Concerns Surrounding California’s Public Pension Fund

An independent evaluation of the California Public Employees’ Retirement System (CalPERS), the largest public pension in the United States, has highlighted several risks for its 2.4 million members. These include issues related to secrecy, ongoing poor performance, undervalued investment costs, and potential conflicts of interest.

This report was initiated last year by nonprofit advocacy groups, particularly beneficiaries who were worried about delays and the lack of transparency regarding the performance of the $630 billion fund. When attempts to urge the state Legislature for a formal audit and the establishment of an inspector general were unsuccessful, they opted to hire their own investigator, a former Securities and Exchange Commission attorney.

Some key findings from the report include:

• The fund’s returns place it in the bottom 15% among 230 U.S. public pension funds over both five- and ten-year periods.
• Approximately 9% of the fund’s assets are tied up in aging private equity partnerships, sometimes referred to as “zombie funds,” which limits the selling of portfolio companies. These funds incur management fees while yielding minimal or no returns to investors.
• Despite the fund’s underperformance, employees are compensated at high levels, with four executives earning over $1 million, four more making over $900,000, and 26 earning between $500,000 and $900,000.

Margaret Brown, president of the California Retired Public Employees Association and a former CalPERS board member who funded the report, expressed her deep concerns about the risks facing the fund, emphasizing the need for an independent inspector general with subpoena power to scrutinize records.

On the other hand, CalPERS CEO Marcy Frost dismissed the report as merely an opinion filled with exaggerated claims that could unnecessarily alarm its members about the stability of their pensions. She noted that recent private equity investments have improved fund performance and have reduced fees significantly since 2024.

Increasing scrutiny has also fallen on some public pension funds, largely due to concerns regarding the secrecy of their activities, the possible overvaluation of private equity holdings, and the use of questionable benchmarks to make performance seem better than it is. Public pensions manage around $6 trillion nationwide, which is relied upon by about 36 million Americans.

The CalPERS investigation was carried out by Edward Seidle, who reported that CalPERS executives provided limited documentation and denied requests for other necessary documents. This made it challenging for him to assess the fund’s opaque private equity and debt holdings.

CalPERS countered that they had given Seidle access to over 20,000 pages of documents, although he claims he received a DVD containing them only recently and has yet to verify its contents.

CalPERS has also pushed back against proposals for greater transparency regarding private equity investments, suggesting that the confidentiality surrounding these terms means many pensioners likely do not understand the precise nature or extent of the fees they pay.

Seidle worried that CalPERS, a major investment player influencing others, did not allow stakeholders insight into how their funds were managed. He argues that public pensions should be transparent, saying it’s troubling when a lack of disclosure is defended as beneficial.

Call for Independent Oversight

Financial specialists have consistently advocated for independent oversight of U.S. public pension funds. Rich Wiggins, a former director for the Iowa Public Employees’ Retirement System, proposed having a single independent auditor, funded by the state, to review all state pensions. He emphasized the need for external accountability in evaluating pension performance against realistic benchmarks.

Wiggins, who has experienced firsthand the repercussions of inaccuracies within pension fund reports, now finds himself in a legal battle for wrongful termination against the state of Iowa.

In contrast, other public pensions, like the New York State Common Retirement Fund, have implemented independent oversight for years. Seidle’s report suggests that having an inspector general at CalPERS could address various issues, particularly surrounding the fund’s private equity and debt holdings and uncover potential inappropriate fees.

Moreover, the report alleges that CalPERS’ long-term investment consultant, Wilshire Associates, is owned by a private equity firm, which raises conflict of interest concerns. This relationship has persisted as CalPERS has leaned on Wilshire’s expertise to boost its private equity investments.

Although Wilshire stated it aims to manage conflicts properly, both it and CalPERS’ financial backers have opted not to comment further on these matters.