Friday Letter Travelgate

The apparent public outrage over CalPERS staff travel makes us wonder: do California pensioners want their global assets managed by under-resourced homebodies?  

It is healthy and proper to be sceptical of public officials: they periodically do bad things. And so it is perhaps not surprising that new California court documents regarding the ongoing CalPERS pay-to-play investigation are being given a salacious treatment by the mainstream press.

The Los Angeles Times this week reported that CalPERS investment staff have “for years” “allowed” senior portfolio managers to “take private jet trips around the world, paid for by firms seeking business” with the public pension. In addition, staff members have received “gifts”.

The story is based on recently disclosed testimony from one of the pension’s senior private equity staff, Joncarlo Mark, who described to investigators instances of GP-funded travel and “gifts” (more on these later) at CalPERS.

In the unfortunate aftermath of very real and serious pay-to-play incidents, news coverage like this may cause the reader to assume that the civil servants employed by CalPERS were making investments based on which GP had the best cognac in his private jet.

But the better way to see these revelations is that they are symptoms of an inherently flawed institutional structure whereby one of the world’s largest pools of investment capital is managed by a small team of cash-strapped government employees, most of whom genuinely want to understand the opportunities to which they might commit billions in public dollars.

Mark testified that he flew on jets, including class-warfare-inspiring private jets, to places like Shanghai, Mumbai and New York.

A director for the Center for Public Interest was quoted as saying: “Not only should the public have been told that these trips were going on, the public should have been stopping them.”

Oh really? CalPERS has confirmed that its staffers accepted travel arrangements from GPs in which the pension was a part owner and when the pension was on the LP advisory board and their presence was required at key meetings. Should CalPERS officials not travel on behalf of businesses in which they are key stakeholders? And shouldn't the businesses themselves pay for these trips?

Citing transparency concerns, since 2009 CalPERS has required all travel arrangements to be made by the pension employees themselves and to comply with more modest state-set per diem policies. But near the very bottom of a pension press statement issued Thursday, one learns that these expenses, once reviewed, are then invoiced back to the external managers. So GPs indeed still pay for CalPERS staff travel – after all, their funds are part-owned by CalPERS. But it is now official policy that these funds treat pension staffers as second-class citizens within the business ventures they back, flying in the back of the airplane while the GPs use the state money that backs their business to pay for seats up front!

US public pensions, including CalPERS, need to do a better job educating the public about a basic fact – the management of a highly complex global portfolio requires a sophisticated and well-resourced staff and significant travel. Unfortunately, the nearly bankrupt state of California probably does not want to pay for these.

We also have to wonder if there would be similar public outrage if it were instead revealed that a CalPERS official had, say, invested public money in Indian assets without ever having been to India.

Certainly there are many potential hazards where pension officials receive valuable services and gifts from fund managers, and these need to be policed. CalPERS has done a poor job of policing these, but its overseers also have failed again and again to properly resource the programme while at the same time paying lavish fees to GPs. The political will to upgrade the CalPERS investment function is missing, and this has created profound asymmetry between the LP and its GPs.

As for the undisclosed “gifts”, Mark enjoyed a meal at a Morton’s steakhouse and another one at The Kitchen, a Sacramento haunt where “dinner often needs to be booked weeks in advance”.

If CalPERS were set up more like a professional asset management firm – the Canadian model of public pensions – and less like a politically charged nomenklatura, no one would worry that its investment staff might abandon fiduciary duties for a plane flight and a medium-rare rib-eye.