Council To Vote on City’s CalPERS Response

The City Council will vote on Monday to authorize Steve Mermell to work with other cities and draft a letter to the California Employees Retirement System (CalPERS) regarding recent changes that could provide greater risk to its investment strategy.
The Council will also take action on a recommendation that would allow the City to engage local state legislators to pursue changes to CalPERS governance including the Board structure and increased transparency

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

Last week, City Manager Steve Mermell told Pasadena Now that he was 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 likened the new strategy to gambling and said the downside risks are too great and that taxpayers could end up footing the bill.

Finance Committee members Margaret McAustin and John Kennedy who make up that group with Mayor Terry Tornek and Victor Gordo also decried the changes. Pasadena Now was not able to contact Gordo and Tornek before deadline, but spoke to them after that story was posted.

“Taking on debt with a hope, of investing in property from that debt is a misguided approach and far too risky to the taxpayers of this state, this arbitrage model in this volatile economy is more risk than I believe CalPERS should take,” Gordo said.  “Ultimately it’s the taxpayers of the state who have to come up with more money if CalPERS bets incorrectly, and they have done that in the past.”

Tornek said CalPERS is in a tough business.

“They’re expected to make returns that will be generous for the people who participate in the system, but at the same time, not place demands that are too huge on the member communities that belong to the organization,” he said. “It’s not an easy task.”

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.

“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.”

The meeting begins at 2 p.m. and can be viewed at pasadenamedia.org.