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CSU-ERFSA Legislative Director Raises Concerns About Recent CalPERS Investment Decisions

Our Legislative Director, Robert Girling, made the following statement to the CalPERS Risk and Audit Committee on Tuesday, April 21, 2020 in response to widespread concerns raised about a decision by the CalPERS Chief Investment Officer to sell certain "tail-risk" investments. These investments were a hedge against a sharp decline in financial markets. It is estimated that the sale of these tail-risk investments before the recent sharp declines in the stock market cost the CalPERS pension fund approximately $1 billion.

To the CalPERS Board of Administration:

The CSU Emeritus and Retired Faculty and Staff Association (ERFSA) commends the Board for its responsiveness to the valid concerns of members regarding Investment Committee Item 7.b Delegation Resolution.  The concerns raised by and voiced by State Controller Betty Yee and all members of the Board correctly recognized the problems inherent in the resolution.  We thank you for your vigilance and hope that this proposal will be permanently withdrawn. [Webmaster's note: The resolution in question delegated broad powers to approve investment strategies and decisions to the 7-member Investment Committee without receiving approval from the entire CalPERS Board of Administration.]

ERFSA members respect the work done by CalPERS staff and Board working together to safeguard our resources and prudently manage our investments.  We deeply appreciate the dedication and goodwill with which you work for the people of the State of California and our State pensioners.

We are concerned by the characterization of critical public comments by CalPERS retirees and representatives as ill-informed. We have drawn our information from the public record.  

According to Bloomberg: 

"CalPERS had been warned about the perils of shifting strategy. At an August 2019 meeting of its investment committee, Andrew Junkin, then one of the pension plan’s consultants at Wilshire Associates, reviewed the $200 million of tail-risk investments.

“Remember what those are there for,” Junkin told Calpers executives and board members, according to a transcript. “In normal markets, or in markets that are slightly up or slightly down, or even massively up, those strategies aren’t going to do well. But there could be a day when the market is down significantly, and we come in and we report that the risk-mitigation strategies are up 1,000%.”

"A number of [the CIO’s] subordinates argued in favor of keeping the hedges in place, saying it was only a matter of time before the 10-year bull market in stocks came to an end, the people said."

Let me further add that CSU ERFSA does not endorse any Public Comment that could be construed in any way as insulting or offensive to any individuals or members of staff or the Board.  As stated, we hold the Staff and the Board in esteem.

However, in view of the controversy surrounding public perception of errors in judgment by the Staff, we would advise the Board to retain independent financial counsel to assist in the interpretation of the complexities of financial decision-making that they are being required to do on our behalf.  We believe that this will avoid the desire by some members of the Board to rely solely on un-examined Staff interpretations and provide Board members with the basis for careful examination of alternative views where needed.

Let us reiterate our full confidence in the Board to manage our investments in this time of great turmoil and uncertainty.  CalPERS has weathered worse storms than the current financial crisis. We are heartened to know that the CIO had taken steps to reduce risk of the portfolio and improve the liquidity management, steps which should assist in recovering from the estimated $70 billion losses since the beginning [of the current market decline].

Robert Girling
[CSU-ERFSA Legislative Director]