by David Kersten, Kersten Institute
The California Public Employees’ Retirement System (Calpers) would like to leave its series of high-profile scandals in the past, but Californians must never forget the series of fraud, bribery and high-crimes committed by Calpers executives—perhaps what is most unfortunate is that the public agency’s worst crimes have gone unpunished.
“What Calpers did is the worst financial fraud in the history of the state and probably the country,” says California Pension Reformer Chuck Reed, noting that the passage of SB 400 in 1999 and the subsequent events is much bigger than the Bernie Madoff and Enron scandals combined.
Calpers has refused to comment on these issues, despite several attempts to get comments and explanation regarding the allegations raised in this article and related research.
Reed says that Calpers executives got the California Legislature to pass SB 400 in 1999 by saying that it would “not cost taxpayers a dime…Well technically that is true, it did not cost a dime, it cost them more than $400 billion,” Reed says.
SB 400 (Ortiz) dramatically expanded pension benefits for public employees in California, including retroactive benefit increases, and became the new statewide standard for pension benefits in California, despite the fact that the costs of the benefits are unaffordable to many.
After the sentencing of former Calpers CEO Federico Buenrostro in federal court on bribery charges earlier this week, Calpers issued a press statement which tries to close the book on the Buenrostro scandal and his “reign of terror” on California public agencies during the time he served as CEO from 2002 to 2008. Buenrostro pled guilty to accepting bribes from a former Calpers Board member in exchange for bags of cash, a trip around the world, and the financing of his wedding.
Rob Feckner, Calpers Board President stated “This saga has now come to an end. We are stewards of a sacred trust, and it must never be compromised for personal gain. As an organization, we’ve taken meaningful steps to strengthen accountability and transparency throughout Calpers. We’ll continue to work to make sure these measures are rigorously followed and that we hold ourselves to the highest ethical standards.”
But the truth is that Feckner, as Calpers Board president since 2004 and a board member since 1999, presided over the systematic defrauding of California’s public agencies. Unfortunately, there are not any laws on the books in California to prevent a state agency such as Calpers from defrauding local public agencies, but it is an important story to tell nonetheless, particularly in light of Calpers now trying to sweep everything under the rug.
An Inside Look at the “Biggest Fraud” in the History of California
After SB 400 was passed in 1999, Calpers went around to local governments in California with a sales pitch that ended up being a complete scam.
Bill Kampe, Mayor of the City of Pacific Grove (Monterey County), says his city is one of the many public agencies that was scammed by Calpers and continues to pay a huge price. Pension costs now make up 25% of the city’s General Fund spending, and continue to grow, while the city is having a tough time paying for basic city services and infrastructure needs, such as road maintenance, Kampe says.
Kampe said the problems started in 2001 when city officials made a big mistake and accepted a “raw deal” from the Calpers. At the time, Calpers officials urged the city to adopt a series of major benefit expansions for public employees, particularly public safety employees, that they said would help with recruiting and improving public safety services in the wake of the 9/11 terrorist attacks. Furthermore, Calpers said the benefit enhancements would not cost much money and benefit the city in the long-run.
But by 2004 Pacific Grove city officials soon realized they had been “duped” by the union-run Calpers, when a few years later Calpers jacked up its rates and the City of Pacific Grove realized that it was having a harder time recruiting and paying for public safety officials because the changes allowed for retirement at age 50 with very generous pension benefits. As a consequence, the city had to layoff 1/3 of its staff, eliminate road maintenance for five years, and enact deep cuts to public services–all issues that the city continues to struggle with more than a decade later.
Mayor Kampe said California state law is too restrictive and does not let the city reverse the “raw deal” sold to them by Calpers even though it is hurting his city and many other cities in California.
Mayor Kampe said the only hope is a statewide ballot measure to let them get out from under the state’s restrictive laws and the tyranny of Calpers policies which continue to hamstring the city and cost city taxpayers millions of dollars. That’s why he called former San Jose Mayor Chuck Reed a few years back and offered to sign-up as an initiative sponsor for Reed’s proposed pension reforms.
