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Thursday, Oct. 22, 2009

Our View: CalPERS agents should scrutinized

If review finds fund losses traced to improper activities, public is owed an explanation.

The California Public Employees' Retirement System's Board of Administration approved a $100 million investment in 1997 over the objections of the pension fund's professional investment staff.

That investment in a Texas-based private equity firm was pushed by Al Villalobos, a former member of the CalPERS board.

After leaving CalPERS in 1995, Villalobos set himself up as a placement agent, a middleman who helps companies seeking opportunities to invest slices of the public pension fund's vast assets.

Ten years later, when CalPERS finally bailed out of the Texas deal Villalobos helped arrange, it had lost $30 million on its original investment, more if inflation and lost opportunity is factored in.

It is impossible to calculate the potential gains the fund might have earned had it invested its $100 million in some other more prudent investment opportunities.

Last week, CalPERS announced it was conducting a "special review" of the "fees paid by its external managers to placement agents."

Pension fund officials launched the review after discovering Villalobos had collected $50 million in fees from companies seeking opportunities to manage portions of CalPERS' billions of dollars in assets. Like the Texas equity deal, most of the 11 pension fund investments involving Villalobos that CalPERS disclosed lost money.

Beyond the exorbitant fees Villalobos was paid, his firm hired former CalPERS Chief Executive Officer Fred Buentrostro last year, just as the giant pension fund's value plummeted. The hire raises important questions about improper influence Villalobos may have had with top officials at CalPERS.

The review of CalPERS is the latest move in a widening national probe of politically well-connected middlemen who help steer billions of public pension fund dollars to their clients for a fee.

New York Attorney General Andrew Cuomo, who started the investigations in New York, already has obtained guilty pleas in several cases involving placement agents and alleged bribes to New York public pension fund officials. California Attorney General Jerry Brown is part of a task force Cuomo has established to fight pension fund abuse nationwide.

Villalobos is not the only former CalPERS board member under scrutiny. Sean Harrigan, who served on the board in 2003 and 2004, later joined the Los Angeles Police and Fire Pension fund. He resigned last May, citing a Securities and Exchange Commission probe into his ties with a firm that has become embroiled in the New York state pension fund investigation.

All the investigations targeting pension fund abuse should raise alarms in government circles throughout California. CalPERS, with current assets totaling some $200 billion, manages retirement funds for 1.6 million government workers.

The fund lost 23 percent of its value last year. State and local governments that rely on CalPERS to invest their pension funds are bracing for huge contribution increases to backfill for those losses.

As their costs have mounted, the state, cities, counties and special districts have been forced to slash services, lay off workers and impose furloughs.

If its review finds that any pension fund losses can be traced to improper activities by influential former board members, CalPERS will owe the public an explanation -- and an apology.