order to garner a promotion to an Investment Manager position after she was denied twice. This was a staff member who did not have any investment qualifications or experience in the financial markets. Due to the political climate at CalPERS, the Executive Team acquiesced to her demands, fearing a lawsuit. That manager was found guilty of many policy violations, but CalPERS won't fire her because they're scared.

This also has a trickledown effect-managers who are hired via the T&D program often hire other team members through T&D also. That is because these managers know they're not qualified and often become insecure. In one unit in particular, an Investment Manager who was hired through the T&D program terminated nearly every staff member on her team who had a master's degree and replaced them with her personal friends through the T&D program, all with only administrative backgrounds. Once the team members spoke up about the injustice, they were terminated or intentionally failed on probation to shut them up. Human Resources supported the firings. In fact, many people from Human Resources use the T&D to garner themselves Investment Officer and Investment Management positions.

As many people have stated to me over the years, "CalPERS is backwards" and that's true.

CalPERS is operating similar to a Ponzi or pyramid scheme with each person hiring their friends and family members, most of whom are not qualified. The objective is for these people to get as much money as possible from the fund. Their focus is not safeguarding the assets. We've seen this behavior from multiple high-ranking team members at CalPERS. As an example, the former CIO onboarded her friends to high level positions including Deputy Chief Investment Officer and Managing Investment Director positions before she left.

Further, high level managers continue to get wined and dined by consultants, to then turn around and do business deals with them. How can this be, you say? I thought CalPERS put guardrails in place to protect the fund after the Pay-to-Play Scandal? Yes, that's true, they did enact policies, procedures, and regulations in place. However, the problem lies in the enforcement of these policies, procedures, and regulations. CalPERS staff and even staff attorneys have reported violations of these policies, regulations, and procedures to the Executive Team. However, they did nothing, and they allowed these things to happen. What's worse, the whistleblowers got reprimanded including one losing their job. Is it a coincidence that the same week the whistleblower was fired, General Counsel announced his departure? There's no such thing as coincidence.

At the present moment, and how it's been for years, CalPERS attracts corruption at all levels. Many people are not qualified for their positions. They have no incentive to work hard. They have used DEI initiatives and T&D loopholes to garner positions they are not qualified to perform. CalPERS also allows these staff members to spend millions and millions of dollars on consultants instead of performing actual work, some taking advantage of their exempt status and only working two hours per day. CalPERS members are paying for this mismanagement with their future pensions.

Additionally, Executives and Managers have an incentive to spend millions of dollars on unnecessary expenses and to continue to invest funds even when the market is at its highest because it's tied to their bonus. CalPERS is aware that all of this is happening. They're aware that there may come a day when members get a letter in the mail stating, "Sorry, we can't pay your pension anymore, here's a small severance." However, those people at the top won't be there and members will be ones holding the bag. Similar to The Grimm's tale of the Emperor's New Clothes, CalPERS is the emperor and it's trying to trick the public into believing it's wearing new clothes when in reality they're naked underneath, hoping people don't find out.