CalPERS: competitive pay structure essential

The California Public Employees’ Retirement System is seeking state legislation enabling it to pay market rates for its investment professionals.

(PrivateEquityCentral.net) The California Public Employees’ Retirement System is seeking state legislation in order to be able to pay the pension’s senior investment professionals and chief actuary market salaries.

In May, the California Supreme Court upheld a ruling that indicated that public pensions’ constitutionally-derived powers do not allow them to go outside civil service laws to hire investment managers and set salaries. Twenty-eight managers and the chief actuary are affected by the ruling.

“The California Supreme Court ruled that CalPERS’ constitutional powers didn’t extend to hiring of personnel,” controller Steve Wesley, a member of the CalPERS board of administration, said in a statement. “We now must create the appropriate legal authority to establish these investment and actuarial positions.”

CalPERS has a $20bn alternative investment programme. It pays out some $200m per year in fees to private equity fund managers, but less than $1m in salary to the staff looking after its private equity investments.

“CalPERS manages more assets than any pension system in the country, yet existing civil service laws did not provide a compensation structure that is competitive for these specialised classes,” Sean Harrigan, the president of the CalPERS board of administration, said in the statement. “Without legislation to correct this, we will be severely hampering our ability to protect members’ assets, maximize investment returns, and keep the costs down for the state and local government.”

Harrigan said an alternative would be to return to the practice of hiring outside contractors, who would charge four or five times what CalPERS pays its investment professionals.

In November 2001, chief investment officer Daniel Szente resigned rather than battle the litigation limiting portfolio managers’ salaries. Szente left for San Francisco asset manager McMorgan & Co., where he became the chief investment officer.

Szente said state controller Kathleen Connell’s suit against CalPERS, which she claims violates California law by paying portfolio managers more than other state employees would cut the level of investing talent at the pension. Connell sued CalPERS in February 2001 for trying to circumvent state salary regulations by issuing its own payroll checks.

Michael Flaherman, the investment committee chairman at the time, said that if qualified investment staff cannot be retained, CalPERS might have to go back to hiring external portfolio managers. Internal staff had proven to be more cost effective and outperform external managers in many cases, Flaherman said at the time.

Another CalPERS departure related to the Connell suit was Barry Gonder, former head of the alternative investment program at CalPERS, who quit in June 2001 to become the fifth general partner at Grove Street Advisors. The alternative investment program is now headed by Richard Hayes.

CalPERS does not consider itself necessarily bound by standard civil service conventions. “Back in the early ‘90s, proposition 162 passed in California that gave our board the sole authority over the administration of the assets,” CalPERS media spokesperson Brad Pacheco said in June 2001. “The board feels that under the authority of this proposition they have the authority in certain circumstances to opt out of the civil service process to pay these salaries in order to recruit and retain the best possible people to run the fund.”