New policies restrict public plan exec perks

Ongoing corruption probes and concerns over perceptions of favoritism are leading to new policies limiting public pension plan investment officials from accepting luxury travel, meals and gifts from investment managers.

Oregon, on Aug. 1, became the latest state to address the issue. Oregon State Treasurer Ted Wheeler ordered a ban on first-class air travel by treasury department employees — including pension fund staff — as well as on the practice of allowing investment officers to claim per diem reimbursements for meals they were provided for free at conferences and meetings with outside investment managers.

Other public systems that have been subject to new regulations include the California Public Employees' Retirement System, Sacramento; all municipal pension funds in Pennsylvania; the North Carolina Retirement Systems, Raleigh and the Missouri Public School and Education Employee Retirement Systems, Jefferson City.

The new regulations are part of the fallout from the pay-to-play scandals plaguing some public pension funds across the U.S.

The National Association of State Retirement Administrators called for public funds to put ethics codes in place in 1999, although some had requirements before then, said Keith Brainard, the association's research director.

“These ethics codes were developed in good faith with a sincere effort in ensuring appropriate behavior,” Mr. Brainard said. “Sometimes people find ways to get around the system so the standards have to be tweaked and improved.”

Mr. Brainard said growing allocations by public pension plans to private equity and hedge funds are also causing plans to rework ethics rules because of specialized situations created by those investments.

Oregon officials put in place new travel guidelines for investment staff after media disclosures that staffers had luxury travel paid for by private equity firms.

State memos examined by Pensions & Investments show staff had stays at top resorts, including The Ledge at Pebble Beach, Calif., and the Pierre Hotel in New York.

James Sinks, spokesman for Mr. Wheeler, said Oregon Public Employees Retirement Fund, Salem, investment staffers still will attend conferences and meetings of the $51.5 billion fund's private equity firms that are prepaid as part of contracts with the groups.

“It is important for our staff to monitor the state's investments,” he said.

He said, however, that investment staffers cannot be housed in accommodations more luxurious than the standard offering reserved for other attendees. Mr. Sinks said the new policy should alleviate concerns that investment personnel are receiving special treatment.

The new policy is also fair to investment staff. “They don't have to stay in a broom closet,” he said.

The issue of accepting travel and/or gifts from firms doing business with the pension fund flared up recently at the $205.5 billion CalPERS.

Last month, CEO Anne Stausboll directed all staff to review their records to make sure they properly reported gifts in the past.

“We will take all necessary steps to correct any improprieties,” she said in a statement.

Ms. Stausboll made the statement after a senior portfolio manager testified in a court deposition in July that he and his supervisors had regularly traveled on private jets and in first-class and business-class cabins of commercial jets on trips paid for by investment managers.

Senior Portfolio Manager Joncarlo Mark, also detailed receiving gifts of bottles of wine and champagne, chocolates, expensive meals and a toy for his child from CalPERS' external investment managers. He said he reported none of the gifts, although required to do so by state law.

The court hearing was related to a suit brought by California Attorney General Jerry Brown against Alfred Villalobos, a former CalPERS board member who owns placement agent Arvco Capital Management.

CalPERS spokesman Brad Pacheco said pre-2008 luxury travel taken by investment personnel did not have to be reported because it was part of prepaid arrangements CalPERS made with private equity firms to attend meetings.

In any case, he said, Ms. Stausboll ordered changes in policy in 2008, requiring CalPERS' travel office to handle travel arrangements because she was concerned about public opinion. “We want to avoid any perception of a conflict of interest,” Mr. Pacheco said.

Late last year, CalPERS instituted a ban preventing system officials from taking anything of monetary value. CalPERS' policy is stricter than California law, which requires public officials to report all gifts of more than $50.

Even retirement systems that revised ethics rules several years ago are making sure ethics is in the forefront.

The $134.3 billion California State Teachers' Retirement System, West Sacramento, tightened its rules in 2006 on travel and gifts, but in 2009 and 2010, investment staff members were asked to pledge to follow all CalPERS ethics rules, said spokesman Ricardo Duran.

Mr. Duran said travel for CalSTRS staff must conform with the policy set down by the state of California. “In short, CalSTRS staff members fly coach and are prohibited from flying business or first class,” he said. “As for lodging, CalSTRS staff are required to purchase accommodations that are reasonably priced for the venue they are attending.“

In Pennsylvania, all municipal funds are subject to new rules signed into law a year ago by Gov. Edward G. Rendell. The rules require pension funds to adopt their own code of conduct and limit gifts to nothing more than “nominal value.”

Pension funds in North Carolina and Missouri also have been subject to new ethics rules in the past 24 months.

Revised ethics rules put into place by the North Carolina treasurer's office last year for officials of the $65.3 billion North Carolina Retirement Systems formalized the prohibition against direct third-party reimbursement for travel from a contractor or investment manager doing business with the state, said Heather Franco Strickland, a spokeswoman for Treasurer Janet Cowell.

Ms. Franco Strickland said the rules also require full disclosure of actual or estimated value for such reimbursement.

An April report on the pension fund's rules and operations, commissioned by the treasurer, described the difficult circumstances public fund officials face when they attend meetings with private equity firms.

The report said some pension funds have an outside party attend the meetings, eliminating the need for anyone from the fund to attend and, thus, eliminating the need for the private equity firm to reimburse the pension fund for travel.

The report, by consultant Hewitt EnnisKnupp said having private equity fund officials reimburse pension funds for travel to their meetings leaves funds susceptible to criticism regarding conflicts of interest and bias.

But the report recommended such practices continue so pension funds officials can monitor their investments.

The $26.5 billion Missouri Public School Retirement System and Public Education Employee Retirement System, tightened ethics rules in 2008 after a newspaper series showed some executives openly accepted gifts, meal and travel from investment firms with which the fund did business.

New disclosure rules require the reporting of lodging and travel paid by a third party and ban gifts of more than $50.