A first-of-its-kind survey by the Center for Public Integrity and Public Radio International gives California a B-minus for state government accountability and transparency. But the the State Integrity Investigation finds no state got an A – and it warns that state houses are “ripe for corruption and self-dealing.”
The survey also found oversight of California’s state pension boards lacking.
The California Public Employee Retirement System (CalPERS) manages the pensions of 1.6 million state workers. It’s the largest pension fund in the country with nearly a quarter of a trillion dollars in assets.
For years, proud CalPERS board members have pointed to the fund’s financial strength as proof of their governing skill. But during the recession, the fund lost a quarter of its value.
Now critics are pushing for more independent oversight at CalPERS.
There are 13 CalPERS board members. Six of them qualify for CalPERS pensions. They’re elected to the board by other CalPERS members and can even raise campaign contributions to get elected. How they decide to run CalPERS affects their own pensions and can cost taxpayers billions of dollars.
Stuart Drown is the executive director of the Little Hoover Commission – the state government watchdog. He says CalPERS could benefit from independent voices.
“The degree to which there’s an over-representation on a board of people who have a direct potential to benefit from those decisions, I think it diminishes the public’s confidence.” Drown says.
The Little Hoover Commission has recommended all government retirement boards include “a majority or substantial minority” of independent members.
“It’s important to have them to discuss the implications of decisions such as increasing benefits or changing retiree ages, the discussion of every single one of those components can benefit from having an outside view.” Drown says. “Particularly the view from somebody who’s wondering what effect it’s going to have on taxpayers.”
But CalPERS Deputy CEO Robert Udall Glazier says taxpayers are well represented on the board by the state treasurer, the state controller and three government appointees.
“ Not all of them necessarily have a stake in the system,” Glazier says, “but the fact that all of them are personally interested by profession or by their career path to make sure that the citizens and the public employees of California have a secure retirement is very strong, good thing for our state.”
The state government guarantees its employees retirement pay. Both the state and the employees contribute to the pot, but most of the pension money comes from returns on CalPERS investments. Poor returns create an “unfunded liability” that the state has to pay.
Last June 30th, CalPERS projected an $85 billion liability. But Glazier says that shouldn’t worry taxpayers.
“We’ve been able to prove with our track record that we’ve met the returns that we need over the past 20 years, over the past 30 years – a very strong return rate.”
But former state lawmaker Joe Nation with the Stanford Institute for Economic Policy Research says public employees on the CalPERS board have an incentive to overestimate investment returns. He says that way, they can contribute less to their pensions and if CalPERS investments underperform, the state pays the difference.
“If you have committed to make that payment in 5, 10, 20 years to that retiree, you need to be able to make that payment,” says Nation. “You can’t assume some outrageous number. Anyone can assume that they’re going to earn 10 percent per year. But we know the reality is the odds are stacked against them.”
Nation has calculated what CalPERS will owe retired state employees in the years ahead and whether it can cover those obligations. He used a lower, more conservative rate of return – and calculated that CalPERS would fall $240 billion short.
But Robert Udall Glazier at CalPERS says reasonable people will disagree on the numbers.
“Mr. Nation definitely has his opinion as to what he thinks our return rate should be and he uses a lower rate. And because he wants to assume a lower rate, then he’s going to produce numbers that will generate headlines and have people worried about whether or not we’ll be able to meet all our funding requirements.”
At its March meeting, the CalPERS board voted to lower the fund’s projected return rate by a quarter percentage point. It was the first cut in a decade. But the CalPERS staff had recommended a half-point reduction. The board ignored that advice.
Stanford’s Joe Nation says when board members have a vested interest in financial decisions, “You’re not going to make the right decision. You’re going to say, ‘Well, we should have reduced the discount rate a half point, but that’s really going to affect budget problems back home, so I’m not going to do it.’ Or, ‘That’s really going to impact me personally.’ Whether you think that or not, that’s how people operate.”
CalPERS will spread the reduction over two years to soften the blow. The lower return rate means that state will have to pay an extra $300 million to CalPERS in the next fiscal year.
Governor Jerry Brown has proposed expanding CalPERS board with outside experts as part of his 12-point plan to reign in pension costs.