Meng Revelations Brinking On Touching Off Public Employee Pension Reform

CalPERS, the retirement system for California’s state and a significant number of its county, municipal and smaller governmental agency employees, has drawn the curtain on much of the detail relating to the activity of Yu Meng, its former chief investment officer who resigned in August amid a scandal, the dimensions of which are not likely to be soon, if ever, publicly fathomed.
Nevertheless, what is already known about Yu’s tenure with the California Public Employees Retirement System and the still minor degree of outrage it has sparked carries with it the prospect that long overdue reforms of the system may be forced upon it by a slowly awakening public that is coming to realize it is footing the bill for the system’s excesses.
Meng, who goes by the first name Ben, was the state pension system’s chief investment officer for a relatively short 19 months before events overtook him. The degree to which the responsible officials in the organization for which he worked failed to exercise scrutiny, both as to his hiring and performance, is breathtaking.
He returned to the California Public Employees’ Retirement System, known by its acronym CalPERS, as its chief investment officer in January 2019 after having worked for the pension system in a lesser capacity previously. There was a marked lack of diligence by the California Public Employees’ Retirement System’s board and administrators at the time of his 2019 rehiring, particularly for an organization of the size and financial magnitude of CalPERS, which manages roughly $350 billion used  to fund the retirement benefits for some two million state, county, city, and school and water district employees.
The Chinese-born Meng came to the United States more than a quarter of a century ago and later became a naturalized American citizen while he was working in the American financial industry, including with Wall Street investment banks and CalPERS. In 2015, Meng returned to China to work as the deputy chief investment officer at the State Administration of Foreign Exchange, having been recruited by China’s Thousand Talents Program. The Chinese Administration of Foreign Exchange manages over $3 trillion in foreign currency purchases and investments for the Chinese Government. It is not publicly known for certain, but the Federal Bureau of Investigation and the Central Intelligence Agency believe that at that point Meng was recruited to work as a spy for the Chinese government. FBI literature characterizes the Thousand Talents Program as an asset in “China’s non-traditional espionage against the United States,” which employs or otherwise induces people who transit between the United States and China to funnel U.S. trade secrets and the product of taxpayer-funded research into the hands of the Chinese government.
While in his role with the Chinese Administration of Foreign Exchange, Meng gave an interview to the communist-oriented People’s Daily in which he said he was working for the Administration of Foreign Exchange out of a sense of patriotic duty to what he called “the motherland.”
In 2018, Marcie Frost, the chief executive officer for the California Public Employees’ Retirement System since 2016, set her sights on recruiting Meng to succeed Ted Eliopoulos as CalPERS’s chief investment officer, in anticipation of Eliopoulos’s departure to become vice chairman of Morgan Stanley.
Meng was hired under terms that were to provide him with a $633,932.75 basic salary, $910,645.50 in incentives and other compensatory arrangements before benefits, along with benefits of $215,911.60, for a total compensation package of $1,760,489.96 in 2019.
As might have been expected of someone of his means and understanding of the international, national and state financial markets, Meng was simultaneous to his work for the California Public Employees’ Retirement System engaged in making his own personal investments. At least some of those investments represented a conflict with the work he was doing for CalPERS.
By late 2019, Meng was registering as a blip on Indiana Republican Congressman Jim Banks’ radar screen. Some time after that, Banks remarked upon and questioned the investments CalPERS was making in certain Chinese companies and stocks under Meng’s direction.
In February 2020 Naked Capitalism, an internet-based publication which bills itself as engaging in “Fearless commentary on finance, economics, politics and power,” had begun looking into the California Public Employees’ Retirement System’s investment activity. In April, Naked Capitalism posted a far more hard hitting piece which quoted financial analyst Nassim Nicholas Taleb questioning Meng’s honesty and competence in having failed to correctly manage CalPERS’s investment portfolio, in particular his move to dump two of CalPERS “left tail risk” hedging positions, such that the California Public Employees’ Retirement System gave up a hedge gain of over $1 billion in the larger of those holdings. Naked Capitalism in the posting pointed out misrepresentations Meng made when questioned about the decision. Taleb estimated that a series of questionable trading decisions Meng made in response to the COVID-19 crisis will result in a net loss to CalPERS of over $19 billion.
