UC Regents & CalPERS Drank the Same Kool-Aid

Just got around to reading last week's News & Review about funny business by UC Regents. I guess the Haas School of Business was asleep at the wheel.

It seems that key regents got carried away just like some CalPERS board members and financial advisors. Why do rich people think they are smarter than the rest of us?

Maybe because it's because most people aren't paying attention. Or maybe it's because most people have drunk the exact same kool-aid, and think that men in expensive suits must be better at making money.

But doing what everybody else is doing is guaranteed to be a lame investment, although doing the opposite of everyone else is not a guarantee either. There's no substitute for rationality.

And there's no substitute for thorough inspection of the reality behind the money, even if widespread lack of transparency makes it practically impossible.

Sustainable Return on Investment?

I read in the paper this morning that CalPERS' consultant thinks the fund's ROI will average 7.84% during the next decade. But a model is only as good as its assumptions.

I fear that Wilshire's model, like virtually every economic model in use, conceives of money as the independent variable, when in fact it must always be the dependent one.

Big Business vs. Small Governments

Republicans like to pretend that government is all bad. But business is certainly not all good.

State Street Bank and CalPERS Assets

I read in the paper that CalPERS isn't going to fire State Street Bank, a corporation with at least 25,000 people in 9 sub-corporations, not every department of which may be 100% honest and transparent. Reportedly, State Street provides CalPERS with several types of services, ranging from custodial and administrative to investment management. It appears that State Street has gobbled up much of its competition during its relationship with CalPERS, which goes back to at least 1999.

It's not entirely clear whether or not State Street is managing members' deferred compensation accounts, although that does seem to be a service they offer. DPA says Nationwide Retirement Solutions manages it via their service center site, although at the bottom it says "Retirement Specialists are Registered Representatives of Nationwide Investment Services Corporation," a member of FINRA, and in turn a part of Nationwide Financial Services, Inc., (look, the logo matches!) which apparently is now privately held by Nationwide Mutual Insurance Company. I may have gotten lost and started going in circles here, but nonetheless I have to say Savings Plus has done all right by me. They offer me funds that perform consistently with their descriptions - bonds, stocks, risk levels - and I choose what works.

Unfortunately, it appears that both Nationwide's and State Street's awareness of sustainable investment is very superficial. While they say they are committed to reducing the environmental footprint of their own operations, they seem unconscious of any impact of climate change on the economics of pension investment.

Such myopia on the part of anyone whose livelihood depends on achieving numerical monetary targets like an average 7.75% return is not surprising. Their 'economic' vision reads just like that of the editors of The Economist - it's all about monetary growth and never mind all the refugees. But even on that front, mortgage-related challenges still lurk, not to mention ancillary market distortions.

But future monetary returns depend on a real economy that is healthy. Economies with millions of homeless refugees displaced by capitalist numerical ideologies are not healthy economies. I know there are at least one or two other paradigms available.

When will the CalPERS Board talk about paradigms outside of the monetary-growth box?

Is College A Good Investment?

Apparently the politicians in the legislature think prisons are a better investment than California's public universities, since the portion of the general fund that has been taken away from the CSU and UC systems in the last 25 years is somewhat more than the additional portion that CDCR has received.

I'm glad that the "Blue and Gold Opportunity Plan" covers fees for students from families making less than $70,000, but is there an implication that this is the floor for the middle-class? And what is the ceiling for middle-class? I sincerely hope it is lower than the inflated salaries enjoyed by Mr. Yudof and other big cheeses. If Yudof truly believes that UC is "in imminent danger of losing our quality and competitive edge," why hasn't he lowered his salary to just take what he really needs?

But from a larger economic perspective, I have to ask myself what kind of college educations society really needs. I have noticed a substantial amount of 'degree inflation' in the past generation or two. The excellence and expertise of my engineering professors at San Jose State was not strongly related to their paper diplomas; some of the best had only a BS while some weak ones had PhD's. And nowadays many youth think that you can never get a good job without the college ticket.

However, few jobs really require a bachelor's degree, let alone a master's or doctorate. Maybe we should stop worrying about our competitive edge, and start paying attention to cooperating with each other, because no economy can function without lots of cooperation. In fact, you can't have a legal transaction if coercion or force are required.

Yet coercion is implied in our usual attitude toward our jobs. But why? Why not do jobs we like instead of ones we don't? As the originator of Open Space Technology points out, "After all, if we did only what we cared to do, not much would get done. Or would it? Isn't it true that jobs done by people who don't care are not worth much? Is it not also true that people who care greatly accomplish incredible things? And fortunately, there are a lot of different people who care about a lot of different things, which means there is a high likelihood that the majority of things needing to be taken care of will be taken care of--by someone who cares."

What if our economy was based on taking care of things rather than making money? Which kind of economy would be better for old pensioners?

What if our economy was based on healthy human nature? Maslow's hierarchy offers guidelines, suggesting that most people do best when their life is a balanced blend of physical and mental activity. Bureaucrats in offices will benefit from exercise such as gardening that is more useful than jogging, and construction workers will benefit from exercise such as math and literature classes. Artists needn't worry about making money with their art because everyone makes art, along with taking care of the various things that each one of us care about.