Kampe says he hopes Reed pursues a measure at a future statewide election, and admires Mr. Reed for his courageous leadership and willingness to act when nobody else will.
He said he has raised these issues several times with state lawmakers, including members of the California State Senate and California Assembly, but they quickly change the subject and refuse to do anything to help cities like Pacific Grove because they can’t go against their “friends” in organized labor.
Kampe said organized labor sends attorneys from Sacramento to Pacific Grove to help hold the union line on cost savings when the city’s public contracts come up for renegotiation. He said he’s frustrated with the “facade” organized labor and its attorneys put up because it’s not sustainable and not good for his city and its citizens.
In the meantime, Kampe says he and many other Mayors in Monterey County will have to struggle to make ends meet and keep their fingers crossed that some relief will come soon at the statewide ballot box.
Calper's Worst Crimes Continue to Go Unpunished
Former Calpers CEO Buenrostro is now in jail serving a four and a half year prison sentence for bribery, but his crimes against California’s public agencies continue to go unpunished.
Meanwhile, Calpers Board CEO Rob Feckner who worked hand in hand with Buenrostro to perpetrate the scam against California’s public agencies, walks free, along with any number of other Calpers executives who cooked up the scheme that became the biggest defrauding of California taxpayers and public agencies in the history of the state.
Pension reformer Chuck Reed and Mayor Bill Kampe say that California’s public agencies are stuck with the aftermath of SB 400 because pension benefits cannot be rolled back under California law, particularly once they have been accrued.
In the private sector, what Calpers, Buenrostro, Feckner, and other Calpers executives did is known as “fraud” and considered a punishable crime (i.e. selling a product under false pretenses, very similar to “predatory lending”). But in the public sector, such activities represent “business as usual” at Calpers and other public employee pension funds.
“It’s a 20-year record of failure,” Reed says about Calpers record, noting that Calpers unfunded liabilities have climbed from $3 billion to $100 billion since the passage of SB 400. But the pension debt for all California local and state agencies is estimated to be $1 trillion (market basis, compared to $400 billion for officially reported debt) or $77,000 per household, according to Stanford University.
All this debt can be directly linked to SB 400 and the subsequent actions of Calpers for setting a new statewide standard under false pretenses to both the California Legislature and hundreds of public agencies.
A less discussed, but equally heinous albeit slightly less expensive crime, is the fact that Calpers chose to axe its retiree health care liability disclosure project in 2000, which has lead to the build up in an estimated $300 billion in unfunded retiree health care liabilities for California's public agencies since 2000.
In 1999 and earlier, Calpers executives took a look at these figures, and should have notified and continued to notify Calper public agencies of these debts, but instead chose to discontinue the program after huge mounting liabilities were found, according to official Calpers documents and other inside sources.
The Governement Accounting Standards Board (GASB) has since required the public disclosure of retiree health care debts, beginning in 2008, but Calpers should have notified its public agencies of the existing of these debts a lot earlier, since it had the data and knew about the problem in 1999.
Adding insult to injury, Calpers even has the audacity to deny that its pension debts are largely if not primarily responsible for the bankruptcies of California public agencies including Stockton, Vallejo, and San Bernardino County. But if you look at the data the employer contribution of the pension costs for these cities climbed from less than 10-15% of payroll in the early 2000s to more than 40% of payroll, sometimes as high as 60% of payroll in the case of the CHP and public safety officers.
Pension debt is by far the largest and fastest growing debt category that California’s public agencies struggle with, and it could have all been prevented if Calpers had chosen to act in the public interest, as opposed to the interest of the state’s public employee unions—who control its board and all its activities.
Buenrostro only got four and half years, but California taxpayers and public agencies have what appears to be a life sentence for the growing list of atrocities committed at the hands of Calpers executives since 1999.
Related: “Insolvent Film Special Report: CalPERS “Culture of Deception” Largely Responsible for $1.2 Trillion California Public Debt Crisis,” by David Kersten, Insolvent Film, published March 4, 2016.