Eliminating The Middlemen

A recent article indicates that big institutional investors are empowering themselves to make their own markets instead of continuing to depend on Wall Street. But the members of the Institutional Investors Roundtable don't appear to include CalPERS. However, in 2011 CalPERS joined with other institutions and they have been making some progress toward the larger and very challenging goal of sustainable investing. But I hope they also liberate themselves from Wall Street, and invest in Main Street where most retirees live.

CalPERS Check-Up

CalPERS vital signs may be showing some improvement lately. For starters, the Board raised the rates for employers, that is, the multitude of state and local agencies which depend on it for pension investments. As ably explained by Ed Mendel, the pain needed to ensure adequate funding will be phased in over several years. Hopefully agency budgets will withstand these extractions.

And of course, this still optimistically assumes a 7.5% average return for the foreseeable future. JJ says no prob, all the big institutional investors are equally optimistic. Maybe so, but i hope it's not for the same bad reasons - that lower and more rational forecasts would cause too much pain.

Moreover, CalPERS may be getting a least a bit serious about sustainable investments. I recently got wind of a Symposium, co-sponsored by CalPERS and UCD Graduate School of Management, to be held in early June. It sounded interesting enough that I submitted a paper, but since they picked only 7 out of almost 100, I can't feel that disappointed at being rejected.

Still, after reading the titles of the selected papers, I felt relieved at being left out. The titles themselves are already pretty foggy, and the less obscure titles led to abstracts that left me almost completely in the dark. I have a hard time believing that the Board will be able to really understand them without translation, and I can only hope that CalPERS executive staff will be able to a) understand them, and b) explain their meaning to the Board. Maybe they could even explain it to me.

Personally, reading the titles made me feel like I was watching someone move the Titanic's deck chairs into esoteric arrangements designed to help the authors get tenure. While these papers are probably not wrong, I just can't convince myself they're really on the right track for the post-fossil-fuel future that would be our best investment.

And if CalPERS does actually decide to disinvest in fossil fuels, as some advocate, they will need a whole lot of sustainable investments to replace current fossil fuel investments, given the latter's huge role in our economy.

Are my ideas for post-fossil-fuel investments any better than the fancy academic ones? Maybe - you can judge for yourself. But I am sure that they are more understandable, even for PhD.s in economics.

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.

Relocalized Investments?

Today in the news I read about concerns that foreign investors may gain too much control over corporate domestic assets, such as a gold mine near some military facilities in Nevada.

I hope CalPERS staff are looking for the kind of investments in basic value that such investors are likely attuned to. My father, who did reasonably well with his investments, advocated buying stock in companies that made things people needed and wanted.

From an investment perspective, rates of return on investment in production of needs are low, because such industries are usually old and stable. On the other hand, rates of return on investment in production of wants tend to be higher, because of the growth in sales often seen with new toys and also the risk that this growth is likely to be unrealized or temporary.

But it should be obvious that any economy without businesses that are old and stable and producing basic needs at affordable prices - clean air and water, healthy food, and snug shelter - cannot be a healthy economy. And without a healthy economy, no pension fund can succeed in paying benefits without recourse to the taxpayers.

Is Capitalism Sustainable?

Some recent commentary on the anniversary of the fall of communism suggests mixed reviews.

But it's safe to say that Pogo was right. We have met the enemy and he is us. No one can manage their money wisely if their underlying values are about money rather than about reality. Wall Street says it cares about Main Street, but I'm skeptical.

Of course, if worse comes to worse, you can always blame someone else.

Is Arnold Gaming This CalPERS Pension Contribution?

I just read that the Governator wants to pay CalPERS $4.8 billion next year rather than one of the lower and longer-term options CalPERS offered the state.

But is this more or less fiscally responsible than paying one of the lower options this year and more in later years? By paying more now, Arnold puts CalPERS more on the hook for their own promise of 7.75% per long-term-average year. I wager that CalPERS' calculations of the higher payments that the state would have to make later, if it contributed a lower amount next year, are based on that 7.75% assumption. Perhaps Arnold doesn't think the state's tax economy will grow 7.75% per year in the future. I would not predict it either. (Of course, taxes are not a fixed proportion of the economy.)