The first thing we care about is physical survival, which means water, food, and sleep. Then comes our future water, food, and sleep, and next our community. Getting to this economic level means sustainability and security. The other things people care about are all the fun--creativity, play, spirituality, and life-long learning. Sure, some people are better artists than others, but few artists will be happier doing only art than as a jack-of-all-trades.

And even with universal health care, nobody lasts forever. But nothing can ever take away the happiness of living one's own best life. And not some celebrity's life.

Pension Reform?

Did sparks fly at yesterday's CalPERS pension forum? Maybe one or two. But worse, the focus on facts which was highlighted by the moderator could have used better lighting - and some key summary charts instead of just big talking heads onscreen. Still, the formidable "California Retirement Dialogue Resource Material" book which was available at the forum appears to contain many facts, and would require in-depth study to discern the conclusions and implications for taxpayers and for CalPERS members and employers.

Four thoughtfully selected panels provided the meat of the agenda. More than a few of the day's panelists had participated in the Post-Employment Benefits Commission (PEBC, which is apparently the same as the Post-Retirement Pension Commission). The first panel moderator was Amy Brown, the editor of The Public Retirement Journal. Mr. Oliveira, a CalPERS Board Member, talked about pension reform, sustainability (but just the financial kind), volatility, local control, transparency, and the need for legislation to provide the tools for sensible change. A panelist who must remain nameless because I didn't note it referred us to the National Institute on Retirement Security and one or 2 of their recent Research Reports.

Other informative and thought-provoking remarks were heard from Richard Stensrud, CEO of Sacramento County's Retirement System, Norman Stein of the National Pension Rights Center, and Harvey Robinson of RPEA. Prof. Stein listed key pension principles, such as universal, secure and adequate, that all pension programs should follow, while Mr. Robinson mentioned the need for economic and actuarial realism, and the need to integrate collective bargaining with individual choice.

As noted in the Bee's headline (which was surprisingly hard to find online), we got a little excitement after lunch to keep us awake. Not surprising, when you consider that the organizers had put David Crane (of the California Commission for Economic Development and Arnold's special assistant to get a 2nd tier) in with 2 union guys, who were less fact-oriented than one could have wished. Why are manly men so sentimental? Moderator Robert Walton, a retiree from CalPERS and former member of the PEBC, may have been the one who mentioned that only 25% of benefits come from actual contributions, and 75% are returns on investments. Gary Pokorny, Walnut Creek's city manager, seemed very sensible. He may have been the first to sound the recurring theme of the afternoon, that 'tis better to change oneself than to change by initiatives passed by disgruntled and economically terrorized voters with "pension envy."

Wrapping up with a nuts-and-bolts sort of panel, we heard from David Felderstein, retired from the State Senate Public Retirement and Social Security Committee staff, Scott Adams, a pension analyst with AFSCME, Ann Craig of Placer County, and one or 2 others. Although I don't exactly agree that police work is a young person's job, I didn't realize that public safety staff typically don't get social security. I also realized that retiring and then annuiting is a way for people to work part-time, which state managers resist strenuously when you ask them for it. Another interesting factoid is that a substantial minority of CalPERS pensioners have moved out of California.

We heard more echoes of the themes of local control (one size doesn't fit all), and of choosing to reform to preempt initiatives for more stringent changes. And the perennial question of political will - how much discipline do we have to contribute now for a future rainy-day market crisis?

There's no denying the fact that systemic forces are creating pressure for change.

But there was no discussion of the larger economic picture, and trends like oil depletion and climate change that could upset the whole GDP-$$ structure of the monetary system. So I can't begin to answer the question posed by Mr. Hamm of the CAHP, "What's normal? What's the 'normal' market that we'll return to after this financial crisis is over?"

Autopsy of the Financial Crisis

Today C-SPAN2 broadcast one of the ongoing hearings of the Financial Crisis Inquiry Commission, chaired by Phil Angelides. One of today's witnesses, Mary Schapiro, Chair of the Securities & Exchange Commission, testified that voluntary regulation is a bad idea under almost all circumstances. Presumably this applies to all kinds of government regulations. Schapiro stressed the importance of financial accounting practices that are truly consistent with reality.

She also mentioned that pension funds are required by law to purchase only securities and other investments that have been rated AAA.

Perhaps CalPERS, and other California pension and ordinary investment funds, should consider forming their own rating agency, since the existing agencies (notably Moody's, Standard & Poor's, and Fitch) offered uniformly warped advice, leading many investors to make decisions they thought were sound but turned out to be the kind of investment you usually make in Las Vegas.

Later on, Illinois's Attorney General, Lisa Madigan, described a problem faced by many states, where federal preemption prevented states from regulating these sorts of problems. And Texas' State Securities Commissioner Denise Voigt Crawford reiterated this plaint, describing it as a turf battle that leaves citizens poorly protected from financial predators. Apparently, they fear that proposed 'reform' legislation will deprive states of the right and power to protect their constituents.

Crawford, who is also the President of the North American Securities Administrators Association, went on to express concerns about regulatory capture of securities oversight agencies by businesses such as investment banks.

I suspect that those who want to make government so small you can drown it in the bathtub have overlooked the fact that when business is not equally modest, such regulatory capture will be the rule rather than the exception. But then that's just business as usual.