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Issues & Goals for the California Public Employees' Retirement System

Today, and most likely for some time to come, CalPERS faces unprecedented challenges in all three of its "business lines": pensions, investments, and health care. I want to outline those challenges and provide my views, goals and objectives for meeting them at CalPERS.

Pensions:
We are all aware of the resurgence of attacks on public pensions nationally and in California. Unfortunately, CalPERS is at the center of this attention. While CalPERS is restricted from advocating particular views, we as a pension fund are actively involved in making objective information readily available, both about defined benefit pension systems in general and CalPERS pension system in particular. I will help ensure that CalPERS continues its efforts to guard against abuse of the pension system (e.g., spiking, unjustified disability retirement). And I will speak out as an elected board member in defense of defined benefit pension plans and the notion of a broader retirement security for all.

Investments:
One of the best ways to protect our pension system is to obtain the maximum risk-adjusted rate of return on our investments. As long-time Board member Bob Carlson so succinctly put it, the greatest risk is taking no risk at all. If, for example, we were to bend to the governor's wishes and reduce our target rate of return to 6%, our unfunded liabilities would skyrocket, employer contributions would soar, and the challenges to protect the system would likely become unmanageable. I advocate staying the course in terms of our investment goals; however, I am working for changes that include substantial recasting of asset classes, increased emphasis on risk management, ensuring adequate liquidity in times of market stress, and less rigid asset allocation targets.

I am also working to improve Board oversight of investments. The Board must carefully walk the line between overly restrictive policies governing authority of our investment professions to make decisions and our fiduciary responsibilities. We have considerably tightened our control over investment decisions in real estate and similar changes in private equity are under study. I am committed to an investment policy that is realistic about our prospects for earnings. The Board needs to hear a variety of economic views so that we can better guard against the mistakes that caused the recent recession and the stock market losses that are putting pressure on our economy and pension fund.

Virtually as harmful to the system and to long-term viability of pension plans as poor returns is inappropriate influence peddling. Recent, and continuing, media pieces on placement agents and a (very) few CalPERS managers and former board members have helped fuel attacks on the system. CalPERS has contracted with external legal counsel to conduct an extensive and intensive review of investment transactions. This review will seek to identify "pay-to-play" incidents and to recover any inappropriate payments made by CalPERS to external managers or other parties. Findings that indicate possible criminal behavior will be referred to appropriate state and federal authorities.

Health Care:
Even with reform at the national level, the rising cost of health care will continue to place downward pressures on salaries and benefits of public employees. While holding employee out-of-pocket costs constant (e.g., co-pays, deductibles) may be difficult, I will fight to ensure that the employee share of total costs does not increase. The right approach to constraining both employee and employer cost of health benefits involves more fundamental efforts (than simple cost shifting) to reduce waste, inefficiency, and overhead; improve member health and their understanding of the health care system; and increase member participation in making smart decisions about care.

One beneficial outcome of rapidly soaring health care costs is the increasing availability and accessibility of data and health information technology. These technologies not only support better choices by care givers and patients, they also facilitate more rapid determination of cost-effective treatments and low cost, high quality providers. Costs are also driving fundamental changes in health care delivery (medical homes, coordinated care, remote medicine, accountable care organizations, etc.).

CalPERS needs to move more aggressively to explore, evaluate, and implement ways to ensure quality, reduce costs, and improve access. The resource limitations imposed by the state on CalPERS management of this $6 billion business must be relaxed. CalPERS must have an adequate budget to hire and contract with health care professionals who can administer the ongoing operations as well as investigate promising approaches, conduct our own research, and engage in pilot studies. Payoffs from informed investments in health care (e.g., work-site employee health and wellness facilities) can be substantial. Achieving the necessary resources to support these efforts may require legislation.