On the other hand, neither Arnold nor CalPERS have offered any answers to the questions above. How will CalPERS identify and invest in enterprises whose returns will fund retirees' pensions and whose workers will produce directly the most sustainable good and services? Will these enterprises offer 7.75% ROI? I would not predict that either.

But we don't need 7.75%, especially if we are investing in direct production such as properly civilizing and empowering our children. Or investing in ecovillage smart growth.

More immediate relief could come in the form of state retirees stepping up to the plate and en masse agreeing to progressive reductions in benefits, where the smallest pensions were maintained while the largest bore the brunt of an evidence-based sliding scale. Or CalPERS could invest in the state educational system.

Legislators Say: Do As I Say Not As I Do

Today in the Humboldt Times-Standard, I found an op-ed piece that revealed a well-kept secret that I don't recall reading about in the Bee: our Legislature thinks they don't deserve the same pay cut that has been inflicted on other state employees.

Apparently the California Citizens Compensation Commission decreed back in May that legislators' pay should be cut 18% effective December 2010, from $116,208 to $95,291, and also that per-diem, car, medical and other benefits should be cut 18% effective next month.

And legislators are feeling so threatened and deprived, they have been whining to AG Jerry Brown, claiming that if they are based on budget problems rather than on the constitutional criteria that are presumably prescribed as a basis for the commission's decisions.

What is not immediately clear is whether or not legislators have read the existing legal opinions which the commission presumably based its actions on. It's also not clear why the AG should spend its remaining unfurloughed staff time on this rather than on truly important matters that affect the whole state.

It's also not clear if CalPERS has any legal basis for putting legislators in their place, nor if they have the moral authority to do so, given recent reports of funny business highlighted in previous posts. But it's in the interests of CalPERS members and retirees, even those who reside in other states, for legislators to follow the rules and take their fiscal medicine, just like everyone else.

As my mom used to say, 'joys shared grow happier; sorrows shared are weakened.'

Does CalPERS Have A Board Recall Process?

About halfway through this news article, we learn that Kurato Shimada, re-elected to the CalPERS Board just a few weeks ago, is also implicated in the insider-trading funny business that tars two former colleagues on the Board, Alfred Villalobos and Fred Buenrostro, as well as the lame (and ill) duck, Chuck Valdes.

The mystery of the power of incumbency is clearly not yet solved. Although we may easily identify the perpetrator - namely, human nature - the nature of the motive is far murkier. But until that clarity is achieved, I fear that democracy will fail to achieve its promise of the greatest good for the greatest number.

Sustainable Pensions

It's not news that pension funds nationwide have taken a beating, and face tall challenges if they are to meet the overly-optimistic commitments which have been made.

As a retiree, I am very concerned about a CalPERS investment strategy that is fixated on a numerical target such as 7.75% ROI, rather than on investments which are sensible and low-risk. Personally, I would prefer to see relatively small reductions in my modest stipend if they meant that CalPERS would have the flexibility to abstain from unrealistic or uncomfortably high risk.

The selfish attitude of too many civil servants, that they should get what has been promised no matter who else suffers, could easily erode everyone's quality of life as local and state governments gut basic services now and in the future.

Retirees, many of whom receive stipends that dwarf mine, should have options to give back some of the money in return for considerations such as having the capital that has been set aside on their behalf invested in more conservative and less risky ways.

Another alternative would be investing such capital in truly sustainable ways that could directly benefit such wise pensioners.

I'm Voting For JJ Jelincic

JJ and I sat down yesterday afternoon for a discussion of CalPERS, economics, and sustainability. After almost 2 hours of a wide-ranging conversation, I feel that his understanding of CalPERS as an organization, the details and structure of the financial system as a whole, and the practice of ethical politics, all make him an excellent choice for helping protect our retirement security and strengthen CalPERS operations. Apparently he had been considering running for at least a year before making a definite decision about a year ago.

While my ideas about how best to achieve sustainability, and related concepts about economics, are unusual, he understood these ideas well enough and readily enough that our conversation was for me an enjoyable discussion and meeting of two informed and independent minds. I believe we both learned some valuable information and concepts.

