Sunday, May 21, 2017

Sad and bad news at Calpers: Jelincic to retire and Governor and Treasurer propose a gimmick

Sad and bad news at Calpers:  Jelincic to retire and Governor and Treasurer propose a gimmick

I’ve never met with or talked to Mr. Jelincic, but he’s one of my public pension heroes. Mr. Jelincic has been a director of CalPERS, the nation’s largest pension plan.  He’s a hero because he’s raised the uncomfortable questions about the investment performance, asset allocation, and expenses of the California pension.  Normally, someone can’t be a hero for just doing his job.  However, Mr. Jelincic has been ridiculed and even censured by fellow board members.  While the rest of the board sought congeniality in lieu of solutions and answers, Mr. Jelincic conducted a one-person inquiry.


Mr. Jelincic’s retirement is not the only bad news out of California.  In addressing the looming pension deficit, Governor Brown and Treasurer Chiang have proposed a gimmick instead of a step forward to address the problem.[1] They’ve proposed contributing an extra $6 billion to the pension.  However, they’re using borrowed money instead of taking the hard decision and contributing additional appropriations.  California taxpayers who bear the primary risk of the pension’s deficit are being asked to bear even greater risk by this subterfuge.  CalPERS pension faces challenges because they’ve sought politically expedient solutions.  For a long time they bet that the higher returns of private equity and hedge funds could solve the problem.  It didn’t work.  Now they’re resorting to financial jujitsu.

I’ve written periodically about the problems at CalPERS, which are serious. [2] Performance has lagged, fees have soared, and funding has been inadequate.  In addition, CalPERS has resorted to selective and misleading disclosure to keep the public from getting a clear picture. Those are ingredients for further trouble because no one is taking responsibility or accepting blame.  Mr. Jelincic made enemies because he dared to do the job of a prudent director.  Pension beneficiaries and taxpayers alike are losing their strongest advocate.

Tuesday, April 18, 2017

Showing up for work early isn't advisable for some

Showing up for work early isn't advisable for some

On a residential street in the Town of North Castle, Westchester County, NY two men sat in a white Honda waiting to start work as flagmen for Consolidated Edison.  After a few minutes, an unmarked and then a marked police car arrived with lights flashing.  The men were asked to step out of the vehicle with their legs spread and their hands on the trunk.  One officer asked to search the vehicle, while the other “guarded” the two men by resting his hand on his service revolver.  A third police car arrived with flights flashing.  The men were asked to step back, so the trunk could be searched.


As the officers were completing their search, a large ConEd truck came over the hill and parked.  At that very moment the police officer found two stop and go signs and two neon colored vests in the trunk.  The officer closed the trunk, spoke briefly to the two men, and then the three police officers got in their cars and drove away.


The two men, a Latino and an African American donned their vests grabbed their signs and went to work.   I spoke briefly to each of them: this wasn’t their first stop.

Thursday, April 13, 2017

The wrong lesson: apologies aren’t a P.R. exercise

The wrong lesson:  apologies aren’t a P.R. exercise

Press Secretary Sean Spicer and United Airlines Chairman Oscar Munoz issued apologies recently, which prompted the New York Times to write about the “delicate and increasingly common ritual of the corporate and political worlds: the public apology.”[1]  It took Mr. Spicer and United Airlines several iterations to say they were sorry for their comments, and the Times wondered why public and corporate officials have so much difficulty apologizing.



The Times reporter, Michael Grynbaum, never realizes that he hasn’t gotten to the core of the problem early in his story.  He leaves us with the conclusion that Mr. Spicer, Mr. Munoz, and many other officials have just not absorbed the lessons of making an effective apology.   In two revealing sentences Mr. Grynbaum reports:

The fine art of repentance is a skill taught in business schools and promoted by high-priced consultants.

The key to contrition, according to public-relations experts, is projecting sincerity, humanity, and a plain-spoken demeanor — the better to convince a cynical public.

The key to an effective apology doesn’t require business classes, consultants, or public-relations experts.  An apology isn’t really an apology unless the speaker means it.  I’m not talking about being a good actor and delivering the right script.  If you don’t really feel remorse then your apology is hollow, and all you’ve done is tried to placate the public.

Was Mr. Spicer really sorry for offending the survivors and relatives of those gassed by the Nazis?  No, he was upset about letting down his boss, President Trump, and creating a distraction during this week’s news cycle.  Was Oscar Munoz really sorry that security officials dragged David Dao off an airplane?  No, he was responding because United Airlines’s load-factor was about to take a hit.  Even if each of them had delivered a better-rehearsed statement of contrition, their respective apologies would not have been any more effective or sincere.

Most families and religious organizations teach us everything we need to know about apologizing.  We know that remorse and contrition require us to take personal responsibility for our transgression.  However, when we step into the public or corporate spheres those lessons are left behind.  The public’s cynicism about our government and corporate institutions would be far lower if our leaders spoke from the heart instead of from a set of well-craft talking points.










