Calpers staff voices concerns with transparency bill

  • Staff supports transparency bill “in principle,” has reservations about costs
  • Impact on existing funds could cost Calpers “tens or hundreds of millions”
  • Annual administrative costs to rise by $800,000 across Calpers, Calstrs, UC system

California Public Employees’ Retirement System’s staff tacitly endorsed a State Assembly bill requiring greater disclosure of fees and expenses, but only if it’s amended to reduce “significant negative impacts” to the pension’s costs and operations.

Chief among their recommendations: Staff held an unfavorable view of a provision requiring the negotiation of additional disclosure from existing alternative investment funds.

AB 2833, sponsored by Assemblyman Ken Cooley with the support of Calpers board member and California Treasurer John Chiang, mandates alternative investment managers provide relevant fee and expense information on forms prescribed by state and local retirement systems. The retirement systems would then have to make annual disclosures of fees and expenses.

Under the bill, fund managers who sought amendments, extensions or renewals on active vehicles from Jan. 1, 2017, onward would be subject to the new disclosure requirements.

Reduced influence

If the managers refused to comply, Calpers would be forced to abstain from limited-partnership votes on any new proposals, effectively limiting its influence among the fund’s investors, staff wrote.

Calpers’s inability to invest in funds that reject the disclosure requirements, or to vote on amendments or extensions requested by certain investment firms, “could negatively impact Calpers investment returns in material amounts, potentially tens or hundreds of millions of dollars,” wrote staff members Mary Anne Ashley and Wylie Tollette in a memo.

That’s on top of the actual cost of implementing new reporting standards. A State Assembly committee analysis of the bill found that should AB 2833 become law, it would increase annual administrative costs across Calpers, California State Teachers’ Retirement System and University of California Retirement Systemby a combined $800,000.

“Calpers strongly supports AB 2833 in principle but several amendments are necessary to minimize negative impact on Calpers operations, reduce costs, and allow for standardization in reporting among the private equity funds in which Calpers invests,” Ashley and Tollette wrote.

The memo goes on to say that staff would support a bill that limited enhanced disclosure requirements to new fund commitments.

Treasurer Chiang’s office had not yet formally assessed Calpers’s recommendations, Deputy Treasurer Grant Boyken told Buyouts. That said, the treasurer’s office is not likely to support an amendment.

“Our thought was, let’s capture as much (of the portfolio’s fees) as possible,” Boyken said. “I think they have some legitimate concerns about complexity. Without speaking for the treasurer, I would say our position hasn’t changed.”

Calpers board member JJ Jelincic, a longtime advocate for greater transparency around the private equity program, agreed: “One of the things they’re trying to do is align the current bill with our current reporting standards. But the reason the bill exists is because our current reporting standards aren’t adequate,” Jelincic said.

Even so, both Boyken and Jelincic said they supported other amendments recommended by staff, including greater clarity around which “related parties” would be subject to the disclosure requirements.

Staff also requested an amendment to provide that the reporting of all data come from Calpers rather than the alternative investment manager. Another recommended amendment would break out the reporting of different fees, including carried interest, as individual line items in the retirement system’s annual disclosures.

Hot-button issue

Calpers’s accounting of fees and expenses became a hot-button issue for the pension in mid-2015, when Tollette said staff lacked the ability to track the amount of carried interest collected by private equity fund managers.

After a subsequent analysis of its records, Calpers disclosed it paid out $3.4 billion in carried interest to active general partners since its inception.

“Our ultimate hope is that if we have reporting requirements … then we can have a conversation about the appropriate level of fees,” Boyken said.

“It was a revelation last year when we found out we don’t have a full view into carried interest and other fees, and we can’t have that conversation until we have that fuller view.”

Cooley and a Calpers spokesman could not immediately be reached for comment.

Action item: Calpers staff’s recommendations: