New CalPERS Board Member Has Serious Concerns About Private Equity Plan

Jason Perez is also skeptical about ESG investing, a focus that most individuals on the CalPERS board support.

Jason Perez won’t officially be sworn in as a board member of the California Public Employees’ Retirement System (CalPERS) until Jan. 21, but he has already developed serious concerns about the retirement plan’s $20 billion planned private equity initiative, he told CIO.

The police sergeant from Corona, California, who beat CalPERS Board President Priva Mathur in an election upset in October, said he has problems with the lack of public disclosure that will be part of the new private equity plan.

CalPERS investment officials have proposed two private equity organizations that will be funded by the pension plan to make direct investments. Horizon would make buy-and-hold investments in established companies, while Innovation would take stakes in late-stage venture capital companies in the technology, life science or healthcare segments.

Each limited-liability corporation would be controlled by an external general partner and would not be subject to state public disclosure laws. Basic information including the compensation packages for the general partners wouldn’t be publicly disclosed. CalPERS officials have acknowledged that the general partners could make millions of dollars a year with bonuses.

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Perez told CIO that the planned private equity program should be transparent, underscoring the importance of “the ability of the public to keep us honest.”

The police sergeant also said he wants a full explanation from CalPERS legal officials as to how they have determined the program is legal. Under the CalPERS new private equity plan, the pension system would be a limited partner as part of a general partner-limited partner relationship in Horizon and Innovation but wouldn’t have a say in specific investments made by the two private equity organizations.

“I don’t know that CalPERS can do legally what it is attempting,” he said. Perez said he would be in a better position to understand some of the issues around the private equity organization if the CalPERS board would make public what it discusses in closed session, something he thinks the board should do as much as possible on all issues.

CalPERS officials say they expect to ask board members to approve the program in February or March, but Perez said he feels it might be difficult for him to understand the full ramifications of the private equity initiative so quickly. He said that a six-month delay before the vote might be preferable.

Pension system investment officials have said time is of the essence in getting the program approved, noting that potential general partners have other options besides CalPERS.

Perez received national publicity when he beat Mathur, particularly because he campaigned against core tenets of the CalPERS investment program, such as the pension system’s emphasis on engaging corporations to improve sustainability practices and increase the diversity of their governing boards.

The pension system engages corporations it holds stock in on the theory that good environmental, social, and governance (ESG) practices will lead to better investment results. It also requires its external managers to explain how they use ESG factors in their portfolio selections. In addition, CalPERS has small investment portfolios that use ESG factors. For example, of its $165.8 billion global equity portfolio, around $3 billion is comprised of ESG investments.

Perez continues to question whether ESG is a wasted effort by CalPERS. In the interview with CIO, he said he is not against ensuring companies have proper risk management, which could involve looking at ESG factors. Perez, however, said he wants to ensure there are reasons for the ESG investing and engagement that CalPERS practices.

“When ESG has nothing to do with maximizing returns and it is just for the sake of being socially conscious, it shouldn’t have a place in our retirement plan,” he said.

Perez said he is also concerned that CalPERS may put too much pressure on corporations to live up to standards like board of directors’ diversity when it may have nothing to do with making profits. CalPERS has made a major push to put women and minorities on corporate boards in recent years.

“We should not be extorting companies,” he said.

Perez said at the first CalPERS meeting he attended several years ago, there was a three-hour discussion on diversity in corporate boards, not how CalPERS should maximize investment returns. “It really threw me off. I was pretty upset,” he said.

The police sergeant said he also has concerns about CalPERS’s divestment efforts, such as its 2000 ban on investing in companies with tobacco interests. The CalPERS investment committee revisited the issue in 2016 but decided to keep the ban in place and extend it not only to the CalPERS internal portfolio, but to external managers.

Perez said that was the wrong decision, noting a CalPERS consultant’s study that showed a several-billion-dollar loss long-term because of the divestment.

“If it’s legal and it’s no way connected to terrorism and it’s profitable, we should be in it,” Perez said.

Perez has worked for the Corona police department since the mid-1990s. The city of 106,000 residents is only 47 miles from Los Angeles, but the distance seems farther. Banners hang from lamp posts with pictures of every town resident who has served in the military.

Trendy restaurants are impossible to find, but hundreds of people are waiting in line on Saturday night for dinner at the Texas Roadhouse, a restaurant chain in one of the local strip malls. Perez lives next door in Norco, a rural community in the heart of California horse county.

“I am a tobacco-chewing redneck from Norco,” he said bluntly.

Perez said he is concerned about CalPERS being able to pay pension benefits for him and the 1.8 million other California residents in the largest US pension plan, and it’s the reason he ran for election.

CalPERS is only around 70% funded and conservative critics have argued that state and local governments need to reduce pension benefits or scrap defined-benefit programs like CalPERS in favor of defined contribution plans.

Perez will be only one voice on the 13-member CalPERS board, which also includes the state controller and the state treasurer. Most of the 13 members, who also serve on the system’s investment committee, are strong supporters of CalPERS’s ESG efforts and the new private equity plan.

Perez said he won’t be afraid to make his views known on the board and investment committees.

He said in the limited training he has received so far, he has been told about working positively with his colleagues. “Make sure you interact with people collegially,” he said he was told.

Perez said he is open to all views but doesn’t expect to be quiet when expressing his concerns at board and investment committee meetings.

“It would be nice to get along with everybody,” he said. “But that’s not the goal.”

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