The nation’s two largest pension funds, the California Public Employees’ Retirement System and the California State Teachers’ Retirement System, have been plagued by myriad fiscal problems and even a corruption scandal in the case of CalPERS, and yet these systems continue to lecture the private sector on ethical corporate governance. The latest nonsense, released recently, is a project funded by the two systems to promote “diversity” in board rooms.
The two funds launched something called the Diverse Director DataSource (3D), which is designed to help companies find “untapped talent to serve on corporate boards,” according to a statement from the pension funds. It’s meant to be voluntary, but make no mistake about the political and investment muscle these two funds wield. As the Wall Street Journal reported, many Wall Street sources believe this really is a mechanism by which the investment funds can select board members and exert more political control over corporations.
“This is a milestone in the development of 3D,” Anne Simpson, CalPERS senior portfolio manager, said in a statement. “3D is an innovative resource that opens the door to finding candidates whose fresh ideas and new perspectives can help companies generate lasting, sustainable value and provide a check against the kind of ‘group think’ that played a significant role in the financial crisis.”
Talk about chutzpah. CalPERS and CalSTRS are masters of group think, and these organizations have been front and center in some of the dubious investments at the heart of the financial scandal.
CalPERS officials made some wacky investment bets – i.e., homebuilding projects using borrowed funds at the height of the housing bubble – and CalSTRS officials “rolled the dice” on risky investments to make up for a growing shortfall and ended up with an even bigger problem, according to published reports. These are the two largest pension funds, and they are poster children for the financial crisis they now claim to be addressing through this exercise in political correctness.
Despite the talk about improving financial performance and providing new, diverse ideas on corporate boards, this project seems to be mostly about affirmative action in the nation’s boardrooms. This isn’t about diverse ideas – something one rarely finds from the union-dominated, taxpayer-backed pension funds – but about putting as many liberal activists on corporate boards as possible.
This is about two public-sector organizations using their immense financial clout to meddle in the governance structure of whatever remains of this nation’s private sector. The public-sector unions have created havoc in the world of government, as unfunded retirement promises are leading to higher taxes and reduced services. Now they want to take their “expertise” and apply it to the nation’s already hobbled, regulated and often-subsidized private sector.
For fun, I looked online at the boards of directors of CalPERS and CalSTRS. These organizations don’t live up to the standards they are foisting on everyone else, in terms of ethnic diversity or diversity of worldview.
CalPERS lists 13 board members (including ex-officio members). I count 10 older white guys, one older black guy, a woman and the elected state controller, John Chiang, who is of Chinese descent. More significant, every one of these board members is a public employee, a retired public employee, a “private” contractor who works for public employees or an elected official.
The CalSTRS board is dominated by white women and, for obvious reasons, all members are public employees. These are two of the least-diverse groups imaginable.
Officials from the board reminded me that these government boards’ make up is determined by statute. But so what? They shouldn’t be lecturing others or trying to hand-pick directors for companies.
Hypocrisy is nothing new when it comes to these funds. For instance, CalPERS bases its investment predictions on an optimistic 7.75 percent assumed rate of return (the higher the rate, the more money expected in the system and the lower the predicted debt), but when it has to use its own money to buy out localities that want to take their funds elsewhere, it uses a Scrooge-like rate – one that is even below the rate suggested by a pension-reform-oriented Stanford study CalPERS still maligns.
Both pension funds are awash in unfunded liabilities – the massive taxpayer-backed debt, estimated at up to a half-trillion dollars in California alone, that is quashing public budgets and imposing burdens on future generations. The pension funds used their political clout over the years to hide the problems.
Their own investment decisions have oftentimes been troubling. This is from Bloomberg news service: “CalPERS made a series
of disastrous bets on real estate after letting its internal risk controls break down and ceding too much control to outside investment advisers during the housing bubble. … On top of the fiscal mess, CalPERS is also caught up in a corruption scandal involving middlemen who help money managers win investing assignments from pension funds.”
Regarding former CalPERS CEO Fred Buenrostro, the San Francisco Chronicle reported: “While running the nation’s largest pension fund for six years, until 2008, he was having his wedding paid for by a placement agent, getting free chips at a Las Vegas casino, allegedly forging documents and pressing investment staff ‘to pursue particular investments without evident regard for their financial merits.’ But with much regard to what his staff called ‘friends of Fred.'”
CalSTRS has debt issues but hasn’t faced the same ethical scandals as CalPERS. Nevertheless, as the corruption scandal unfolded at CalPERS, the entire CalSTRS investment staff sent a letter of support to their colleagues at CalPERS.
So we see that CalPERS and CalSTRS are, indeed, diverse organizations – groups with diverse views about basic ethical and management issues. The diversity push isn’t the only recent episode of ethically challenged pension funds ignoring their own problems and lecturing others. An article in California Watch is headlined, “Buffeted by scandal itself, CalPERS denounces News Corp.”
The real scandal is that these pension funds are backed by taxpayers, who will pick up the pieces for such greed and political correctness.
Editor’s note: This op-ed was originally published in The Orange County Register.