Pension board has been under fire

By Adriel Hampton
Staff Writer S.F. Examiner
Published: Tuesday, February 22, 2005 12:01 PM PST

The effort to reform California public pension systems comes as CalPERS, the nation's largest public fund, has been under fire from some business groups critical of what they see as a union-driven departure from sound investment decisions.

The CalPERS board at its last meeting elected union activist Rob Feckner as president. He follows Sean Harrigan, a union leader who some board members felt put the pension system into too many losing battles.

As an investor in many companies, the CalPERS board for decades has felt it should use the retirement fund's position to compel public companies toward its most up-to-date definition of good citizenship.

"CalPERS has been a national leader in effective corporate governance for 25 years, OK. Respected throughout the country," said CalPERS board member Controller Steve Westly at a retreat last month. "The last two years we lost our focus. We took on too many issues, we lost on to many issues and we lost our leadership position."

Allan Zaremberg, head of the California Chamber of Commerce and co-chair of Citizens to Save California, a pro-Gov. Arnold Schwarzenegger fund raising group, said CalPERS involvement in the recent Southern California grocers strike was inappropriate and showed the system sometimes strays from the bottom line in its advocacy.

While CalPERS most often runs into criticism when it pushes social agendas, it also uses its clout as a major shareholder on financial issues like linking CEO pay to company performance.

CalPERS board members say Harrigan, an official with the grocery industry United Food and Commercial Workers union, created an apparent conflict, but most of the board was concerned with the management of Safeway's chief Steven Burd.

Ron Alvarado, the State Personnel Board member who took Harrigan's seat on the CalPERS board, denied Harrigan was targeted for removal due to his activist role. Alvarado said he was sensitive to concerns CalPERS was losing its focus on fiduciary duty. "Perception can be reality," Alvarado said.

The personnel board ousted Harrigan in December.

Feckner, who like Westly did not criticize Harrigan directly, said he plans to delegate more leadership and play a less prominent role than his predecessor.

Westly's reference to the board taking on "too many issues" include votes against corporate board members on 85 percent of its proxies last year. CalPERS' negative votes were focused on issues such as companies hiring their auditors as consultants. Among its targets was Coca Cola board member Warren Buffet, the well-known chairman of Berkshire Hathaway Inc.

The vote against Buffet, along with its influence during the grocery workers' dispute, drew criticisms from business interests and partisan critics. That ire is already transferring into support for Gov. Arnold Schwarzenegger's reform plan, despite assertions from the governor's staff that CalPERS is not a target.

"I think they should focus on ensuring a good rate of return for the state of California" rather than social activism, Zaremberg of the state chamber said. "That should be their No. 1 goal."

The high political stakes of CalPERS actions -- former Vice President Al Gore recently praised the system for its efforts to force auto makers to reduce emissions -- often take precedent over fiscal concerns, some charge.

"If they were engaged in real corporate governance the chamber would cheer," said David Hirschmann, vice president of the National Chamber Foundation. "When they use corporate governance to further any special interest agenda or advance anyone's political career, we think that's a mistake."

Targeting large pay packages for CEOs is among the system's top goals this year.

"Who else is out there talking about corporate governance?" said Alberto Torrico, D-Newark. "The federal government has no interest in taking on corporations."

At the CalPERS retreat, Kevin Cameron, president of the analytical firm Glass, Lewis & Co., which advises CalPERS and other large shareholders how to vote their proxies for corporate boards, told board members that institutional shareholders are the only force countering "remorseless upwards pressure" in CEO pay, a trend he said threatens long-term value in companies. Public pensions have increasingly been joined by large stockholders like the Vanguard Group in questioning corporate directors in an effort to see better returns.

When CalPERS moves into social advocacy, board members say its efforts are driven largely by the interests of the system's members -- union government workers. In December, the board voted on a policy against investing in companies that provide contract employees for government work.

Working in concert with companies is also a goal of some board members. At a recent board retreat, Jeffrey Amann, general counsel for the business software firm Siebel Systems suggested that CalPERS and its professional staff should focus on playing an advisory role -- one that would lead more companies to value its input. Siebel this year launched a performance-based bonus system for all its employees.

Retirement nationally

Ninety percent of state and local government employees participate in defined benefit -- or guaranteed -- retirement plans

California's more than 2 million public pension members account for about 12 percent of the nation's total and all have defined benefit, guaranteed retirement plans with supplementary 401(k)-style plans as an option

10 states -- Texas, Washington, Ohio, South Carolina, Florida, Montana, Nebraska, Oregon, Colorado and Indiana -- offer employees plan options

Michigan, West Virginia and the District of Colombia have limited defined benefit plans to new employees, offering a 401(k)-style defined contribution plans instead

Differences

Here are the key differences between the existing California public employees defined benefit plan and Gov. Arnold Schwarzenegger's defined contribution proposal:
- Defined contribution (proposed)

RISK: Employees bear market risks, reap gains

TRANSFER: Plans can include immediate vesting

RECRUITMENT: Plans may be popular with workers who foresee short careers with the state

COST: Retirement savings depend on individual choice; employees who invest wisely will earn more than a defined benefit plan; government employer could lower matching contributions
- Defined benefit (existing)

RISK: Benefit to employee cannot be changed and taxpayers pick up the difference if government investments fall short

PORTABILITY: Short-term workers may get back only what they paid into system

RECRUITMENT: Plans reward long-term service. A switch to new defined contribution plans may hurt employer efforts to recruit workers who have the old plan with another government agency

COST: Overall benefits are cheaper to deliver due to fewer plan choices; government can use early retirements to save on payroll costs and encourage turnover