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City Manager Concerned About CalPERS Investment Strategy

Governance restructure and risky investments cause for alarm for city's Finance Committee

Published on Tuesday, July 14, 2020 | 2:50 pm
CalPERS Sacramento headquarters

City Manager Steve Mermell is currently drafting a letter to the California Employees Retirement System (CalPERS) regarding recent actions that could provide greater risk to its investment strategy.

CalPERS manages pension funds for in Southern California, including nearly $1.3 billion for the city.

“I am concerned that in its efforts to achieve greater returns, CalPERS is taking on additional risk, by shifting more investments to private equity and more alarmingly, borrowing money to invest,” Mermell told Pasadena Now. “While the strategy may get results, just like gambling, the downside risks are too great and it’s the taxpayer that will end up footing the bill.”

In a recent Finance Committee members expressed concerns about changes made to the CalPERS governance model that reduced transparency and allowed the group to take on additional investment and plan risk without involving member agencies,” according to a city staff report.

City officials want to take actions that would require CalPERS to inform, collaborate and educate member agencies prior to changes in the Investment Strategic Plan.

“CalPERS is planning to invest 20 percent of their portfolio into risky illiquid private investments that are not in accordance with their fiduciary responsibilities to responsibly invest employees funds,” said Councilmember Margaret McAustin who sits on the committee along with Mayor Terry Tornek, John Kennedy and Victor Gordo. “I and all members of the finance committee object to this investment strategy.”

In August, the CaIPERS’ Board of Directors voted to restructure the governance model and reduced the number of annual board meetings from nine to six.

The board also restructured its investment committee, changing it to a subcommittee with no decision making powers and decreased its annual meetings from nine to four.

The meeting came two months after the CaIPERS Investment Committee met in closed session in June to discuss a new investment strategy involving increased investments in private assets and emerged with a new strategy of “better assets” and “more assets.”

According to a city staff report, these investments carry more risk.

State laws allow CaIPERS to meet in closed session to discuss investment decisions.

“I hope Governor Newsom and our locally elected state leaders are concerned by the recent actions of CalPERS in their decision to borrow billions of dollars on the open market with the hope of reinvesting those same dollars to spike, artificially, returns,” Kennedy said. “We have an affirmative duty to question the policy, hold CalPERS leaders accountable and demand that monies are invested according to conservative monetary and investment strategies polices.”

“At a time when local governments and other public agencies are becoming more transparent, CaIPERS moved in the opposite direction,” according to a city staff report signed by Mermell and Director of Finance Matthew Hawkesworth.

For nearly 35 years CalPERS has followed three guiding principles in investing — safety, liquidity and yield and sought a modest investment return or discount rate of four percent, and invested in low to no-risk fixed income strategies like treasury bills.

The rate eventually went to seven percent, and despite new benefits designed to outweigh additional costs, member agencies, including Pasadena, continued to have concerns about rising pension costs, balancing budgets and mitigating costs.

“If Pasadena and other member agencies want to hold CaIPERS more accountable and have a greater voice, changes need to be made to their governance structure, the State’s Government Code, and the Public Employees’ Retirement Law,” the staff report reads. “The State Government Code provides CaIPERS and their Board with autonomy and that autonomy means that member agencies have virtually no voice beyond a public comment at a meeting.”

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