CalPERS Bumped Pay as Fund Dived?

Cathy
Bussewitz of the Huffington Post reports, CalPERS
Bumped Pay as Fund Dived (HT: Peter):

As its investment
portfolio was losing nearly a quarter of its value, the country's
largest public pension fund doled out six-figure bonuses and substantial
raises to its top employees, an analysis by The Associated Press has
found.

Board member Tony Olivera
said the California Public Employees' Retirement System tried to reduce
the bonuses but was under contractual obligations to pay them.

CalPERS' plunging value came as stock values tumbled around the
world, the state's economy suffered its worst decline in decades and
basic state services faced severe budget cuts.

Virtually all of CalPERS' investment managers
were awarded bonuses of more than $10,000 each, with several earning
bonuses of more than $100,000 during the 2008-09 fiscal year. The cash
awards were distributed as the fund lost $59 billion.

Steve Deutsch, director of pensions and endowment at Morningstar
Inc., said many public pension plans award performance bonuses, and
called CalPERS' performance during 2008-09 "middle of the road."

"It's absolutely very widespread, but very
low profile in terms of being acknowledged, discussed, or disclosed by
the plans," Deutsch said.

The revelations prompted two key Republican lawmakers to call for
more oversight of how CalPERS and other state pension funds compensate
employees and make investment decisions, while a Democratic lawmaker
promised legislation to control salaries and bonuses.

CalPERS spokesman Brad Pacheco said bonuses
are based on the fund's performance over five years, not just the year
immediately preceding the bonus, in order to encourage managers to seek
long-term investments rather than short-term gains. He said bonuses in
the 2008-09 fiscal year were 50 percent lower than in 2006-07 and that
the market declines will continue to dampen bonuses in future years.

"Incentives are part of total compensation and critical to the fund's
long-term success as well as recruitment and retention of skilled
investment professionals," Pacheco said in an e-mail.

Bonuses
also were paid to employees who are not part of the fund's investment
team, including a public affairs officer who received bonuses of nearly
$19,000 a year two years in a row and a human resources executive who
received bonuses topping $16,000 both years.

The number of CalPERS executives making
$200,000 a year or more rose from 13 to 15 over the two-year period.
Those employees received an average salary raise of 12 percent and an
average bonus of $115,705 in the 2007-08 fiscal year and $63,311 in
2008-09, according to the AP's inquiry into CalPERS compensation.

Senior investment officers responsible for segments of the portfolio
seeing the steepest declines were among those rewarded, due in large
part to the fund's long-term bonus system.

Real estate was the
hardest-hit investment category in the CalPERS portfolio during the
2008-09 fiscal year, suffering from the same property devaluations felt
across the country. That portfolio lost 47.9 percent of its value over
the fiscal year. CalPERS awarded the portfolio's senior investment
manager, Ted Eliopoulos, a $93,941 bonus on top of his $333,124 salary,
which was 8 percent higher than the previous year.

According to
CalPERS' annual report, the global equity portfolio saw a 26 percent
decline in U.S. stocks and a 32.4 percent drop in international stocks
during 2008-09. Eric Baggesen, the senior investment officer for global
equity, received a 6 percent raise, bumping his salary up from $300,000
to $318,000 in the 2008-09 year. He also received bonuses totaling
$254,186 over the two-year period.

The AP obtained the data from
CalPERS through a California Public Records Act request and analyzed the
compensation of employees earning salaries of at least $90,000 per year
in both fiscal years. CalPERS says bonuses for 2009-10 are being
determined.

For the sake of consistency, employees who worked
only one of the two fiscal years were not included in the AP's overall
data analysis.

Like all state
employees, those at CalPERS were subject to furloughs in the last half
of the 2008-09 fiscal year, which amounted to a 9.2 percent temporary
salary decrease over the final five months. Those furlough reductions
were not taken into account in the analysis because they did not affect
official salaries used to determine raises and pensions.

Employees of the pension fund are
paid salaries and bonuses out of the fund's investment returns. The
salaries are not paid directly by California taxpayers, but they come
from the same pot as pension payments.


Taxpayers are on the hook to cover the deficit between returns generated
by investments and what is owed to state retirees.

Earlier this year, the pension fund's board voted to take between $480
million and $600 million more from the state to make up for investment
losses and the fact that retirees are living longer and receiving more
pension payments. Part of that will come from the state's general fund,
which faces a $19 billion deficit. CalPERS does not need legislative
approval to enact an increase in the state's pension contribution rate.

CalPERS' board of directors recently voted
to allow the board to defer, cut or eliminate performance awards if the
fund's fiscal year absolute return is less than zero percent, or for any
other reason, Pacheco said. He added that investment managers' salaries
were frozen in the most recent fiscal year, 2009-10.


Board member Olivera said the CalPERS board tried to reduce bonuses for
2008-09 but was "contractually compelled" to honor them.

"But we have taken steps now to make sure that can't happen in the
future," Olivera said.

However,
the board voted Sept. 15 to give the chief investment officer and CEO
authority to award bonuses of as much as 20 percent of salary to
investment managers they're worried about losing to the private sector.
Employees would have to return the bonuses if they leave CalPERS within
two years.

"It's not that they're just piling on
bonuses; this is key to retaining staff," Pacheco said in an interview.

Late Tuesday, Democratic state Assemblyman Anthony Portantino of La
Canada Flintridge said he will reintroduce legislation aimed at freezing
salaries and bonuses at the pension fund, saying the "behavior must
stop."

Republican state Sen. Tony Strickland of Thousand Oaks
reacted to the report by calling for more oversight of CalPERS and the
California State Teachers' Retirement System. He is running for state
controller and, if elected, would sit on the boards of both funds.

