Cyber Insecurity - Part 2

We noted Wednesday that UCLA had suffered a cyber attack and data breach. All UCLA would say is that those people affected had been notified. It gave no indication of how many such people there are or exactly what data regarding those people had been exposed.

As it turns out, the same breach has affected CalPERS and CalSTRS. From the Sacramento Bee we learn that the breach involved such things as Social Security numbers and other personal information:

California State Treasurer Fiona Ma urged the chief executive officers of the nation’s two largest public pension funds to hold special board meetings on a recent data breach that exposed Social Security numbers, birth dates and other personal information on nearly 1.2 million retirees and other beneficiaries. Ma sits on the board of both pension funds: the California Public Employees Retirement System and the California State Teachers’ Retirement System. “While it appears that member retirement benefits are not at risk, those affected may ... now be especially vulnerable to identity theft and other fraudulent activity,” Ma said...

Full story at https://www.sacbee.com/news/politics-government/capitol-alert/article276811231.html.

Maybe UCLA needs to say something more about the magnitude of the breach. Are those affected being given free data monitoring?

Rumor Mill: Finding Fault With the RASC

As we have noted in the past, there have been problems with the UC Retirement Administration Service Center (RASC) for some time.* New retirees and spouses of deceased UC employees and retirees have trouble reaching the RASC, getting service from the RASC, etc. Delays in receipt of benefits, cutoffs of health insurance, and so on, have been reported. And various efforts have been made to fix the problem - which seems ultimately to stem from a decision to centralize case processing (taking it away from the campuses) and link it to a balky computer system.

A rumor has reached yours truly that the RASC topic was going to be discussed at the upcoming March meetings of the Regents, but has been delayed until the May meetings. How did it get on the agenda? Maybe some regent received a lot of complaints. It's not known. (It's very unlikely that UCOP would put it on the agenda since UCOP is in charge of the RASC.) Why was the topic delayed until May? Also, not known. How reliable is this rumor? Not known either.

If the topic does come before the Regents, a modest suggestion from yours truly would be for someone to take a look at case processing for the much larger CalPERS and CalSTRS systems. If they can do it without major problems, UC should be able to do it.

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*https://uclafacultyassociation.blogspot.com/2023/01/thinking-about-retiring-or-already.html.

Don't Respond

I hope I don't have to tell you not to respond to this text message, if you got it, not least because it refers to CalSTRS rather than UCRS. 

No Oil - Part 2

Follow-up: In an earlier post this month, we noted that oil-related investments were removed from the various UC-operated savings plans.* CalPERS and CalSTRS, meanwhile, seem to have fought off a legislative attempt to order them to drop oil-related investments. (They have very small oil-related investments compared with their overall portfolios, mostly through index funds which they hold.) From the Sacramento Bee:

A bill that would have forced California’s public pension systems to sell their oil and gas holdings has been dropped from a state Assembly committee agenda for Wednesday, signaling that it won’t move forward this year. Senate Bill 1173, introduced earlier this year by Senator Lena Gonzalez, D-Long Beach, would have required the Public Employees’ Retirement System (CalPERS) and the State Teachers’ Retirement System (CalSTRS) to sell a combined $11.5 billion worth of publicly traded securities by 2030. The bill cleared the state Senate at the end of May on a 21-10 vote with nine abstentions, but was pulled Monday from a Wednesday hearing in the Assembly Committee on Public Employment and Retirement, which is chaired by Assemblyman Jim Cooper, D-Elk Grove. Cooper’s office didn’t immediately return a call Tuesday...

Full story at https://www.sacbee.com/news/politics-government/the-state-worker/article262741417.html.

The bill in question included a provision protecting members of the boards of the two funds from lawsuits if it turned out that such divestment harmed the funds.* The bill did not refer to UCRP, presumably because of the assertion that UCRP has already divested and because of the constitutional autonomy of the Regents.

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*http://uclafacultyassociation.blogspot.com/2022/06/no-oil.html. See section 2 for the protection provisions.

Delete It!

If you got one of these emails, I hope you read the fine print and noted that anyone who thinks UCLA is part of CalSTRS probably would not be a good pension advisor. My advice: delete.

COLA for CalSTRS is a Reminder for UCRP and the Regents

CalSTRS, the state pension plan for school teachers, has a system in place to deal with the impact of high inflation on pensioners. It normally provides a 2% COLA (cost of living adjustment) which "works" OK when inflation is in that range to maintain purchasing power. But it also has a system in place to deal with the impact of higher inflation, basically by limiting the erosion of purchasing power so that pensions don't fall below 80-85% of their real starting value.

There is relevance in the CalSTRS approach for the UC pension plan which I will explain below. But first, note the item below from the Sacramento Bee:

THE STATE WORKER 

Retired California teachers could receive checks to help cover inflation costs 

Wes Venteicher, 6-1-22

About 55,000 retired teachers would receive new payments to supplement their pensions under a proposal moving through the California State Legislature. Aimed at offsetting inflation, Senate Bill 868 would provide quarterly payments to teachers who retired before 1999. The proposal would deliver increases of 5% to 15% of their pensions depending on retirement year, with those who retired before 1980 eligible for the biggest bumps, according to a summary prepared by the California State Teachers’ Retirement System. The CalSTRS board supported the proposal early this year. The legislation cleared the state Senate last week. It requires approval from the Assembly and Gov. Gavin Newsom to become law. 

The new benefit would cost about $592 million, according to CalSTRS. The money would come from an account established in 1989 to help retired teachers cope with inflation. The account, which is separate from the system’s $318 billion investment fund, is supported by the state’s general fund, revenue from leased school lands and payments related to federal land grants to California schools. The proposal, introduced by Sen. Dave Cortese, D-San Jose, would provide additional payments on top of two other inflation-based CalSTRS benefits. 

