CalPERS trustee claims staffers prepared to bolt

Many CalPERS investment staffers are looking for new jobs, upset with both proposed ethics rules that they feel go too far and a perception that that all CalPERS employees are disreputable, board member J.J. Jelincic revealed.

“People are getting extremely tired of being beat up all the time,” Mr. Jelincic said in an interview with Pensions & Investments. “Morale is way down.”

The comments by Mr. Jelincic — who also serves as a CalPERS investment officer — are backed up by several former investment staffers of the $230.1 billion California Public Employees' Retirement System, Sacramento. They say privately that some of the fund's most senior and experienced investment personnel could soon be leaving.

Many of the proposed changes would affect personnel at CalPERS' investment office. As one of the largest U.S. pension plans, CalPERS' investment office staff of 240 rivals that of many money management shops. The staff, including support personnel, not only monitors investments, but also invests about half of CalPERS' assets.

The potential departures come as proposed ethics rules would make it easier to suspend without pay or terminate investment staffers and restrict their post-employment options.

The proposed rules are the result of ongoing state and federal corruption investigations as well as a civil suit by the California attorney general charging former CEO Fred Buenrostro and ex-board member Alfred Villalobos with corruption.

Last week, a CalPERS-commissioned investigative report found the nation's largest defined benefit plan spent tens of millions of dollars unnecessarily because Mr. Buenrostro allegedly steered contracts to clients represented by Mr. Villalobos, who had become a placement agent.

Washington lawyer Philip Khinda, who conducted the investigation, said changes such as post-employment restrictions for retirement system employees are needed. “We cannot overstate the importance of these recommendations to safeguard the institution,” he said in an interview.

Mr. Buenrostro went to work for Mr. Villalobos' company, ARVCO Capital Research LLC, seven weeks after he was forced to resign by the CalPERS board, the report said.

The report also discusses disclosure forms from Apollo Global Management to meet what Apollo officials felt were federal securities law requirements and to inform the company's private equity investors that it was paying fees to placement agents.

The forms said CalPERS officials understood that Mr. Villalobos was receiving fees in connection with the pension system's investments in various Apollo funds. The CalPERS investment staff did not feel “it was appropriate for anyone at CalPERS to execute” the disclosures, the report said, and were advised not to sign the forms by CalPERS' in-house and outside counsel.

But Mr. Buenrostro signed 11 different disclosures requested by Apollo in 2007 and 2008.

The disclosures enabled Mr. Villalobos, who had made a standing offer of employment to Mr. Buenrostro, to receive more than $20 million in fees from Apollo, the report said.

One form was signed after Mr. Buenrostro resigned on May 12, 2008, but still listed him as CEO. The report characterized the signing of the forms as a “striking example of Mr. Buenrostro's failure to discharge his duties of care and loyalty to the institution (CalPERS) and the many beneficiaries it serves.”

In a statement to P&I, CalPERS spokesman Brad Pacheco said the retirement system must adopt a series of reforms to “make sure the incidents detailed in the report do not happen again.”

In his report, Mr. Khinda cited the case of Leon Shahinian, a senior investment officer who had headed the system's private equity program. Mr. Shahinian — one of the system's most highly paid employees, who made $500,000 annually in 2006 and 2007, according to state records — earned more than $100,000 while on administrative leave that started in May 2010.

The report said Mr. Shahinian accepted Mr. Villalobos' offer to fly on a private jet to New York City to attend a May 2007 black-tie gala for Leon Black, founder of private equity firm Apollo Global Management, and stayed at Mr. Villalobos' two-bedroom hotel suite. Mr. Villalobos was representing Apollo at the time.

A month later, according to the attorney general's suit against Mr. Villalobos, Mr. Shahinian recommended that the CalPERS board approve the purchase of an ownership interest in Apollo. The report said Mr. Villalobos was reimbursed by Apollo for the cost of the $50,000 plane ride, $8,000 in hotel charges and $1,500 in car service fees.

Mr. Shahinian originally had resisted repeated attempts by Mr. Buenrostro to influence the investment process, telling CalPERS board President Rob Feckner that Mr. Buenrostro was trying to influence the investment process for friends, the report said. It also said Mr. Shahinian told Mr. Black it was unnecessary for Apollo to recruit Mr. Villalobos for help in obtaining CalPERS contracts.

“After years of apparently diligent performance for CalPERS, however, (Mr.) Shahinian seemed to lose his way,” the report said.

