- New budget omits PE fund expenses included in previous budgets
- PE fund expenses totaled $75 mln in 2015-2016 fiscal year
- State senators, board candidate question the shift
California Public Employees’ Retirement System approved a $1.68 billion budget that omits tens of millions in private equity expenses included in its previous annual budgets.
The $322.5 billion retirement system’s budget for PE-management fees fell to $260 million for the 2017-2018 fiscal year, a $131 million decline from what it had budgeted for the current fiscal year ending June 30.
The projected cuts to private equity helped reduce CalPERS’s overall operating budget by $110.5 million from the previous year, a 6.2 percent decline, pension documents show.
The new budget excludes, however, a variety of fund-related expenses that CalPERS pays its PE managers for legal and auditing services, amounts included in its budget in previous years. Those expenses were significant in the 2015-2016 fiscal year, totaling roughly $75 million.
It’s unclear how much CalPERS expects to pay in PE expenses in FY 2017-2018, or how those projections would have influenced its budget.
CalPERS will continue to pay these expenses, but they have no bearing on the retirement system’s annual budget, spokespeople told Buyouts earlier this month. The decline in costs was also attributed to the phasing out of older private equity funds that charged CalPERS higher annual management fees.
The CalPERS finance and administration committee on Tuesday approved the 2017-2018 fiscal year budget after discussing the exclusion of PE expenses. In a web broadcast of the meeting, board members appeared to agree with Chief Operating Investment Officer Wylie Tollette’s assertion that CalPERS can’t control the amounts PE managers charge in expenses, placing those costs outside the purview of its budgeting process.
“Putting [private equity fund expenses] in a budget might imply a level of control the limited partner does not have,” Tollette told Buyouts in an interview before the meeting. General partners charge partnership expenses to fund investors at their own discretion, he said, and “we don’t control those expenses. Putting those in our budget, frankly, doesn’t necessarily make a ton of sense to us.”
PE fund expenses should never have been included in older budget documents or financial reports, a second CalPERS staffer told Buyouts. The retirement system’s new accounting system for its $26 billion private equity program, which it launched in mid-2015, enables CalPERS for the first time to separate expenses from private equity management fees. This made it easier to justify their removal from the budget.
Private equity expenses will continue to be footnoted in public reviews of the PE portfolio, as well as the annual financial statement, moving forward, Tollette said.
CalPERS’s decision to exclude a significant component of its private equity program’s costs from its budget was criticized by CalPERS board candidate Margaret Brown, who at a May 15 investment committee meeting questioned staff’s motivation for making the change.
Those concerns were echoed by two senators on the state’s public employee and retirement system committee, Republicans John Moorlach and Mike Morrell.
“The rationale of, whether you have control over it, seems a little weak,” Moorlach told Buyouts. Moorlach, a certified public accountant and financial planner, added: “You wouldn’t reduce your rental income, in your second home, if you had to replace the air conditioner or the toilet. You’d have your income and then the long list of expenses.”
That said, if CalPERS’s reporting and disclosure of those expenses is in alignment with accounting principles formalized by the Governmental Accounting Standards Board, which sets accounting standards for public pensions, Moorlach said his concerns are moot.
“It doesn’t seem like the proper approach, but if they have a GASB … promulgation saying they can do it, then who am I [to say]?” he told Buyouts.
Action Item: For more information on CalPERS, visit www.calpers.ca.gov
Calpers headquarters is seen in Sacramento, California, on Oct. 21, 2009. Photo courtesy Reuters/Max Whittaker