Friday, June 30, 2017

Another Case of Lunacy: The NC House Considers Impeaching the Secretary of State

Another Case of Lunacy:  The NC House Considers Impeaching the Secretary of State

The North Carolina House of Representatives is about to embarrass our state[1].  Republican Representative Chris Millis of Hampstead has introduced a resolution[2] to institute impeachment proceedings against Secretary of State Elaine Marshall.  The charge?  The resolution alleges that the Secretary granted notary power “to several hundred individuals as notaries public who did not "[r]eside legally in the United States" as required by G.S. 10B-5 and who were not "qualified aliens" pursuant to 8 U.S.C. § 1621.” While the charge is ridiculous, the North Carolina General Assembly has a proven record of doing ridiculous things.


Even if Secretary Marshall’s office authorized a few people to be notaries who weren’t qualified, it’s hard to see how this would constitute an impeachable offense.  Moreover, there are only a few anecdotes floating about the Internet about illegal notaries engaging in any kind of improper behavior, and I’m not sure these stories are credible.  Granted, the definition of impeachable offense is very broad in NC.[3] Mr. Millis’s accusations are hardly the appropriate fodder for an impeachment proceeding.  

Mr. Millis says that he is concerned that alien notaries might be notarizing absentee ballots.  In other words, he’s trying to link his concern over alien notaries to another far-fetched issue: voter fraud.  Not only is Mr. Millis’s concern far-fetched, absentee ballots don’t even require a notary if they are witnessed by any two people over the age of 18, who haven’t been convicted of a felony or class II misdemeanor.  N.C.G.S. § 163-231 

According to Representative Millis, his office found 320 people have been improperly approved as notaries over the past 9 years.  I could only find old data on the number of notaries in our state, but the data would suggest that something like 0.2% out of 143,000 notaries may have been improperly granted notary status.[4]  The Secretary of State has processed many more applications and renewals over the past nine years, so the actual error rate would be even less than I’ve estimated (giving credit to Mr. Millis’s allegation).

Secretary Marshall denies that her office granted notary power to anyone who wasn’t a legal resident, and avers that it is in full compliance with federal law.   Her Deputy Secretary has testified before the House Rules Committee about the documentation the Department uses to determine whether an applicant is legal resident in the U.S.  As best I can tell, the Department uses the same sorts of proof as other states.

If you are wondering why non-U.S. citizens can be notaries, it’s because the Supreme Court says so.  In Bernal v. Fainter, Secretary of State of Texas, et al., 467 U.S. 216 (1984), the Court ruled that a Texas law requiring U.S. citizenship was unconstitutional under the Fourteenth Amendment of the Constitution.  The court put the role of a notary in proper perspective, a view that Representative Millis does not understand, “Although there is a critical need for a notary's duties to be carried out correctly and with integrity, those duties are essentially clerical and ministerial. Texas notaries are not invested with policymaking responsibility or broad discretion in the execution of public policy that requires the routine exercise of authority over individuals. 467 U.S. at 217.

There’s no question that Representative Millis and his Republican colleagues are engaged in a blatantly political exercise.  Remember, we’re talking about licensing notary publics, who simply attest that a person appeared before them and affixed their signature to a document.  As the Supreme Court stated, this is just a clerical or ministerial act.  If you take the time to look at the Secretary of State’s process for approving notaries, it looks like the same process in every other state.

While the impeachment of Secretary Marshall would be absurd, I wouldn’t bet against it.  Federal and state courts have repeatedly found actions by our legislature violate U.S. or N.C. constitutions.  If the House impeaches the Secretary and the Senate convicts her, there is no appeal.   The integrity of our state’s government is at stake.






[3]  NCGS § 123-5. Causes for impeachment.
Each member of the Council of State shall be liable to impeachment for the commission of any felony, or the commission of any misdemeanor involving moral turpitude, or for malfeasance in office, or for willful neglect of duty.