He listed 4 key reasons for running:

1. having a board member with his level of investment expertise

2. cutting costs by bringing money management in-house and reducing the use of contractors and consultants, and also reining in top staff salaries

3. defending defined benefit pensions in general

4. improving corporate governance

However, I have not yet had the opportunity for a similar discussion with Cathy Hackett, which I hope will take place later this month. Still, I should state for the record that I am somewhat skeptical of unions in their role nowadays, although more skeptical about corporations. Union leadership often seems to focus on money only and not on the larger leadership of ensuring a robust economy that can actually meet everyone's needs. And they are not always open to new ideas, such as when Bill Camp and the Labor Council didn't even bother to talk to me before making an endorsement in Sacramento's 2008 mayoral race.

Nov. 5 update: Having never had an opportunity to discuss economics and CalPERS management with Cathy Hackett, I cannot know if I would have changed my mind. But maybe she didn't really want to respond to my questions.

Another Predatory Investment Comes Home To Roost

Today's paper had more news about investment woes at CalPERS. It turns out that this isn't exactly new news.

As in East Palo Alto, this ill-timed real estate venture is all about dispossessing renters and profiting from gentrification. But apparently the tenants were tenacious, being as fond of their homes as anyone.

Especially nowadays.

Healthy Lives Essential to Wellness

Rep. Matsui and CalPERS Board Chair Feckner explain - and advocate - how to fix our health care system, and why we need to.

But as long as we continue to live the lifestyle common in the over-developed countries, this fix won't stick. We need to use less fossil fuel, less sugar and white flour, less paperwork, and do a lot more walking, gardening, and traditional crafts that are the foundation of local self-reliance and sustainability.

Now, half the people do all the paperwork, a quarter of the people run the machines, and a quarter of the people are either homeless or filthy rich. We need a 20-hour workweek so people have time to take care of themselves and their families, and live a healthy balanced life.

Discussions about economic welfare never address the insecurity of a very uncertain future for this economic system, and of not knowing how your town will be able to take care of itself locally. We need to de-develop in order to achieve the greatest economic security for the greatest number.

It's Not the Money, Folks

Apparently CalPERS invested in another ill-fated real estate venture to gentrify East Palo Alto.

The weak link in their analysis is similar to the misperception which underlies regulators' concern that banks should retain more capital as a proportion of loans on their books. But the real cause of the financial crisis was bad collateral, overvalued houses funded with abusive mortgages. So what banks must do is insist on quality collateral for their loans, and exercise due diligence on mortgage terms.

Similarly, for CalPERS, the quality of an investment cannot be completely evaluated by looking at the expected monetary return on investment. One also has to look at how an investment will directly help meet people's needs for clean air and water, healthy food, and snug shelter. A project that substitutes rich people's needs for poor people's needs just creates for social chaos.

Will The Real Conservatives Please Stand Up?

The Tea-Party March on Washington last Saturday was billed as a grassroots movement of conservatives. But since the dominant theme seemed to be frustration, it's hard to tell what they wanted to conserve. Jitters about the national debt, while understandable, seem like a delayed reaction, given military spending in this century and the last.

But whatever "conservative" means, there is something suspicious about any definition of conservatism that attracts fewer women than men. Given the nature of human reproduction, women are by definition the more conservative sex. Whether created or evolved, the sex whose reproductive success requires more long-term planning is the sex who will conserve and allocate resources in the most judicious and thrifty way, ceteris paribus.

I can't help noticing that groups labeled "progressive" often attract women and others who are having trouble finding enough resources to conserve. While I'm not altogether sure exactly what "progressive" means, I think these groups are often trying to improve people's lives.

One way of looking at all this is to try to find the best of both worlds. So, if it is conservative to think we have to live within our ecological means, then I am a conservative. And, if it is progressive to think we have to share when we can, and take care of mothers and children first, then I am a progressive.

But what about CalPERS? How can investments best succeed at optimizing both resource uses and outcomes? One way is by directness; by minimizing the distance, the amount of processing, between resource and outcome.