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Get to the root cause of CalPERS mess
Officials at the California Public Employees' Retirement System are scrambling to respond to a series of embarrassing disclosures regarding close relationships between CalPERS officials and placement agents – politically connected middlemen who helped steer billions of dollars of pension fund investments to their clients.

CalPERs board president Rob Feckner last week endorsed legislation being drafted that would require agents to register in the same way lobbyists do. The legislation would also bar their clients from paying them commissions based on the investments they helped to arrange.

But the reforms under consideration do nothing to address the real problem that besets the state's giant pension fund – lavish benefits for certain public employees that the state and local governments simply can't afford. By supporting a sweeping pension benefit hike in 1999 and understating what the real cost of those enhanced benefits would be, the CalPERS board placed the state, local governments and taxpayers at risk.

Pension formulas the CalPERS board supported allow many public workers to retire with 90 percent of their pay in their mid-to-late 50s. To pay benefits that rich without unduly burdening state and local government budgets, the pension fund has to earn extraordinarily high returns on its investments.

To earn those high returns, CalPERS invested in riskier and riskier ventures. For example, in 2000, CalPERS became the first big public pension fund to invest in hedge funds – groups of investors that use aggressive investment strategies that even the most sophisticated investors have trouble understanding....