Wednesday, June 28, 2017

What would you think if I sang out of tune? Comments from CalPERS’s CIO

What would you think if I sang out of tune?  Comments from CalPERS’s CIO

A couple of weeks ago, Ted Eliopolis the CIO for CalPERS opened an investment meeting with a rebuke of unnamed critics of the pension’s private equity program.[1]  Mr. Eliopolis claimed that the incessant attacks on the private equity staff are unwarranted and raise questions about whether CalPERS can continue to invest in private equity.  I have been one of those critics, although I doubt my comments carry much influence.  However, my issue with CalPERS is the leadership of the organization, not its staff.  I am confident that the staff has worked tirelessly to address performance, accounting, and transparency issues. 


Mr. Eliopolis lamented the negative press coverage that causes distractions and makes the job of investing more difficult.  As CIO for North Carolina, I faced front-page stories questioning the pension’s investment programs, as well as my decisions and motives.  Without a doubt the stories were painful.  As the leader of North Carolina’s investment effort, my job was to ensure that the attacks didn’t distract staff.   We simply continued to invest.  Mr. Eliopolis’s statement to the investment committee only serves to reinforce my critique of CalPERS.  The pension plan has a leadership problem.

Mr. Eliopolis also lamented the damage being done to CalPERS’s reputation by critics.  The damage is self-inflicted.  The actions of former and current leaders at CalPERS have tarnished CalPERS’s reputation.  However, when it comes to private equity, reputation has little to do with CalPERS’ access to private equity investments.  As long as the pension continues to make eight and night figure commitments, PE firms will keep flocking to Sacramento.  In private equity, as with much of investment management, it’s all about the money.

Mr. Eliopolis claimed that no other pension plan has faced the kind of critique being leveled at CalPERS.  As the nation’s largest pension plan, CalPERS receives more scrutiny than other public investors.  However, I’ve seen plenty of criticism leveled at Rhode Island, South Carolina, Illinois, Kentucky, Utah, New York City, North Carolina and other public pensions over their private equity programs.  The issues are the same ones facing CalPERS: performance (or lack thereof), escalating fees, and transparency.

I think CalPERS is absolutely right to be taking a close look at how private equity can add value to the pension plan.  However, the real challenge isn’t transparency, accounting, or critics.  Rather, it’s the problem of size and scale.  Since CalPERS began allocating large amounts of capital to PE nearly 30-years ago, public pensions and sovereign wealth funds have flocked to the asset class.  The edge CalPERS had as a first-mover has been eroded.  Moreover, the universe within which CalPERS can invest, while deploying a meaningful amount of capital, has shrunk.  Only a small number of PE firms have the scale, resources and relationships to deploy the large amounts of capital required for CalPERS to have a meaningful PE allocation.  In other words, CalPERS no longer has the luxury of exploring emerging and niche strategies that offer the potential for extraordinary returns.  Those opportunities tend to be too small to make a meaningful difference to the pension.

In order to confront the issues facing its private equity program, CalPERS needs to invite debate, dissent and discussion.  Unfortunately most CalPERS’s leadership wants to sing with one voice.  Successful investors allow many voices to be heard.   Mr. Eliopolis’s comments to the Investment Committee will not help the staff, the private equity program, or the pension because he’s terribly off key.  When the CIO completed his remarks, he was greeted with applause.  Stunned silence would have been the appropriate reaction.

Monday, June 19, 2017

CalPERS is putting the screws to board dissent

CalPERS is putting the screws to board dissent

Later this week, the CalPERS board will consider a new rule that requires board members to submit articles and other materials to the CEO rather than transmitting them directly to fellow board members.    The CEO will then determine the appropriateness of forwarding the material to the rest of the board.  The pension’s counsel claims that this new rule is needed to remain in compliance with the state’s public records law, known as Bagley-Keene.  Bagley-Keene isn’t a model of clarity and I’m not in the habit of reading it.  However after reading the statute, I’m hard pressed to understand how the proposed rule has anything to do with the open meeting law.