The report criticized Mr. Shahinian for his New York trip. “While these dealings do not appear to have altered the analysis that he and the investment staff performed on the proposed transaction, (Mr.) Shahinian's failure to inform his CIO and the board of his activities in New York before their approval of the investment was a disappointing error in judgment — an error as graveas his decision to accept the invitation,” the report said.

Mr. Khinda told the CalPERS board on March 15 that Mr. Shahinian remained on the payroll because state civil service regulations required that he continue to receive his salary. He said CalPERS should ask the state Legislature to streamline civil service regulations so employees can be disciplined more quickly and the pension system does not “bear the cost of their high salaries.”

Mr. Jelincic said state civil service regulations would have allowed CalPERS to cut Mr. Shahinian's salary within five days of being accused of wrongdoing.

“They could have put a bullet in his head,” Mr. Jelincic said.

But he said he believed CalPERS officials agreed to let Mr. Shahinian continue to draw his salary because of the report's conclusion that the private equity investment chief originally resisted Mr. Buenrostro's attempts at influencing the investment process.

Mr. Shahinian resigned in August 2010 after three months on administrative leave.

Malcolm Segal, a Sacramento attorney for Mr. Shahinian, said his client had adhered to high ethical standards. He said it was standard policy in 2007 for investment managers to pay for the staff travel of CalPERS investment personnel. “He did nothing wrong in traveling to meet a client,” he said of Mr. Shahinian.

Mr. Jelincic, a former state worker union leader, said the investment staff's civil service status is a good thing. He said the fact that investment personnel are not at-will employees, as is the case at most investment firms, gives them confidence to question management decisions when needed.

CalPERS CEO Anne Stausboll told board members on March 15 that given the controversial nature of the proposal to reduce civil service protection, it will need to be studied over the next few months.

Mr. Jelincic said the investment staff is bound to be upset with the new proposal. “It's just another drop in the water torture,” he said.

Mr. Jelincic said he expects the board to ultimately recommend that the Legislature implement the proposal. “If it's a good-government thing, we can pass it,” he said. “Whether it makes sense or not is another thing. The perception is driving the train.”

Mr. Jelincic abstained when all other trustees on March 16 approved supporting a legislative bill that would prohibit board members and staffers from accepting gifts of more than $50 a year from any entity doing business or planning to do business with the system. The current limit is $450 a year.

While the bill might be well-meaning, Mr. Jelincic said, CalPERS officials are being put in a double bind. They can't allow investment managers to pick up the bill for meetings that take place in fancy restaurants, yet the state per-diem allowance doesn't give them the money to pay for the meal itself without opening their own wallets.

He said the state per-diem allowance is $6 for breakfast, $11 for lunch and $18 for dinner, an inadequate amount when traveling in places like New York City. “How many places in Manhattan can you find a dinner for $18?” he asked.

A CalPERS official, who asked not be identified, said Ted Eliopoulos, senior investment officer for real estate, was forced to write a $500 check from his personal account to attend a function in China earlier this year to discuss the retirement system's real estate investments. The official said that because CalPERS policy would have prohibited his Chinese hosts from covering the expense, Mr. Eliopoulos had a choice to miss the meeting or cover the expense himself.

Mr. Eliopoulos declined to comment and referred a caller to CalPERS' press office. Mr. Pacheco, the spokesman, did not directly address the payment Mr. Eliopoulos made, saying only: “We would agree that the state per-diem rates are insufficient and that this is a statewide problem in government that needs to be addressed.”

Another resolution passed by trustees last week supports legislation by state Controller John Chiang that would prohibit for two years former CalPERS investment staffers from working at investment firms that have done business with CalPERS.

Mr. Jelincic said the ban is making some employees consider leaving the system now because they don't want to be bound by the new rules. He added that investment staffers receive relatively low pay compared with their peers in the investment industry. “Everyone I know who has left CalPERS has at least doubled their salary,” he said.

Investment officers who work for CalPERS make up to $108,000 a year without bonuses, while more senior portfolio officers can make up to $189,000, according to the California Department of Personnel Administration.

Mr. Jelincic said the fund has been able to attract qualified staffers because working at CalPERS provides great experience and builds resumes. He said he is concerned that potential candidates might not consider CalPERS if post-employment restrictions are put in place.

Mr. Chiang, an ex-officio member of the CalPERS board, insisted that regulations, such as banning former CalPERS staffers from working for investment companies for a period of two years, will help remove the taint of unethical behavior that has hurt morale.

“We want to remove the appearance of influence,” he said.