Incidences of board members at public pension plans misbehaving are on the rise.
The rancor between board members of the $10.4 billion San Diego County Employees Retirement Association is just the latest public episode, observers say.
Other examples of such actions include board chairmen not allowing items on agendas; board members changing their votes; board members scheduling votes to manipulate outcomes, knowing trustees who might vote differently are absent; and investment staff threatened by board members, especially when it relates to hiring money managers.
That behavior not only interferes with the boards' ability to carry out their duties, but also makes it difficult to hire investment and administrative staff, insiders say.
“During the past few years, I have seen increasing instances when important funding and benefit votes are accompanied by personal invective, shouting and grandstanding to the cameras. I have seen threats of litigation leveled against individual trustees while votes are pending. I have seen trustees demand to see the personal e-mails of other trustees,” said Harvey Leiderman, a San Francisco-based partner with law firm Reed Smith LLP who serves as fiduciary, investment and litigation counsel to multiple state, county and city retirement systems.
Why the increase in bad behavior by board members? Some say the public perception of rich public employee pension benefits straining government budgets has become a national political issue, increasingly putting board members in the public eye and dividing them over preserving or demolishing defined benefit plans.
These “stressed-out boards” are acting in ways that can detract from the mission of funding and delivering promised benefits to retirees, Mr. Leiderman said. “Some of the key decisions board members must make have to do with things like capital markets projections, expected future rates of returns, asset allocations, assessment of risk, understanding improving mortality rates, projecting payrolls — judgments that should be data driven, not politically driven,” he said. “Nevertheless, we are seeing some trustees step onto the dais with their political baggage in tow, burdening the discussion with the weight of their views as to whether they should shore up defined benefit plans or hasten their demise.”
Mr. Leiderman said while the “overwhelming majority of trustees are responsible, capable and courteous public servants,” incidences of bad behavior are on the rise. Each side sees the other as having a “hidden agenda,” hampering their ability to exercise clear judgment, he said.
“The reality is that governance matters, it really matters,” said one consultant who declined to be identified. It matters how boards conduct themselves, what they pay staff and how the board members treat each other, the consultant said. “If they don't do a good job in all of those things, the best people won't want to work for those boards,” he said.
Board member behavior has been so poor that as fiduciary counsel, Mr. Leiderman had to take boards into emergency closed session to deal with these kinds of threats, he said. “And apparently, system administrators are seeing the same kind of behavior, and are worried that a level of mutual distrust will complicate effective decision-making,” he added.
“I've worked hard to unite our public pension boards around their mission to fund and deliver promised benefits,” Mr. Leiderman said. “Their duty is to the members and beneficiaries of the systems, not to redesign these plans or make policy decisions about the wisdom of perpetuating them.” n