The retirement system provides a 2% increase to all retirees and beneficiaries each year. The increase is not compounded. Rather, the system increases retirees’ payments each year by an increment equal to 2% of what they received upon retirement. Additionally, the system tracks how retirees’ pensions are affected by inflation. When inflation shrinks the “purchasing power” of a pension below a certain floor — 80% to 85%, as set by the CalSTRS board — a retiree or beneficiary becomes eligible for supplementary payments. Those supplements restore purchasing power to between 80% and 85% of what it was originally.

Cortese’s bill would provide additional payments from the same account to teachers who retired before 1999, bringing their purchasing power closer to 100%. Retirees would receive quarterly checks starting July 1, 2023 that would increase their benefits by average amounts ranging from about $1,860 per year to about $3,768 annually, according to CalSTRS. 

The account that would fund the payments is called the Supplemental Benefit Maintenance Account. It’s meant to supply supplemental benefits through 2089, and has about $11.9 billion more than estimates say it will need, according to CalSTRS. Cortese’s proposal would reduce the surplus to about $11.3 billion. 

The surplus is due to lower-than-expected inflation in recent years, CalSTRS spokeswoman Rebecca Forée said in an email. Supplemental benefits are not guaranteed for retirees. If inflation surges well above the assumed annual rate of 2.75% for many years, the fund could run out of money early, according to CalSTRS. Inflation, as measured in federal indexes, rose 4.4% in the fiscal year ending June 30, 2021, according to CalSTRS, and is on pace to exceed 4% for the year ending later this month.

Source: https://www.sacbee.com/news/politics-government/the-state-worker/article262049272.html. 

In contrast to CalSTRS, the UC pension plan does not have a formal guarantee of maintaining 80-85% of starting purchasing power. Its formal COLA arrangement is more protective against inflation than CalSTRS' system, but it only partially compensates for inflation above 2%. The partial protection means that some long-time pensioners eventually have their starting purchasing power fall below 80-85%. In the past, when there was high inflation, the Regents had a periodic "practice" (not a formal obligation) of protecting pensioners from falling below 80-85% by making periodic ad hoc adjustments in the pensions of those below that level. In effect, the Regents would voluntarily do what CalSTRS automatically does.

Inflation has picked up in the past year. The latest UCLA Anderson forecast (which we will discuss in a separate post) indicates that the Consumer Price Index won't get back to a 2%-ish level until 2024. Thus, in response, past practice of the Regents would be to restore those pensioners who have fallen below 80-85% of purchasing power - there won't be many at this point - to that level. However, no such discussion at the Regents has taken place. 

There are now new Regents who were appointed in the era of low inflation who probably know nothing of the past practice. The fact that there is discussion in the legislature with regard to having CalSTRS go BEYOND the 80-85% guarantee and go all the way to 100% - as the article above shows - would be a good starting point for a discussion of the 80-85% practice for UCRP.

Watch the Regents' Investments Committee Session of 5-17-2022

The Regents meetings this week began on Tuesday with a meeting of the Investments Committee. The meeting opened with public comments on UC admissions standards and the dropping of the SAT, state vs. out-of-state UC admissions, electrifying UC campuses in response to global warming, the Hawaiian telescope, textbook costs, the UC-San Francisco Parnassus project, and labor issues. Four students (3 in-person; one by phone) complained of antisemitic incidents at UC-Davis and UC-Irvine. Apart from the general link below in which they are embedded, we provide a separate link to those four comments.

As for the actual subject of the day, investment returns, there was nothing unexpected. In a prior blog post, we noted that returns to the pension were negative in the first nine months of the current fiscal year ending March 31, thanks to the sinking stock market. We also noted that in our prior post that there would be gloomy results in the period after March 31 - and there were.* No one seemed particularly upset. However, such results - which inevitably will be mirrored at the larger CalPERS and CalSTRS pension funds, are likely to revive talk about underfunded public pensions.

There was some discussion as to why UC assets can't be used to finance UC campus building projects. It was said that such use would save money but that there were legal hurdles raised whenever the subject arose. It was decided to have a presentation on what those hurdles were at some future meeting.

As always, we preserve Regents meetings indefinitely since the Regents, for reasons unknown, delete them after one year. Links to the session are below:

Full session: https://archive.org/details/regents-investments-5-17-22.

Four incidents: https://archive.org/details/regents-investments-5-17-22/4+comments+UC+regents+5-17-2022.mp4.

Full meeting: https://archive.org/details/regents-investments-5-17-22/regents+investments+5-17-22.mp4.

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*http://uclafacultyassociation.blogspot.com/2022/05/pension-finance.html.

Spillover from CalPERS

UC's pension fund is large by any standard. It had almost $90 billion in assets as of March 31. But it is dwarfed by CalPERS, the huge state pension fund that covers most state employees apart from UC employees, and many local employees. When the public thinks of government pensions, it thinks of CalPERS (and CalSTRS).

CalPERS continually makes headlines because of management problems, outright misconduct, and scandals. Such events tend to drive changes in state pension policy. Sadly, the headlines are continuing, to the indirect detriment of UC's pension system. See below:

THE STATE WORKER of Sacramento Bee 

CalPERS board violated open meetings law, judge rules. Ex-board member wants more information 

Wes Venteicher, 5-9-22

The CalPERS Board of Administration violated California’s open meetings law when it excluded the public from a discussion two years ago related to the exit of its former investment chief, a judge ruled last week. The retirement system’s board held a closed-session meeting in August 2020 after the sudden resignation of former Chief Investment Officer Ben Meng. Meng quit after someone filed a conflict-of-interest complaint over his personal investments in Blackstone, a private equity firm in which the pension fund also was invested. A notice published by the board said the meeting, held 12 days after Meng’s resignation, was closed so board members could discuss a “chief executive officer’s briefing on performance, employment, and personnel items.” 

