Don’t Let CalPERS’ CEO Scandal Divert Attention From the System’s Accomplishments

CalPERS, the largest pension fund in the country, is facing a scandal over apparently false claims its CEO made on her employment application. The negative publicity CalPERS is facing over its CEO hire should not distract attention from the positive steps the system has taken in the areas of transparency and prudent fiscal management.

CEO Marcie Frost, hired in 2016, claimed she was studying for a college degree, had years of experiencing managing pension funds, and that she made technology reforms to the funds she managed. An August article on the Naked Capitalism blog provides evidence that these claims are false. State Treasurer John Chiang called for an independent investigation of Frost’s educational background.

Undoubtedly these developments will subject CalPERS to more negative publicity, distracting attention from some of CalPERS best practices and policies.  But the good news from CalPERS is worth highlighting as we do below.

First, CalPERS measures its assets at market value, rather than relying on asset smoothing techniques.  Asset smoothing phases in actuarial gains or losses over several years to reduce the volatility of reported unfunded liabilities.  When actuarial smoothing methods result in assets being overstated, pensions systems appear to be better funded than they actually are – misleading policymakers, beneficiaries and taxpayers.  A preferable method is to use current market value to measure assets against liabilities and then discount those assets based on conservative expected rates of return to measure calculate the funded ratio. CalPERS is migrating to a 7% assumed rate of return, which is more conservative than the assumption used by many systems, but arguably not conservative enough. Last year, the system reduced its 10-year investment return forecast to 5.8%.  

CalPERS is also amortizing unfunded liabilities more aggressively. Earlier this year, CalPERS board decided to move from a 30-year amortization schedule to a 20-year schedule for unfunded liabilities arising from new actuarial losses (i.e., actuarial results coming in below expectations each year). Previously, the slow rate of amortization and the fact that the amortization process was “ramped up” (i.e., gradually phased in), would cause cases of negative amortization, under which unfunded liabilities grew rather than shrank from year to year. CalPERS’ new policy should eliminate cases of negative amortization.

Finally, CalPERS provides local government employers with multi-year projections of contributions under a variety of return scenarios.  These projections are included in plan level actuarial valuations, the latest of which were published last month, The projections enable local officials to see whether they have sufficient fiscal capacity to make future contributions, even if CalPERS investment returns fall below expectations.  

In conclusion, there are many things CalPERS could do to improve, including the proper vetting of high-level employees; however, the media sensation around scandals like this should not overshadow the important policy changes directly affecting fiscal health that have been and should continue to be made.