[1] https://www.nytimes.com/2017/04/12/business/media/apology-sean-spicer-holocaust-oscar-munoz-united.html?ref=business&_r=0

Friday, April 7, 2017

Accounting is the Wrong Lens: North Carolina’s new treasurer is cutting fees

Accounting is the Wrong Lens:  North Carolina’s new treasurer is cutting fees

North Carolina’s new Treasurer Dale Folwell says that the state public pension plan and health insurance fund are in trouble[1].  The two funds represent completely different levels of challenges.  The health insurance fund is in trouble.  Rather than building reserves to fund the future health expenditures of employees and retirees, the state has operated it on a pay-as-you go basis.  An aging cohort of beneficiaries and escalating expenses has turned health care into a $42 billion long-term problem. 



The pension has challenges as the Treasurer correctly points out.  Investment performance has lagged the 7.25% investment assumption over most periods, which means that the assets have not grown quickly enough to keep pace with the pension’s obligation to employees and retirees.  As the Treasurer, rightfully notes, any shortfall has to be made up by the taxpayers.   However, giving the insurance fund and pension plan equal billing is a wrong and puts the pension at risk of being diminished or eliminated in North Carolina’s current political environment.

How is the Treasurer going to solve the pension problem?  Like an accountant.   Treasurer Folwell frequently touts his credentials as a CPA, and accounting is a noble and useful profession.  However, accounting and investing are at the opposite ends of finance.  Accounting is rearview look at balance sheets and income statements.  An accountant can tell you where you’ve been financially and how you’ve done.  However, accounting principals don’t tell you where you need to go as an investor.

An investment process shaped by lawyers further complicates the new Treasurer’s task of addressing the investment performance of the pension.  In the previous administration, policies and procedures ruled the day[2].  Former Treasurer Cowell instituted reams of new policies and instituted several levels of legal review.  Just like accounting, the law and sound policies are important to a pension plan, but they are not a substitute for investment judgment and skills.  Treasurer Folwell should probably take the time to pare back the role of legal review and procedure in the investment process.

Promising fee cuts is a good way to campaign for Treasurer.  It’s easy for the public to understand.   However, fee reductions should not be a primary goal of managing an investment portfolio whether it’s the state pension or your 401(K).  Instead, keeping fees low should be a by-product of sound investment management.  In other words, the Treasurer should be focused on asset allocation, returns, and risk.  Once those key parameters are set, fees become a relevant by-product.

The Treasurer wants to reduce state pension fees by $100 million over the next four years.  He campaigned on the promise to reduce fees, and true to his word, he’s taken the first steps toward that goal.   I’ve written repeatedly about the escalating level of management and incentive fees paid out by the NC pension plan.[3]  Last year, total fees were more than $600 million according to a recent presentation to the Investment Advisory Council.[4]  The rapid rise in fees is due entirely to the pension’s foray into alternative investments.

In the first meeting with his Investment Advisory Council, the Treasurer’s promise to cut fees was front and center.  In my opinion this was a mistake.  Instead the Treasurer should be developing a strategy to slowly and thoughtfully reduce the pension’s exposure to alternative investments.  He should be analyzing the returns and risks of making this shift.  He should be identifying the real estate and private equity managers and strategies that he wants to preserve as he shifts the portfolio’s emphasis.

By emphasizing fee reductions and moving quickly and publicly the Treasurer is committing the cardinal sin of letting the marketplace know in advance what the pension is going to do.  It’s like playing bridge with all your cards exposed.  For example, we know from the IAC presentation materials that the Treasurer is going to try to sell some of the pension’s private exposure in order to drive down fees.  However, selling illiquid private equity exposure is best done quietly in order to maximize the value of the sales.  We can also surmise that it will difficult to manage the pension’s private equity program, since it appears that the pension will be constrained in continuing to invest with some of better managers or pursue new opportunities.

Campaigning, accounting, and investing are three distinct areas of expertise.   The Treasurer made a reasonable promise to his voters to reduce investment fees.  Now that he’s an investor, it’s not a great idea to treat the process of reducing fees like a United Way campaign by continually telling the public how close he is to his goal.  As an accountant, it’s extremely valuable to get a clear perspective on the financial challenges of the health insurance and pension funds.  However, as an investor he needs to put the challenge of each fund into proper perspective.

As a good politician the Treasurer should seek as much publicity as possible when the savings on fees reaches $100 million.  As a fiduciary for the public employees and retirees of North Carolina, he should manage the pension plan around return and risk, and let the savings accumulate quietly.



[1] http://wfae.org/post/trouble-looms-state-pension-and-health-plan
[2] http://meditationonmoneymanagement.blogspot.com/2013/12/when-lawyers-manage-investments.html
[3] my most recent post was http://meditationonmoneymanagement.blogspot.com/2016/08/north-carolinas-public-pension-is.html
[4] https://www.nctreasurer.com/inv/IAC%20Resources/2017_3_29_%20IAC%20Major%20Initiatives%20final.pdf