J.J. Jelincic, a former CalPERS board member, requested a transcript of the meeting and other CalPERS records through the state’s Public Records Act. CalPERS denied his requests, and Jelincic sued in March 2021, saying the pension system had improperly closed the meeting and withheld records. Alameda County Superior Court Judge Michael Markman issued a final judgment in the case Tuesday, after determining nearly everything discussed in the meeting should have been held in open session, with the exception of some comments made by Matt Jacobs, the retirement system’s chief counsel. 

Judge Markman ordered the retirement system to provide the transcript to Jelincic but allowed redactions of Jacobs’ comments. On Wednesday, Jelincic appealed to the First Appellate District Court of Appeal, asking the higher court to remove the redactions. “PERS has become more and more secretive, and is frequently doing policy discussions in closed session,” Jelincic said. “Quite frankly, the beneficiaries are entitled to know what the hell their trustees and fiduciaries are doing, and they should understand why they’re making the decisions they did.” CalPERS spokesman Brad Pacheco said in an email that the system appreciates and respects the court’s decision and “will factor it into our decisions about future meetings.” 

Markman also denied Jelincic’s request for other records, including additional information related to a CalPERS audit that showed the system — recently valued at about $454 billion — had overestimated the value of some of its assets by about $583 million in fiscal year 2018-2019. Jelincic did not appeal that portion of the ruling. 

MEETING TRANSCRIPT 

In the course of the lawsuit, CalPERS submitted the transcript of the Aug. 17, 2020 meeting to the court for review. In an apparent mistake, the transcript — with redactions — was posted in a publicly visible way to the court’s online document system in August 2021. Naked Capitalism, a blog that covers CalPERS, posted the transcript online. The transcript shows the 13 members of the CalPERS board and at least six employees attended the meeting. They discussed CalPERS’ investigation into what happened with Meng, how to strengthen the system’s conflict-of-interest protections and the possibility that Meng might take legal action, among other matters. 

The potential for legal action from Meng was central to Judge Markman’s decision to uphold CalPERS’ redactions of Jacobs’ comments in the transcript. Jacobs’ comments took up about 27 of the transcript’s 167 pages. Markman determined CalPERS properly redacted Jacobs’ comments under a section of the California Public Records act that allows agencies to withhold information if they determine the public interest in withholding the information outweighs the public interest in disclosing it. “The discussion itself is the sort that would be privileged and would be properly discussed in a closed session,” Markman wrote. 

Judge Markman didn’t view the redacted portions himself, according to Jelincic’s appeal. The appeal argues a court must review the redacted portions before determining they should be withheld. The appeal also takes issue with withholding documents in anticipation of legal action, arguing the law’s exemption for discussing legal strategy is not that broad. In February of this year, CalPERS announced it was hiring Nicole Musicco, who most recently worked at New York private investment firm RedBird Capital Partners, as a permanent replacement for Meng. Deputy chief investment officer Dan Bienvenue filled the job in the time between Meng’s departure and Musicco’s hire.

Source: https://www.sacbee.com/news/politics-government/the-state-worker/article261195657.html.

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THE STATE WORKER of Sacramento Bee

CalPERS audit found widespread violation of laws meant to curb pension ‘double-dipping’ 

Wes Venteicher, 5-10-22

A CalPERS proposal to limit how many years retirees may work for public agencies while continuing to receive a pension has its origins in a 2019 audit that identified widespread violations of state retirement laws. The retirement system found violations in the use of retired annuitants at 72% of the 61 local government agencies it audited, according to a copy of the audit CalPERS provided in response to a Public Records Act request. Two dozen of the agencies didn’t report retired annuitant hires to CalPERS from summer 2014 through summer 2017, according to the audit. 

At 32 agencies, retirees worked more than 960 hours per year, the limit for working at a CalPERS agency in retirement, the audit showed. Retired annuitants who exceeded the 960-hour limit have had to return parts of their pension payments. And the system has taken action to prevent new violations, including automatically monitoring their hours, spokeswoman Amy Morgan said in an email. 

The audit also noted 39 agencies that employed retired annuitants for “several years.” That suggested the agencies were running afoul of the law’s requirement that such workers only be used in “limited duration” appointments, such as for emergencies. CalPERS is crafting new rules that would limit retired annuitant appointments to two years in most cases, with possibilities for extension. 

CalPERS executives have referenced the 2019 audit as they hashed out specifics of the proposal in meetings. Public agencies often hire retirees with specialized skills and knowledge to help on a short-term basis with projects like long-running lawsuits or work on highly technical state equipment, such as water infrastructure. But the arrangements have been exploited over the years by “double-dipping” former public employees who retired as early as age 50 and returned to their former agency at similar pay for similar work while collecting a pension. Lawmakers have attempted to rein in the abuse by limiting the hours per year retirees may work for CalPERS agencies, prohibiting an immediate return to work and restricting what retirees may do and what they are paid. The restrictions don’t apply to private-sector work or agencies that aren’t part of CalPERS. The 2019 audit, while covering only a fraction of the 2,900 agencies for which CalPERS provides retirement benefits, suggests many were slow to comply with laws regulating the use of retirees. 

RETIRED ANNUITANT VIOLATIONS 

Many of the agencies with violations told CalPERS they were unaware they had to report hours, or that specific employees had been retired. Some said they didn’t know they had retired employees who worked more than 960 hours annually. When agencies don’t report hours, CalPERS can’t track compliance with the 960-hour rule, according to the audit. The City and County of San Francisco failed to enroll six retired annuitants in the CalPERS system during the three-year audit period, according to the report. 

Auditors found a retiree who worked 1,016 hours in fiscal year 2014-2015, then left and was rehired as a full-time employee in another division of the agency. No one notified CalPERS, and the retiree went on to work for a total of 1,828 hours in the following fiscal year while remaining retired in CalPERS’ system. The employee worked similar hours the next two years. The division that hired the retiree was “unaware” of their status, according to the audit. The agency hadn’t checked with CalPERS since the City and County of San Francisco started enrolling new employees in the San Francisco Employees’ Retirement System in 2012, according to the audit. Four of the retirees worked for “several years,” suggesting the agency might be violating the law’s “limited duration” restriction according to the audit. It doesn’t say how many years the retired annuitants worked for the county. 

