Tackling the issue of conflict on public fund boards

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."

In response, some boards are developing or have adopted codes of conduct to remind members of their roles and foster a collegial working atmosphere.

CalPERS is currently working on a code of conduct that, in part, is in response to board members allegedly leaking closed session discussions and materials to the press.

In August, board member Margaret Brown in a news release called for the release of information surrounding an internal investigation into whether board members were sharing closed-session information to the press. Ms. Brown said she was not the source of the leaks.

The internal investigation is ongoing, said Megan White, CalPERS spokeswoman, in an email.

Also this year, past sexual harassment charges resurfaced at CalPERS when a former board member unsuccessfully ran for a board seat.

In September 2011, J.J. Jelincic, then a CalPERS board member, was publicly censured and stripped of his committee chairmanships over sexual harassment complaints from female system employees. The same month, the California State Personnel Board and administrative law judge Teri L. Block upheld a reprimand by CalPERS management against Mr. Jelincic for sexual harassment. The $395.3 billion California Public Employees' Retirement System, Sacramento, also voted to limit Mr. Jelincic's travel privileges and required him to attend sensitivity training.

After Mr. Jelincic lost the Oct. 17, 2019, election to unseat board President Henry Jones, he lodged a protest. Among other things, he alleged that CalPERS' press office had solicited negative stories in the press about past alleged occurrences of sexual harassment, and that Mr. Jones, as CalPERS board president, had allowed negative comments about Mr. Jelincic during two board meetings before the election.

Mr. Jelincic withdrew his election protest on Oct. 21.

Several board members said that a code of conduct could help instill more civility on the board.

CalPERS declined to comment. The code of conduct is expected to return to the board for approval in 2020 but no date has yet been set, Ms. White said. CalPERS' funded ratio was 70.2% as of June 30, according to its latest annual report.

CalPERS is not alone in trying to encourage a culture of collegiality. It can take just one board member to divide the board, industry experts said.

"A lot depends on the individuals who are on that board," said Bob Jacksha, chief investment officer of the $13.3 billion New Mexico Educational Retirement Board, Santa Fe.

Not long ago, the board had one member who "gummed up the works," Mr. Jacksha said.

That former board member disagreed with the way the plan was structured and thought most plan assets should be invested in fixed income, Mr. Jacksha said.

"He considered himself as the taxpayers' representative (on the board) first and the pension plan second," Mr. Jacksha said. "In general, boards work well when they stay at the policy level, hire good people, monitor them to make sure they are doing their jobs and are staying within that policy."

The board member decided in 2015 not to seek another term, Mr. Jacksha said.

Pension plan boards should have a diversity of opinion "but in a respectful way," said Amy McDuffee, Westminster, Colo.-based founder and CEO of Mosaic Governance Advisors LLC, a public pension plan governance consulting firm.

If a pension fund is under financial pressure and has board members who were elected on a platform of making reforms, that can result in more polarized boards, Ms. McDuffee said.

The New Mexico PERA is currently experiencing a polarized atmosphere on the board.

On Oct. 31, 2019, Executive Director Wayne Propst's 2014 pay raise was ratified by the board majority.

Six months earlier, board member and New Mexico Treasurer Tim Eichenberg had asked state Attorney General Hector Balderas to investigate whether Mr. Propst's 2014 raise and that of other pension plan executives were given without board approval, according to an opinion article by Mr. Eichenberg sent to several news outlets obtained by Pensions & Investments and written confirmation by Mr. Balderas' office at the time.

Also in May, Mr. Propst was cleared of wrongdoing by New Mexico State Auditor Brian Colon, who in January 2019 had launched an investigation into raises given pension fund employees over the prior five years.

In September 2019, Mr. Balderas reported to the board that his investigation found no information to support fraud, misconduct or any evidence that the raises violated the pension plan's rules or policies.

Even so, according to a recording of the board's Oct. 31 board meeting, board member Loretta Naranjo Lopez said that the raises were unauthorized and amounted to crimes of "embezzlement, misappropriation and possibly bribery."

Additionally, she said she had been assaulted by fellow board member Stephen J. Neel during a closed session on Oct. 8 and that she had filed a police report.

According to the police report filed Oct. 8, she told the police officer that Mr. Neel had asked her whether she was recording the meeting and had reached for her cell phone. There was no contact between them and Mr. Neel did not get Ms. Naranjo Lopez's cell phone, the police report said.

The officer in the report said he told Ms. Naranjo Lopez that Mr. Neel had not committed a crime. Six other board members filed affidavits attesting that they witnessed Mr. Neel's actions and that he did not assault Ms. Naranjo Lopez, nor did he attempt to take anything from her.

"I was happy to see the report completely exonerated me of the false allegations," Mr Neel said. "It is a pity that pointing out to a fellow trustee that their phone was on during an (confidential) executive session could be interpreted as assault or attempted robbery. This was a sad situation. I regret the board was embroiled in such petty matters. I am hopeful that we can focus on the fiduciary issues such as the $6.6 billion unfunded liability, enhanced investment performance and plan design changes."

At a Dec. 10 board meeting, Ms. Naranjo Lopez left the meeting, which meant that the board didn't have a quorum, according to a recording of the meeting.

"I will not be allowing a quorum to allow a state law to be violated," she said.

Ms. Naranjo Lopez left the meeting after reading a statement claiming, among other things, that the board's fiduciary counsel, Reed Smith LLP, had advised the board that giving staff unauthorized raises was a criminal misdemeanor. As a result, she said in her statement, senior staff and the board majority that ratified the raises on Oct. 31 had committed a crime.

New Mexico Secretary of State Maggie Toulouse Oliver, who is also a board member, arrived later, allowing the board to finish its business.

Mr. Leiderman said during the meeting: "Lest silence be deemed to be assent to the statements that were made about myself and my law firm, I would like to simply go on the record and state that the statement that attributed statements and actions to myself and my law firm were materially false and misleading and if the board at any time needs a line by line refutation from myself or my firm I would be happy to do so. But, I didn't want to simply let silence be on the record today as indicating that in any way that I agreed with those statements."

Responding to Pensions & Investments' request for comment, Ms. Naranjo Lopez wrote in an email: "Your questions seem to have come from a biased and defamatory NMPERA staff or board member(s)."

Ms. Naranjo Lopez previously was censured twice by the board. In 2018, she was censured for, among other things, accusing PERA staff of criminal battery over board seating arrangements and filing a complaint with the state human rights commission for harassment. That complaint was summarily dismissed by the commission.

Ms. Naranjo Lopez was re-elected by retirees in 2019 for a four-year term starting January 2020. She has been serving on the board consecutively since January 2012. She previously served on the PERA Board for four years from 2005 to 2009.

A committee of the New Mexico Legislature, the Investments and Pensions Oversight Committee, is currently considering a recommendation that would disband New Mexico PERA's current board and replace it with a smaller, eight-member board made up mostly of appointees by state officials and various retiree organizations.

Currently, most members of the 12-person board are elected by retirees and state employees.

The proposal "would improve the status quo," Mr. Neel said. "The size of the board is too big and unwieldy. Plus the proposal would require (board members have) some expertise. The problematic history of the board shows that there has not been enough expertise on the board in different subject matters such as investments."