For the past year, CalPERS has been dogged by scandals related to its private equity investments. And most of it has been deserved, as the pension giant allegedly became a revolving door for ex-staffers seeking to make millions off their past service.
Unfortunately, there can be a downside to the exposition of public corruption: Well-intentioned journalists sometimes confuse the appearance of impropriety with actual impropriety.
Such was the case last week, when the Los Angeles Times published a story about how “CalPERS investment staff receive luxury travel, gifts from financial firms.” At issue were between 10 and 12 private jet trips taken by Joncarlo Mark, a CalPERS senior investment officer for alternatives, prior to 2008. He also was accused of failing to disclose several gifts in excess of $50, including two meals, some candy and assorted tschotchkes.
From the article:
Ethics experts were troubled to learn that private equity firms on the hunt for ever-bigger government contracts were secretly jetting CalPERS senior investment staff around the world.
I know, it sounds bad. But here’s the thing: True corruption involves receiving goods for personal enrichment. Everything Mark did was for the purpose of CalPERS business, and can be easily justified (with the exception of not disclosing the $50+ gifts, which I’ll explain later). Moreover, all of the trips were in accordance with CalPERS policy at the time.
Let’s go over this point by point:
1. Each of the trips was specifically related to CalPERS business. Some were due diligence, others were for advisory board meetings. In each case, the general partner was contractually obligated to reimburse the travel expenses, based on limited partner agreements. In some cases, the private jets were already being chartered by the GP, so it was cheaper to simply plop Mark down in an empty seat than to pay for a commercial ticket. In other cases, there were no direct commercial flights (including one trip from Shanghai to Mumbai – which also featured more than a dozen other LPs). Moreover, Mark was contractually required to attend some of these meetings.
At the time, CalPERS policy was to allow the GP to plan the travel. Today, CalPERS plans the travel, and essentially invoices the GP. That new policy, in place since 2008, means that CalPERS staff can no longer fly “above” coach class. This even is true for international travel. Had that Shanghai-to-Mumbai trip taken place last month, CalPERS staff would have been precluded from joining, thus missing out on the due diligence afforded other LPs.
Imagine the uproar if CalPERS messed up an investment because it didn’t conduct proper due diligence…
2. Most other public pension systems also use GP reimbursement for contractually-obligated travel. Some do prohibit private planes. Others mandate coach travel for domestic, business class for international. In short, a rule of thumb often is: “Don’t do anything that you can’t defend in the newspaper.” This is where I find fault with Mark’s actions. He showed callous disregard for public opinion. Not smart, but also not corrupt.
3. Each year, CalPERS staffers are asked to fill out something called the Form 700. This document lists all previously-unreported gifts of over $50. That dollar total is in aggregate from a single source. In other words, if Blackstone had bought Mark three meals of $20 over the course of a year, he would need to report it.
I’m told that Mark has acknowledged that he neglected to include a few items that crossed that aggregate threshold, and is going back to amend his Form 700s. Not only will he include the items mentioned by the LA Times, but also some that weren’t (mostly holiday trinkets and the like).
I can tell you that the Form 700 process regularly flummoxes current and past CalPERS staff. As one told me: “I try to keep track of everything, and make sure to ask how much things cost. For example, if there is lunch served at an advisory board meeting, I try to get a value. Our real lesson s that we need to be much more conservative on those values.”
There is no suggestion anywhere that Mark received anything of significant value for himself or for his family. This is in stark contrast to the alleged placement agent corruption, which involved millions of dollars winding up in personal bank accounts.
The LA Times story quotes a government professional as saying the following:
“Not only should the public have been told that these trips were going on, the public should have been stopping them.”
You want to stop the trips, including commercial and private flights reimbursed by GPs? Fine, but then don’t complain if investments go bad. Want them to always fly coach, even on 10-hour international trips? Fine, but don’t be surprised if they get little work done on the plane (sometimes you can’t even open your laptop) or if they’re mentally-exhausted upon arrival (“Some of those public pension guys are just a mess when they arrive in Europe or Asia,” one non-public LP told me).
Public pension officials obviously must follow a stricter code of conduct than must their private peers, but they should not self-regulate themselves into second-class LP citizenship. I’m hoping that CalPERS realizes this dichotomy, and uses Mark as a bulwark instead of as a scapegoat.