When The Bee asked San Francisco’s Office of the City Administrator about the audit last week, the office referred the request to the San Francisco Employees’ Retirement System. The retirement system said in an email that it didn’t have any information about CalPERS retirees. Monterey County did not enroll and report hours for nine retired annuitants in the audit period, according to the audit. Two other retired annuitants worked more than 960 hours per year, according to the audit. The agency told auditors it had misclassified some of the retirees as temporary employees and attributed the extra hours for the two properly classified retired annuitants to other mistakes. Additionally, three retired annuitants worked for “several years,” auditors found. A Monterey County spokesman did not respond to questions about the audit.

AUTOMATIC TRACKING 

Morgan, the CalPERS spokeswoman, said each of the audit findings has been “resolved,” but that auditors have not followed up at the agencies. “However, with our increased compliance and system-triggered monitoring we have more monitoring in place now than when this audit was originally conducted,” Morgan said in an email. The system now automatically tracks retired annuitants’ hours and their start dates, and investigates complaints brought through an ethics hotline, she said. In 2018, a new law took effect that fines employers if they don’t report retired annuitants’ hours, she said. CalPERS has also increased communication with employers and employees before and during retired annuitant appointments, including automated warnings to those who reach 600 and 700 hours, she said. “We have seen a significant increase in communication with employers and retirees to ensure post-retirement employment is in compliance,” she said.

Source: https://www.sacbee.com/news/politics-government/the-state-worker/article261281677.html.

What Did the Governor Actually Say?

He must be saying something.

In a previous post, we noted that the Sacramento Bee was reporting that the governor wanted CalPERS, CalSTRS, and UCRP to sell all their Russian assets due to the Ukraine invasion.* We noted that there may not be buyers for some types of assets and in other cases selling would occur at fire sale prices, not in keeping with the fiduciary duties of the plans.

Another version of the story, however, by LA Times columnist George Skelton has the governor calling for the plans just not to buy new Russian assets, which they would be unlikely to do, given the risks entailed.**

Whatever he may have said, it was surely more thoughtful than the LA Times Editorial Board which - while recognizing the no-buyer/fire-sale problem, says sell everything anyway because it is confident someone can figure out how to do it.***

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*http://uclafacultyassociation.blogspot.com/2022/03/newsom-calls-on-ca-pension-funds.html.

**https://www.latimes.com/california/story/2022-03-03/skelton-newsom-call-state-sanctions-against-russia. 

***https://www.latimes.com/opinion/story/2022-03-03/editorial-california-should-cut-its-economic-ties-with-russia.

Newsom calls on CA pension funds - including UC's - to sell more than $1.5 billion in Russia holdings

Where's the buyer?

From the Sacramento Bee: Gov. Gavin Newsom called on leaders of California’s public pension systems on Tuesday to sell their investments in Russia. The state’s Public Employees’ Retirement System and State Teachers’ Retirement System, along with the University of California Retirement Retirement Plan, have investments funds worth a combined $970 billion. They together hold more than $1.5 billion in investments in Russian stocks, private equity holdings, real estate, debt and other investments, Newsom said in a letter to the three chairpersons of the pension systems’ boards of directors.

CalPERS board President Theresa Taylor said... that while she was “personally appalled at Russia’s actions,” sanctions prevented the immediate sale of the system’s public assets in Russia, adding the system’s directors would have to weigh the affordability of getting rid of its private assets in the country

Newsom asked the three chairpersons to advise him of the steps they’re taking within 10 days...

Full story at https://www.sacbee.com/news/politics-government/the-state-worker/article258928008.html.

There may be significant problems and losses entailed in selling off Russian assets in a fire sale mode. Where are the quick buyers? It will be interesting to see what is said about this demand from the governor at the next meeting of the investments committee of the Regents about two weeks from now. Note that the Board of Regents - which includes the governor as an ex officio Regent - has a fiduciary duty to the fund.

Another CalPERS Scandal Coming at the Wrong Time

From the Sacramento Bee: Retired police officer Steve Landi complained to the California Public Employees’ Retirement System back in 2016 that his police chief was working full-time earning thousands a month while illegally collecting retirement benefits. A CalPERS audit team finally arrived in May 2021. Last month, it said that, sure enough, Landi’s boss, Broodmoor Police Chief David Parenti was one of three police chiefs and a top commander in the department that defrauded the pension system for a decade, together collecting as much as $2 million. It was one of the largest abuses of retirement benefits in years — so egregious that the local district attorney is considering criminal charges.

It also raises a question for Landi as well as Parenti’s two successors: Why did it take CalPERS so long to figure it out and take action? “They were lining their pockets for years,” said Landi, who joined the department in 2015 after retiring from the San Francisco Police Department. “It’s corruption at its finest.” 

CalPERS is a retirement system like no other in the U.S. It covers state employees but also the workers at some 3,000 municipalities, school districts, authorities and other governmental entities. More than 650,000 retirees and another 1 million or so current employees are covered by CalPERS. 

A FAILURE TO COMMUNICATE 

Broadmoor was under scrutiny by CalPERS for failing to enroll some officers in the pension fund at the time, but not for the chief’s double dipping. That suggests to former insiders such as J.J. Jelinic that the CalPERS division that monitors employee enrollment issues has little coordination with another unit assigned to examine double-dipping and other violations of state retirement law. “The right hand doesn’t know know what the left is doing,” said Jelinic, a former CalPERS investment staffer and board member...

Full story at: https://www.sacbee.com/article257232847.html.

You could ask what relevance this CalPERS scandal has to UC, which is not part of CalPERS and which has its own separate pension system. The problem is that CalPERS - which has a propensity for bad management and scandals - tends to tar public pension systems, including UC's, more generally. Recent adverse moves in the stock market suggest that all pension plans will be showing poor results unless the market quickly recovers. Issues of pension finance and unfunded liabilities will come to the fore again. UC tends to be caught up in the political problems of CalPERS (and CalSTRS), even though it is totally separate and doesn't have a history of scandals and bad management. That's the relevance.

