Already under pressure to produce returns in the face of underfunded liabilities, some public pension boards also are having to address bad board behavior.
It's not the first time that boards have faced uncooperative board members or individuals who have been suspected of leaking closed-session discussions. After the global financial crisis, which put the very existence of public pension plans into question, bad board behavior ranged from board members pushing anti-defined-benefit-plan agendas and harassing staff, to unauthorized communication with money managers and a general lack of civility and mutual respect, said Harvey L. Leiderman, San Francisco-based partner at law firm Reed Smith LLP.
"I was amazed then to learn how widespread most of these activities were," said Mr. Leiderman, who is fiduciary counsel to multiple state and municipal pension funds. One of his clients, the $15.7 billion New Mexico Public Employees Association, Santa Fe, last year was embroiled in a dispute over pay raises for senior pension fund staff.
"It's not as widespread today, but where they do happen they seem to be more severe and brazen such as filing criminal complaints and lawsuits against fellow board members and executive staff," Mr. Liederman said.
In 2014, Mr. Leiderman gave a speech at the State Association of County Retirement Systems, Sacramento, in which he listed 29 examples of boards behaving badly that he had seen.
"In the last several years, with the markets doing well, I saw less of it but I am seeing more of it now," Mr. Leiderman said in a recent interview.
Poor behavior could again become more prevalent if there is an economic hiccup that affects pension plan investment returns, industry insiders predicted.
"On a macro level, all public discourse has become highly polarized. Dysfunction results from living in a polarized atmosphere, nationally and internationally. It's in the water," Mr. Leiderman said. "On a micro level, for employees and pension funds, we are living in a highly stressed financial environment."
Despite the fact that the economy remains in a long recovery, many public pension plans are underfunded and struggling to surpass a 70% funding level. The pressure is building on plan sponsors, and nearly every state has cut back on benefits, he said.
"Retirement board members start seeing themselves as advocates and representatives of the constituencies that put them on the board rather than as a collective of fiduciaries working for the common goal of funding promised benefits," he said. "It's tending toward identity politics at the board level. Collegiality has broken down on some boards and board members don't hear each other."