California Public Employees’ Retirement System wants to change state law to allow it to shield from the public information about its private lending program.
A bill to do that is set to be reviewed by a state senate committee on August 5.
California Assembly Bill 2473 already passed the lower house of the California legislature with little fanfare amid the coronavirus crisis despite criticism from stakeholders and at least one CalPERS board member.
AB 2473’s author is Assemblyman Jim Cooper, a Democrat whose district encompasses part of Sacramento county, where CalPERS is located. The system is a sponsor of the bill.
The bill would exempt CalPERS from disclosing the owner of any company that borrows money from the pension. Private loan agreements, due diligence materials, borrowers’ financial statements and the borrower’s collateral would also be exempt from disclosure.
Upon request, the public would be able to learn the name and address of each borrower, the amount of each loan, the annualized time-weighted return of each loan, the amount in payments made by the borrower to CalPERS and whether a loan has been in default for six months or more.
CalPERS role in AB 2473
The CalPERS board approved pursuing legislation at its February meeting. According to the agenda item, CalPERS’ private debt lending would be part of its Opportunistic Strategies asset class. As of June 30, that portfolio was valued at $100 million.
Earlier this year, Buyouts reported that CalPERS increased its budget for opportunistic strategies. In August 2019, chief investment officer Ben Meng said part of the strategy involved distressed debt opportunities rising from a market dislocation.
On February 19, chief of legislative affairs Danny Brown told the board CalPERS would be unable to compete with private alternative debt providers if it was required to reveal too much.
“It could impair CalPERS’ ability to fully participate in this market,” he said, according to the meeting transcript. Meng also said potential borrowers could go elsewhere for their loans.
Board member Margaret Brown (no relation to Danny Brown), a frequent critic of CalPERS investment policy, said “messing with” the California Public Records Act was a “slippery slope.”
“I know that in private equity they call everything a trade secret,” she said. “I want us to be very, very careful that we don’t expand the definition of what needs to remain private or hidden.”
The board approved the plan, with Margaret Brown casting the sole dissenting vote.
Danny Brown said staff had “draft language” finished but would have to find someone to introduce it in the Assembly. But, the bill was filed with the Assembly the same day, according to the legislature’s website. CalPERS declined to comment about this. Cooper’s office did not respond to a request for comment.
“This bill would establish disclosure requirements relating to private-loan records that parallel existing law relating to alternative investment vehicles and public banks,” a CalPERS spokesperson told Buyouts.
The bill also would include California State Teachers’ Retirement System. A system spokesperson said the teachers pension had no involvement in the bill.
Opposition to AB 2473
Several stakeholders and CalPERS critics have problems with the bill, namely not disclosing the terms of loans or the names of borrowers’ owners.
In a letter to State Senator John Moorlach, Margaret Brown said the terms of any loan from a public entity must be public.
“Any entity seeking investment of funds held in trust for the public must be willing to subject themselves to a certain level of scrutiny that they would not necessarily face in a private market,” she wrote.
“There is a strong temptation to make deals which might not be in the best interest of the beneficiaries, and a public pension trust fund is not in a position to gamble in hopes of ‘hitting it big’ on a long-shot with poor odds of success,” she went on. “Secret investments of public trust funds are never in the public’s interest.”
The city of Pasadena, California also opposed the bill in a letter to State Senator Jerry Hill, the chairman of the Senate committee.
“The terms and parties to any loan of funds held in public trust, once executed, are matters necessary for members of the public to assess whether CalPERS staff and the CalPERS board are acting in the best interests of taxpayers, the members and the beneficiaries,” it said.
“This money is a trust,” said Rosemary Knox, the president of the Retired Public Employees Association of California, which opposes the legislation. ”I do believe that we have a right to know who is being invested in on our behalf.”
JJ Jelincic, a former CalPERS investment staffer and board member, spoke out at the February board meeting against the bill and wrote his own letter to the senate committee in June.
“It encourages loans to front or shell companies,” he wrote in his letter, dated June 29. “This bill is about secrecy and not investments.”
The bill is on the agenda for the committee’s Wednesday, August 5, hearing, according to its website.
Action Items: read the text of AB 2473 here. Read the agenda item and transcript of the February 19, 2020 CalPERS board meeting here and here.