Hey Guv! How about a billion for UCRP?

CalPERS - which covers CSU employees and many others - is due for an infusion of funding under Gov. Newsom's new budget plan. So is CalSTRS. But UCRP? Nothing there.

From the Sacramento Bee:

The State Worker

California would kick in CalPERS debt payments ahead of schedule under Newsom proposal

Wes Venteicher, 1-11-22 

California will whittle down its long-term debt in the fiscal year ahead with a supplemental pension payment of $3.5 billion, according to Gov. Gavin Newsom’s budget proposal. The state will pay the money to the California Public Employees’ Retirement System on top of a regular $8.4 billion payment toward the pensions of state workers and retirees, according to the proposal. Newsom highlighted the pension payments in a Monday press conference on his estimated $286.4 billion budget proposal for the fiscal year that starts July 1. 

The supplemental payment of $3.5 billion toward pension liabilities will save the state at least $7 billion over the next three decades, according to the budget proposal. Riding a stock market boom, CalPERS earned enough money on its investments in the last fiscal year to significantly improve its long-term fiscal position. As of July, the system had about 80% of the money it would need to cover all its long-term debts, up from 71% a year earlier. 

The retirement system, with an investment fund valued at $493 billion as of last week, charges the state and other public employers each year under a plan to pay down its liabilities and reach full funding by the mid-2040s. The state has been supplementing its payments over the last four years under provisions of Proposition 2, the 2014 ballot initiative backed by former Gov. Jerry Brown. The measure requires the state to dedicate money each year toward its debts and to a rainy day fund. The state has made $12.7 billion in supplemental payments to CalPERS and CalSTRS over the last four years, and would pay roughly $6 billion more to CalPERS through fiscal year 2025-2026 under current projections, according to the budget proposal. 

California will pay $3.7 billion to the California State Teachers’ Retirement System in the next fiscal year, according to the proposal. But at CalSTRS, which also reported a big investment return for the year ending in July, the return means California state government’s obligations toward the system’s unfunded liabilities could be eliminated in three years, much earlier than the previous target date of 2046. Schools are still projected to continue making contributions to the pension debt through 2046. CalSTRS, valued at $320 billion as of November, expects to reach 80% funding in 10 years and 100% funding in 2041, five years ahead of schedule, according to information presented at a November board meeting. 

Nonetheless, big losses in future years could send the numbers in the wrong direction, driving up state debts. “We are far removed from the public pension quicksand,” said Sen. Steve Glazer, D-Orinda. He said the pension debts are so significant the state should consider setting up a separate pension savings account while it’s benefiting from budget surpluses running in the tens of billions of dollars. Newsom’s office anticipates a $45.7 billion surplus in the next budget year following an $80 billion surplus in the current budget. Glazer has supported Newsom’s proposals to pay pension debt ahead of schedule.

 “Public employees have earned the right to a pension and we have to honestly and fully own that mutual commitment,” he said.

Source: https://www.sacbee.com/news/politics-government/the-state-worker/article257203302.html.

Pension Sustainability

The Brookings Institution - a Washington, DC thinktank - has long published a journal, Brookings Papers on Economic Activity. Papers for the journal are first presented in the conference by the authors with discussants. The eventual result is later published. One panel today (via Zoom) dealt with the sustainability of public pensions. The authors of the paper for that panel simulated various scenarios of a sample of public pension plans including UCRP.* (Plans included are listed on Table 2 of the paper.) The authors - among other things - consider whether the plans run out of assets in their trust funds and when. UCRP essentially doesn't run out of assets in any foreseeable scenario. Under some scenarios, the UCRP trust fund runs out in 50+ years. This result is in contrast with CalSTRS, another California plan in the sample, which has more problems.

Basically, the critiques of the paper provided by the discussants was that risk and volatility were not adequately reflected in the paper.

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*Jamie Lenney, Bank of England; Byron Lutz, Federal Reserve Board of Governors; Finn Schüle, Brown University; and Louise Sheiner, Brookings Institution, "The Sustainability of State and Local Government Pensions: A Public Finance Approach," https://www.brookings.edu/wp-content/uploads/2021/03/BPEASP21_Lenney-et-al_conf-draft_updated_3.24.21.pdf. A summary is at https://www.brookings.edu/bpea-articles/the-sustainability-of-state-and-local-government-pensions-a-public-finance-approach/. The discussants were Deborah Lucas, Massachusetts Institute of Technology; and Josh Rauh, Stanford Graduate School of Business.

UCRS is Rosencrantz & Guildenstern to CalPERS - Part 2

Back in September, we noted that UCRP and CalPERS are administered very differently.* CalPERS has had too-frequent outright scandals and a continuing undercurrent of administrative turmoil. Yet, although UCRP is one of the largest pension funds in the U.S. and does not have a history of scandal and turmoil, it tends to be eclipsed by the much larger CalPERS and CalSTRS. California public pension policy is largely driven by concerns about the two larger funds, especially CalPERS. UC is then swept along by currents not of its making, like Rosencrantz and Guildenstern.

The most recent CalPERS scandal involved the resignation of its chief investment officer (CIO). Now the CalPERS board seems to have a problem in replacing him:

CalPERS whittles CIO pool to 3 before calling off search

ARLEEN JACOBIUS, Pensions and Investments, 3-19-21

CalPERS had whittled the number of finalists for its next CIO to three, but announced Friday that it has suspended the search without making an offer and will pick it back up in June. Officials at the $439.5 billion pension fund plan to revisit the criteria for the job as well as the search process in April, [CalPERS Chief Executive Officer Marcie] Frost said in an interview Friday. The search was triggered by the August resignation of former CIO Yu “Ben” Meng, in the wake of disclosure filings showing he had invested in shares of private equity managers with which the California Public Employees’ Retirement System, Sacramento, had invested in the past. 