Things deteriorated from there, as the intense degree of scrutiny Meng was thereafter subjected to turned up a slew of irregularities, including his apparent yet ongoing relationship with the Chinese government and that he had advised CalPERS to invest heavily in the Blackstone Group after he had himself made an investment in that international investment fund. The infusion of funding from CalPERS boosted the value of Blackstone such that Meng saw an immediate profit of $70,000.
Naked Capitalism’s  reporting strongly implied that Meng had engaged in felonious conduct by failing to disclose his sale of 21 securities in 2019. Naked Capitalism also made a case that Meng’s personal investments tainted and negatively impacted the quality of his investment advice to CalPERS, such as in his involvement in the Blackstone Group and other private equity funds. The site pointed out that while expert analysts working for CalPERS were advocated offloading investments in several firms, Meng was having CalPERS hang onto those instruments, since divesting would have hammered the holdings in Meng’s personal portfolio.
Moreover, Meng’s relationship with the Chinese government attracted the attention of federal investigators. As early as March of last year the U.S. Justice Department and the Securities and Exchange Commission were scrutinizing CalPERS’s investment practices, including holdings in specific Chinese stocks, among them those of companies involved in weapons and military equipment manufacturing and research.
Congressman Banks suggested that California’s state, county and local governments as well as a large number of its public employees were furthering through CalPERS’s investments Chinese military efforts that are crosswise of the United States national interests and security.
Since Meng’s resignation in August, CalPERS and Frost have been less than fully forthcoming with regard to the myriad of investments and financial gyrations the organization made during Meng’s tenure as chief investment officer and the months immediately thereafter.
With questions about what Meng engaged in yet persisting, there is a possibility, indeed a likelihood, that the public, California’s taxpayers in particular, will make a hard focus not only on Meng’s activity, but that of CalPERS as a whole, both historically, at present and into the future.
Generous pensions conferred upon public employees over the last several decades have created a situation that is turning into a major drain on state, county and local budgets. Each year, those governmental entities pay into the retirement system on behalf of current employees. The funds managed by CalPERS, including its investment funds, provide the revenue stream used to pay the pensions of retired government workers throughout the state. The returns on CalPERS’s investments are a major portion of that revenue stream. When the returns on investments reach CalPERS’s earning goal, that money is distributed to the system’s retired members, the pensioners. When the earning goal is not met, there is no reduction in the benefits, but rather CalPERS then turns to the governmental entities that are its constituent members – the State of California, certain of the state’s 58 counties, a substantial number of the state’s 482 cities and towns, as well as many other agencies such as school and water districts – to make up the difference. Ten years ago, CalPERS’s investment return goal was 7.5 percent annually. More recently, that has been downgraded to 7 percent. Consistently with rare exceptions since 2007, CalPERS has failed to meet its earnings goals year after year, necessitating that the state’s governmental entities in Sacramento, at the  county level and locally take a percentage of their operating funds intended to provide governmental services and instead consign that money to payments to people no longer working to augment their pensions. With more and more retirees leaving the workforce every year and lifespans increasing, this is creating a financial crisis that will intensify going forward. In some jurisdictions, local governments are already paying nearly as much to their former employees than current ones. It is projected that by Fiscal Year 2030-31, more than half of California’s municipalities will be in a circumstance where more is being paid out in pensions than in salaries to the employees they will then have on staff.
The scandal that has enveloped Meng and is by extension engulfing CalPERS carries with it the prospect that it will bring so much attention to the irresponsible way in which governmental decision-makers have conferred upon public employees profligately overgenerous pension benefits and the cavalier management of the money provided to the public pension system which originated with the taxpayers that a critical mass of public support for a public pension reform movement will manifest, which will ultimately require that retired public employees see their pensions cut significantly.
-Mark Gutglueck

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