Yet again, the financial press hasn’t picked up this pending rule change.  It was left to Naked Capitalism to unearth this proposal.[1]  Moreover, NC has also figured out that CalPERS has been reproducing full-length articles of copyrighted material on its internal website without permission from the owners of the content.  This is one more example of bad governance from a supposedly sophisticated organization.

The rule’s real purpose is to snuff out dissent, stifle discussion, and give the professional staff unfettered control of the pension.  Having observed hours of board and committee meetings on the Internet, I already thought that dissent and discussion were extremely limited and that the professional staff had too much control over the proceedings.  The proposed reinforces the bad corporate governance model of the nation’s largest public pension plan.

In advance of the meeting, board members should be doing the very thing this rule would proscribe.  They should be gathering the evidence and opinions necessary to meet this proposed rule with the rebuke it deserves.   Despite the outrageousness of this proposal, I’m betting that only one board member will raise concerns.  Sadly, JJ Jelinicic will be leaving the board. 

CalPERS claims to be an enlightened investor that promotes high standards of corporate governance for the companies in which it has an investment.  Those lofty principles do not appear to apply to CalPERS itself.




[1] http://www.nakedcapitalism.com/2017/06/heads-roll-calpers-held-accountable-massive-copyright-infringement.html

Friday, June 16, 2017

How to bury a performance problem: A lesson from CalPERS

How to bury a performance problem:  A lesson from CalPERS

When an investment isn’t working out very well, the first step is to acknowledge the problem.  CalPERS has taken the opposite posture in addressing the shortfall in its private equity program.   Moreover they have engaged in the very behaviors that would require the average retail investor to fire her broker or financial advisor.  If one of CalPERS’s outside managers utilized one of these tactics they too would be terminated.



I won’t describe all of CalPERS misdeeds.   Rather I suggest you read the work of Naked Capitalism[1].  It is the only media source that has consistently investigated the performance of CalPERS private equity program.  The Sacramento Bee, Los Angeles Times, Pensions and Investments and few other publications occasionally provide some coverage, but no one else has done the detailed work required to expose CalPERS’ systematic attempt to avoid addressing the poor performance of their PE program.  In addition, you can find a series of posts on this subject on my blog.[2]

In the first ten years of my investment career I learned about the three inappropriate ways to address a problem of investment performance.  I’m ashamed to admit that in my private sector career I occasionally relied on two of these methods rather than confronting the issue with a client.   Once or twice when my investment performance for a client lagged badly, I resorted to confronting a critic or proposing a new benchmark.  CalPERS has used both methods to distract from its underperformance, plus one more tactic.  Unfortunately, the beneficiaries of the CalPERS defined benefit plan cannot find another investment manager.  However, if your broker or portfolio manager tries any of the tactics described below, find another advisor.

Rather than accepting poor performance, attack your critic.  If a consultant or board member raises concerns about performance, make that person or organization a target.  This tactic will not only deflect attention, it will also intimidate other board members or advisors from asking hard questions about the performance shortfall.  The outspoken board member JJ Jelincic fell victim to this tactic.  He was harassed, censured, and vilified before he finally deciding not to stand for re-election to the CalPERS board.

Instead of admitting to poor performance, change the benchmark.  If the investment performance of a money manger or an asset class, such as private equity, trails the benchmark, attack the benchmark.   The idea is to excuse failure by impugning the standard of comparison.  The staff and consultants at CalPERS have been trying to tell its board and the public that the shortfall in performance is largely the result of a benchmark that isn’t appropriate.  Ironically those are some of the same professionals who proposed the benchmark in the first place.

To further obscure bad performance, change around the asset classes, known in the industry as “buckets”.  In the case of CalPERS, they want to combine public and private equity into one big bucket.  The idea is to bury their PE problem in a much bigger pool of assets.  CalPERS is not alone in adopting this strategy; a number of pensions, including North Carolina, have tampered with their buckets in order to make proper evaluation of their investments much more difficult.

The beneficiaries of CalPERS do not have an advocate challenging the performance of private equity.  The pension’s investment professionals, consultants, and board members have aligned to bury the problem.  This is how America’s leading pension plan has become a laggard.