Ms. Frost said a 10-member subcommittee that included herself had interviewed eight candidates and trimmed the list to three finalists. Originally, the search process, which began in October, was scheduled to recommend a candidate by January or February. The subcommittee last met March 15 and decided to halt the search, in part, due to the global pandemic and a lack of clarity on whether the new CIO would participate in a long-term incentive program, Ms. Frost said. Although the subcommittee had a pool of qualified candidates to consider it did not end up making an offer to any of them, she said...

Full story at https://www.pionline.com/pension-funds/calpers-whittles-cio-pool-3-calling-search

Of course, one might argue that CalPERS is just being cautious - which is a Good Thing. But the perception will be driven by the reminder of the earlier scandal and the fact that no fix is in place after six months.

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*http://uclafacultyassociation.blogspot.com/2020/09/ucrs-is-rosencrantz-guildenstern-to.html

The Sounds of Silence Can Be Heard From LAO

The Legislative Analyst's Office (LAO) has just released a report on CalSTRS funding and the plan the state has to deal with its underfunding. (CalSTRS = California State Teachers Retirement System.) CalSTRS is the second largest public pension that the state has - behind CalPERS and ahead of UCRP. 

What is newsworthy is that the LAO doesn't officially worry about UCRP because of the fiction that it is somehow the responsibility of the Regents (Are they supposed to fund it out of their personal checking accounts?) and not the state. This fiction leads to ongoing budget issues for UC.

You can read about CalSTRS (but not about UCRP) at:

https://lao.ca.gov/reports/2021/4400/Strengthening-CalSTRS-031021.pdf

Spillovers from CalPERS Scandals Tend to Hurt UC

CalPERS, the huge (nation's largest) public pension and retirement fund, has been prone to scandal for years. Even though the UC pension is one of the three major California pension systems (behind CalPERS and CalSTRS), it is governed very differently from the others, particularly from CalPERS. However, when public policy changes are made with regard to public pensions, UC is an after-thought. But we tend to be dragged into whatever the aftermath turns out to be.

The latest CalPERS involves its chief investment officer who abruptly resigned in order, he said, “focus on my health and on my family and move on to the next chapter in my life.”

You can read about it in the Sacramento Bee here:
https://www.sacbee.com/news/politics-government/the-state-worker/article245025205.html

The latest scandal seems to have been triggered by reports in the Naked Capitalism blog:
https://www.nakedcapitalism.com/2020/08/calpers-digs-its-ben-meng-defenestration-hole-deeper-the-more-it-splains-claims-knowledge-of-problem-months-ago.html
and
https://www.nakedcapitalism.com/2020/08/calpers-chief-investment-officer-ben-meng-resigns-following-our-exposing-his-false-felonious-financial-disclosure-filings-and-private-equity-conflicts-of-interest.html
and
https://www.nakedcapitalism.com/2020/08/calpers-chief-investment-officer-ben-meng-made-false-felonious-financial-disclosure-report-more-proof-of-lack-of-compliance-under-marcie-frost.html

There is not much we can do about it, other than fret. From time to time, the Regents have noted that the state routinely funds CSU's retirement costs through CalPERS, but does not routinely pay into the UC plan. Let's hope that this time, the scandal-free UC pension can differentiate itself and distance itself from CalPERS.

UCRP isn't like them

The UC pension system (UCRP) - is the third largest California public pension program, after CALPERS (which covers most non-UC state employees) and CALSTRS (which covers teachers). However, there the connection ends.

CALPERS has had one scandal after another ranging from improper behavior of executives and board members to questionable election procedures. UCRP has no such history.

Today, the Sacramento Bee is running an article about CALSTRS constructing an extravagant addition to its headquarters ($300 million) - shown in the photo above - at a time when it is the most underfunded of the three pension funds.*

It is obviously politically difficult for the UC public relations folks to make the case that UCRP is different from the other two pension funds. UCRP has no grand scandals and no extravagant buildings. It has no electoral shenanigans to get on the board, since UCRP's trustees are the Regents. So we will make those points here and encourage readers of this blog to spread the word. UCRP is the state's third largest public pension fund, but there the similarity to the other two stops.
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*https://www.sacbee.com/news/politics-government/the-state-worker/article238082204.html

What did he say?

From the Sacramento Bee: On his way to an international climate forum two months ago, Gov. Gavin Newsom handed down an executive order meant to sharpen the state’s focus – and its spending – on global warming.

Government agencies have been struggling to explain it ever since. It touts the state’s “$700 billion investment portfolio,” and instructs the government to use it to “advance California’s climate leadership.”

The executive order “is the governor saying ‘I am prioritizing this in a mainstream way across the government. The state as a major investor and asset owner needs to take climate change really seriously,’” said Kate Gordon, director of the governor’s Office of Planning and Research. The order references funds that taxpayers typically think of as restricted, such as money earmarked for road improvements and for pension systems that have a financial obligation to earn as much as cash as possible to provide retirement security for millions government employees.

Newsom’s order happened to follow Caltrans’ release of a report describing decisions to adjust funding for highway projects that had been pledged to the Central Valley. The timing created an impression that the Newsom administration was tinkering with taxpayer-approved transportation plans. Newsom in an interview with The Fresno Bee editorial board earlier this month acknowledged the confusion the executive order created and said he was working to resolve questions about the documents.

The change in highway plans “was a staff level draft and it was ambiguous in how it coincided with an executive order – one from my office, one from Caltrans,” he said. “We have provided clarity. ... I think we have facts to calm the nerves.” The departments affected by Newsom’s order are in the early stages of planning for it. Here’s what they know about it: ...

HOW WILL IT AFFECT PUBLIC PENSIONS?

California’s three state public pension systems are among the biggest in the world, and each has investment strategies that account for climate change.