Executives and investment managers at
CalSTRS, the state's second-largest pension fund, received bonuses
ranging from $1,856 to $146,000 in the 2008-09 fiscal year, according to
documents provided by spokesman Ricardo Duran.

Senate Minority Leader Dennis Hollingsworth, R-Murrieta, said the
Legislature should scrutinize the way California's pension funds choose
investments and select and compensate staff. He carried pension-reform
bills for Gov. Arnold Schwarzenegger.

"The reason the Legislature
needs to step in is that ultimately taxpayers are on the hook for the
losses that are eventually going to come due," he said.

Signs of
trouble in the markets were apparent during the 2007-08 fiscal year, as
the national recession began to deepen. The Standard & Poor's 500
index declined by 14.8 percent in 2007-08 and 28.2 percent in 2008-09,
while CalPERS' overall value dropped by 5.1 percent and 24.8 percent
respectively.

In the group the AP examined, base salaries in
2008-09 ranged from $94,056 to $349,610, with 15 earning more than
$200,000. Bonuses ranged from $5,957 to $114,083, although bonuses were
lower across the board in 2008. That meant the total compensation for
most employees declined from the previous fiscal year.

The salaries and bonuses were awarded as
public pension plans have come under increased scrutiny, especially for
their growing unfunded liabilities – the difference between the current
value of the investment portfolio and the dollar amount promised to
state retirees.

CalPERS, which serves more than 1.6 million public employees, retirees
and their families, estimated its unfunded liabilities at $38.6 billion
on July 1, 2008, the most recent official estimate available. But a
study commissioned by Schwarzenegger and released by Stanford University
in April estimated CalPERS' unfunded pension liability at $239.7
billion. The two groups used different accounting standards to estimate
the unfunded liabilities.

Schwarzenegger has said California's
current pension system is unsustainable and has called for pension
reforms, saying he will not sign a state budget this year without them.

A
few comments on this article. First, to be fair to CalPERS' investment
staff, pay was not "bumped" as the fund dived. Compensation was based on
a rolling five year period, much like compensation at large Canadian
public pension funds is based on a rolling four year period. The Board
was contractually obliged to honor the contracts. As was stated by Mr.
Pacheco, bonuses in the future will be lower because of the fund's poor
performance in 2008.

Second, there is way too much political
interference in US public pension funds, which highlights the governance
issues that plague these funds. In Canada, board members are appointed
to oversee funds and politicians cannot interfere in their oversight or
in the day-to-day management of the fund and have no say on how fund
employees are compensated. The rationale is simple: you want independent
board members to oversee the fund, and let them gauge whether
compensation was merited. Once politicians get involved in determining
compensation, you're going to ensure mediocre performance over the
long-term.

Third, as outrageous as CalPERS' compensation sounds,
it pales in comparison to what most senior investment officers received
as total compensation at large Canadian public pension funds in 2008.
Only the Caisse was wise enough not to dole out any bonuses whatsoever
during that year, but other funds used the "long-term incentive"
argument to justify doling out bonuses as performance nosedived. This
was a travesty. I noticed that CalPERS board will now scrap bonuses if
the fund experiences negative returns, but the proper way to compensate
all investment managers is by adopting compensation practices that
reflect risk-adjusted returns.

This requires using benchmarks that accurately reflect the risks and
beta of all investment activities. If pension funds adopted such
compensation practices, we wouldn't have seen the disastrous losses they
experienced in 2008. Instead, many senior investment managers took
stupid risks to beat their benchmarks, and they ended up getting whacked
in 2008.

Finally, compensation is always a tricky issue. I have had conversations
with senior investment professionals at large Canadian public pension
funds who think they are underpaid. The argument typically goes like
this: "We manage billions and do not get compensated like hedge fund or
private equity managers".

True, you don't get compensated like hedge fund managers but you're
running a pension fund, not a hedge fund! And let me remind you that
hedge fund and private equity managers have significant skin in the
game, hurdle rates, high-water marks, clawbacks, and if they don't
perform, they get zero bonuses. If you want to run a hedge fund, by all
means, go out there and solicit funds, but in my experience, very few
pension fund managers (or other private sector investment managers) can
actually run a profitable hedge fund or PE fund.

I can go on and on about compensation at large public pension funds, but
this topic will resurface in the future as public pension funds face
increasing scrutiny. Once again, all public pension funds should be
subjected to independent performance, operational and fraud audits (on
top of the standard bogus financial audits) and the results should be
publicly available. The public needs to know that board members and
investment staff are managing assets in the best interest of all
stakeholders, including taxpayers who are ultimately on the hook for the unfunded liabilities of these public pension plans.

Comments

[the not so migh...]

Bob Chapman wrote on this, over 40 states have their public pension 50% under capitalized.  The goverment employee is as fu*ked as the peasents now.  

[Gene Parmesan]

That is assuming that said peasants aren't required to make up the shortfall at some point.

[the not so migh...]

I don’t know how that would work.  Would the peasants cover with their food stamps or become indentured servants for life?  Game over man

[ZackAttack]

For all its flashy strategy, CALPERS has significantly (and in some years, massively) underperformed an equivalent asset allocation in unmanaged indices over a very long timeframe.

We saw just the other day that a large-cap index outperformed their leveraged hedge fund allocation. The small-cap index positively destroyed it.

Here's my idea - fire everyone involved, eliminate the entire food chain of hedge fund, PE and fund-of-fund managers, and let the computers run it for 5 bp per year.

Then, the whole issue of compensation never arises.

[SnarkAttack]

Amen.