CalPERS Responds to Primack Critique, With Vitriol

A recent article by Fortune Magazine attacks CalPERS over questions surrounding placement agent activity, but the California scheme has fired back in defense.

(April 26, 2012) — A recent article by Fortune Magazine notes that the $235 billion California Public Employees’ Retirement System’s (CalPERS) fraud case filed by the SEC is raising more questions about the fund’s legitimacy — but the California public pension is firing back with vitriol.

The SEC alleged that the former CEO of CalPERS from 2002 through 2008, Federico R. Buenrostro, and his friend Alfred J.R. Villalobos, who served on the CalPERS board from 1992 to 1995, fabricated documents given to New York-based private equity firm Apollo Global Management. “Buenrostro and Villalobos not only tricked Apollo into paying more than $20 million in placement agent fees it would not otherwise have paid, but also undermined procedures designed to ensure that investors like CalPERS have full disclosure of such fees,” said John M. McCoy III, Associate Regional Director of the SEC’s Los Angeles Regional Office, in a statement.

The Fortune article by Dan Primack claimed that the letters from the SEC to the public pension asked the fund to verify three pieces of information, which the scheme refused to sign: (1) That the placement agent was working on behalf of the private equity firm for a specified fee; (2) The fee is paid by the general partner, not by the limited partner; (3) The investor has a copy of the fund’s private placement memorandum and related documents. The article concluded that altogether, the SEC alleged that the documents (in aggregate) entitled Villalobos to approximately $20 million in fees from Apollo.

Meanwhile, CalPERS fired back, saying: “Dan Primack’s Fortune blog post (“New charges in public pension corruption saga”, April 24) about why CalPERS refused to sign an investor disclosure letter provided by Apollo Global Management reads more like a best-selling fiction novel and in our view doesn’t hold water.”

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The response by CalPERS continued: “With all due respect to Mr. Primack, and we have talked at length with him about this, the reason we didn’t sign Apollo’s investor disclosure letter is set out in our Special Review and given under oath by former CalPERS staff.”

CalPERS outlined the following reasons: “(1) We had never, ever seen such a letter in the industry before that one. (2) There was no reason or benefit for CalPERS or our members to sign it and at the time we had no way of knowing the represented facts in the letter were true or not. (3) The fund had nearly closed and there was no business reason for us to sign it. Our staff made a good judgment call by not signing the letter.”

According to CalPERS, even if the letter had been from a different fund or from a different placement agent, the scheme would still not have signed the investor disclosure letter. The scheme continued to note: “As clearly spelled out in the charges by the SEC, once CalPERS refused to sign the disclosure letter, Mr. Buenrostro and Mr. Villalobos literally took matters into their own hands, including forging documents, and they did everything they could to do it outside the walls of CalPERS including in a different state. The rest is a sad history of deception and fraud. Whether or not Mr. Primack believes it, those are the facts.”

The size of the public pension problem in the United States is growing, and a new paper published by the Harvard Kennedy School for Business and Government explores the obstacles to reform along with potential solutions.

(April 26, 2012) — Total unfunded public pension liabilities in the United States are growing, fueled by an interwoven array of financial, legal and political intricacies, according to a new paper written by Thomas Healey and Kevin Nicholson of the Harvard Kennedy School along with Carl Hess from Towers Watson Investment.

Solutions, however, may be in sight, the authors assert, if major benefit design changes and potential financing changes are implemented, including the following.

1. Eliminate legislative end runs around the collective bargaining process.

2. Tighten up eligibility for heavily subsidized benefits, such as disability and early retirement.

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3. Raise the age of eligibility for full retirement benefits.

4. Reduce the intergenerational risk transfer.

5. Control and monitor the size of a pension plan’s funding ratio.

Over the past several years, estimates of the total size of the public pension problem in the US have ranged from $730 billion in unfunded liabilities to $4.4 trillion.

“Indeed, the public pension problem manifests itself hundreds of times across the United States, in all 50 states and in numerous municipalities,” according to the paper, published by the Harvard Kennedy School for Business and Government. The paper furthermore notes that some analysts of total unfunded public pension liabilities estimate that they have grown by a magnitude of six over the past decade.

The paper adds that underfunding problems are intrinsically linked to the outsized nature of the promises made to public pension beneficiaries. Furthermore, changes proposed by the Government Accounting Standards Board (GASB) could soon bring hundreds of billions of dollars in unfunded liabilities on to the financial statements of public pension plan sponsors, according to the paper.

The authors continue: “We acknowledge that the road to substantive pension reform is a difficult one, fraught with legal, political and financial obstacles…The financial outlook for many public pension plans is bleak, but solutions do exist.”

Read the full paper here.