The California Public Employees’ Retirement System and the California State Teachers’ Retirement System, with a combined portfolio worth more than $634 billion, prefer to use their clout to press corporations to account for climate risk.

CalSTRS in October launched a climate review to account for risks, spokeswoman Karen Doron said in an email. “Engaging companies and policy makers is an effective strategy to reduce greenhouse gas emissions. Further analysis will reveal what companies to invest in based upon future profitability,” she said.

The University of California Retirement Plan, with about $80 billion, in September announced that it would go further by pulling its money out of fossil fuel companies. Each retirement plan is underfunded, meaning the pension systems owe more money in benefits to workers and retirees than they have on hand today.

That’s a big reason that a governor appearing to wade into their investment strategies caused some concern when Newsom released the executive order. “Unless the governor is willing to take even more $$$ from over-taxed California citizens, Newsom should step back,” CalPERS Board of Administration member Margaret Brown wrote on social media accounts after the governor published the order.

Newsom’s executive order directs the pension plans to work with his Finance Department to develop a new investment framework “that reflects the increased risks to the economy and physical environment due to climate change.” Gordon, from Newsom’s Office of Planning and Research, said the order is not a directive calling for CalPERS and CalSTRS to divest from oil companies. Rather, she said, it’s intended help the pension funds spot opportunities and avoid pratfalls as the economy turns to low-carbon or no-carbon alternatives for energy.

“Climate is a material risk to companies, both in terms of physical liability, like PG&E and wildfires and also when you talk about the transition to a carbon neutral economy because some assets will no longer be as valuable,” she said.

For instance, “electric vehicles are a solution and a player in the market,” she said. “We should be thinking of investing in electric vehicles. You want to avoid stranded assets as an investor and you want to avoid physical risk. There’s a growing understanding that climate change is a material risk to investors and companies just like cyber-terrorism or inflation.”

So far, the pension plans have had one meeting with Newsom’s Finance Department to talk about the order.*

CalPERS Chief Investment Office Yu Ben Meng at a board meeting this month called climate change “an investment issue for us” because the pension fund must pay out billions of dollars in benefits “for generations to come.” He said CalPERS would “continue to lead on climate change initiatives” while paying close attention to its investment targets.

WILL IT DRIVE UP COSTS FOR STATE BUILDINGS AND CARS?

The most tangible change to California government from Newsom’s climate changer order so far was an announcement that state government would stop purchasing gas-power cars immediately.**

In January, the state also plans to stop buying vehicles from carmakers that are fighting California’s long-recognized authority to set clean air and vehicle emission standards that are more rigorous than the federal government’s.

As of today, that means the state would not buy vehicles from General Motors, Toyota and FiatChrysler. The state would continue purchasing from Ford, Honda, BMW and Volkswagen.** ...

Full story at https://www.sacbee.com/news/politics-government/the-state-worker/article237601444.html

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*It's unclear from the story whether UC took part in this meeting.
**Unclear from the story whether UC will feel obligated to comply.

Brown's Pension Oblivion

In his last days in office, Gov. Jerry Brown is warning about a "fiscal oblivion" if a state Supreme Court case prevents a modification of the "California Rule."* The Rule prevents prevents public pension take-aways once benefits are promised.

UC has several times modified its defined-benefit pension for new hires. It has never sought to violate the California Rule. The problem is that UC tends to be dragged along into the larger mix when problems arise with CALPERS and CALSTRS, both of which have underfunding problems and issues of governance and management that do not characterize UC.

In any event, the court case should be decided and announced soon in the coming year.
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*https://www.sacbee.com/news/politics-government/the-state-worker/article223385445.html

His Last Hurrah

Jerry Brown's push to get the California Supreme Court to review the "California Rule" on public pensions could ultimately affect UC, probably not in a good way.

Jerry Brown’s last stand on pension reform

By Judy Lin | Dec. 5, 2018 | CALmatters
https://calmatters.org/articles/jerry-brown-pension-reform-supreme-court-unions/

Six years ago, as California strained to emerge from the Great Recession, Gov. Jerry Brown worked a minor political miracle—a rebalancing of the massive state pension systems for public employees.

Shuttling between unions and the strapped governments on the hook for public sector benefits and paychecks, Brown scaled back some of the rules and perks that have made public sector workers more secure, arguing that the pain would be worth it. Results were mixed: The largest benefit rollback in state history yielded some savings, but not enough to entirely fix a pension commitment that taxpayers are increasingly finding hard to manage.

Now, as Brown prepares to leave office—his own pension at hand, after five decades in public service—even that hard-won modicum of fiscal change could be loosened. In a case that went to oral arguments this week, the California Supreme Court is weighing a key legal precedent that could restore the generous pension formulas Brown worked so hard to tighten.

Brown, who at 80 has already surpassed the average retirement age of state workers by 22 years, predicts that he’ll win. But Wednesday’s proceedings made it clear that workers’ arguments are also compelling.

Whatever the ruling, Brown’s successor, Gavin Newsom, will have to cope with the outcome. And—though the state’s unfunded liabilities persist, and economists warn another recession could be just around the corner—Newsom will face a very different political landscape. Should California land in another downturn, Brown’s pension reform miracle could be difficult, if not impossible, to repeat.

The case heard by the high court today involves the California Rule, a legal precedent that requires the state to compensate public employees if their retirement benefits are lessened. In a challenge brought by Cal Fire Local 2881, the firefighters union argues that the ability to purchase additional years of service credit toward retirement, known as “airtime,” is a pension benefit that employees rely on as part of their decision to go into public service.

Brown’s attorneys counter that airtime was never intended by the Legislature to be a vested right and never negotiated through collective bargaining. Therefore, the state can take it away.

Everyone agrees that workers are entitled to the pensions they earn for work that’s already been done. And the argument might seem to be over a procedural technicality on the surface.

But if the court sides with Brown, it could open the possibility of future governors and legislatures modifying current employees’ pensions for prospective work, and perhaps setting a new precedent in which already negotiated benefits are fair game. If the court sides with the union, it would bind the state’s finances and commit taxpayers to paying already expensive retirement benefits.

On a larger scale, the case also could mark the end of a Brown-led era of fiscal reform in Sacramento. A blue-state Democrat with a lifelong tendency against the spending his party was known for, the frugal Brown had the experience and political capital to challenge public employee unions who typically hold sway over Democratic politicians.

Newsom is newer and younger, and won his office in part with strong union backing.  In campaign statements, he pledged to unions that he will protect their pensions; in fact, state firefighters cited Newsom’s commitment as one reason for giving the governor-elect their endorsement.

Meanwhile, Democrats, who have been a majority for some time, also with strong backing overall from organized labor, only gained ground in the November election. As the Legislature convened on Monday, they had not just a supermajority but a “mega-majority” in both chambers.

Both of those developments favor the priorities of public employee unions, as does the seemingly flush economy of the moment. California is projecting a $15 billion surplus this year, compared to a $27 billion deficit when Brown returned for his second stint in the governor’s office. The unemployment rate stood at 4.1 percent in October, compared to 12.1 percent when Brown was sworn in in January 2011.

When the Great Recession cratered state finances and the public gained awareness of generous retirement benefits, Brown was able to leverage those issues to successfully champion a package of changes from the Public Employee Pension Reform Act of 2012 with tacit approval from labor leaders.

While Brown did not get key changes needed to slow down the growth in retirement costs, the Legislature did agree to what the governor called the “biggest rollback to public pension benefits in the history of California.” Among other money-saving measures, Brown was able to raise the retirement age for new employees, ban retroactive pension increases, stop practices such as hoarding vacation and sick time to inflate calculations for retirement benefits, and ban the purchase of additional years of service, known as “airtime.”

Multiple labor unions sued, arguing that Brown’s 2012 changes infringed on their employer’s contractual obligation to provide retirement benefits at the level that was promised on their first day of work. That premise—the California Rule—left state and local governments with little room for savings.

Prior to Wednesday’s high court hearing, lower courts weighed in on the precedent with mixed messages.

In a 2016 ruling upholding a lower court’s decision, Justice James A. Richman of California’s First District Court of Appeal broke from decades of court decisions in finding the Legislature can alter pension formulas for current employees and reduce their anticipated retirement benefits. He wrote that a public employee has a right to a “reasonable” pension, not “the most optimal formula of calculating the pension.”

But another appeals court came to a different conclusion about the “California rule” by deciding in favor of union employees in Alameda, Contra Costa and Merced counties. While the justices agreed there are limits to the California Rule, they said benefit adjustments require “compelling evidence” showing that the changes are necessary to the success of the pension system.

The Supreme Court agreed to take up the issue and is first hearing the firefighters’ case over whether airtime is a vested right. While Adams, for the firefighters union, said he hopes the court will recognize that airtime is earned through service, Brown’s lawyers argue taking away the optional benefit doesn’t mean the employee gets less in pensions.

Brown’s lawyers wrote in a brief that although airtime was thought to be cost neutral, employees could purchase fictional years of credit “often as much as 40 percent below the actual cost.”

Today, the California Public Employees’ Retirement System is carrying $111 billion in unfunded liabilities and the California State Teachers Retirement System faces $76 billion in unfunded liabilities.

During today’s oral argument in Los Angeles, the justices seemed to be searching for where to draw the line that would protect workers without giving them limitless retirement benefits.

Chief Justice Tani Cantil-Sakauye questioned labor attorney Greg Adam about how airtime is protected by the state Constitution when the employee hasn’t performed the work to earn it. And Justice Goodwin Liu wondered aloud whether pension rights extend to life insurance, health insurance or a sabbatical leave that may be offered during employment.

Then Liu turned to Brown’s attorney, Rei Onishi, to ask if the state has a right to change benefit formulas midstream in a worker’s career, which strikes at the heart of the California rule. Onishi said yes if it applies to prospective work. He reasoned that because a worker hasn’t earned the benefit, it’s not an impairment.

That brought on questions from Justice Leondra Kruger about whether the Legislature could wipe away benefits for a class of existing state employees going forward.

Onishi responded that wouldn’t be likely because “other cases of this court have said you have a right to a substantial and reasonable pension as soon as you begin employment. I think completely terminating the system going forward, prospectively, would certainly raise questions about that.”

Though the hearing focused on legalities, the realities of Democratic politics weren’t far from the courtroom. In an unusual move, the governor had his own attorneys argue the case rather than Attorney General Xavier Becerra—a choice that fueled speculation that Brown hoped to shield the attorney general, a Democratic elected official, from union pressure.

And prior to the hearing, the court dodged a thorny question about whether Brown’s most recent nominee to the bench could be impartial. Last month, Brown nominated long-time aide Joshua Groban, who would have provided him counsel on many legal matters. While it wasn’t known if Groban was involved in the case brought by the firefighters union, there was an open question about whether he would have to recuse himself—a question successfully sidelined when Groban’s confirmation hearing was set for Dec. 21, after this week’s arguments.

Gov.-elect Newsom has said he would prefer to stay out of the courts to resolve pension disputes. When CALmatters asked him if the state should be allowed to renegotiate the future benefits of current workers, he suggested a legal fight wasn’t necessary.

“Even with the California rule, we have the tools through collective bargaining to negotiate reforms and commensurate offsets,” Newsom said then.

The economy might change his mind.

Economists have been warning of an inevitable downturn; Wall Street losses translate to deficits here because of California’s reliance on capital gains taxes. That vulnerability, even more than politics, says Jack Pitney, professor of government at Claremont McKenna College, could force Newsom to confront pensions.

“Despite his reputation for being more progressive, the economic reality might end up forcing prudence,” Pitney said. “As he contemplates the governorship, he’s aware of the constraints. He’s a smart guy and he knows how difficult the pension situation is going to be in the years ahead.”