Pension Officials Baffled by Panel’s Divestment Policy

State pension officials reacted cautiously Wednesday to a legislative budget conference committee’s unprecedented attempt to limit state retirement fund investments in companies doing business with South Africa.

Because the policy was fashioned as a last-minute compromise Tuesday night, pension fund officials and their advisers were still struggling Wednesday to understand its effect.

“I’m not sure what it means,” said Donald Reidhaar, general counsel for the University of California Board of Regents.

He expressed a common reaction to the move by the two-house conference committee to place restrictions on pension fund investments in the proposed $35.3-billion budget, which contains hundreds of millions of dollars in state contributions to the funds.

Vote Forthcoming

The Assembly and Senate are expected to vote on the budget today.

In addition to not knowing exactly what the policy means, officials, who said they had not yet carefully analyzed the proposal, wondered: Is it legal? And will it be vetoed by Gov. George Deukmejian?

The policy is aimed at punishing the white minority government of South Africa for its policy of racial apartheid by penalizing U.S. corporations that do business there.

The policy covers the $24-billion Public Employees’ Retirement System, the $13-billion State Teachers’ Retirement System and the $6.3-billion University of California Retirement System.

Together, the systems control $10 billion in investments in corporations that do business in South Africa.

Strong Measures Considered

Originally, the conference committee considered a series of stiffer steps, ranging from forcing divestiture of all investments in companies that do business in South Africa to forbidding the University of California to put state construction funds in banks that do business there.

What the budget negotiators agreed on was a more limited policy that would require trustees of state pension funds to make no more investments after Jan. 1 in companies that make “new investments or new loans” to the government of South Africa or any of its political subdivisions.

The policy also would require trustees to adopt a plan before July 1, 1986, that would force divestment in firms that provide military supplies or which support the policy of apartheid.

It was not clear which companies, or how much of the pension funds’ investments, would be affected.

Some Limitations

Michael Corbett, a consultant to the Assembly Ways and Means Committee who helped draft the policy, said he thinks that the proposal is politically workable because it is limited to companies that do business directly with the white government or provide weapons or enforcement tools that help subjugate the black population.

“I think that what makes this marketable is that this is not a broad, sweeping policy,” Corbett said. “We want to get at those companies that directly support the government and apartheid policies.”

Additionally, the budget negotiators would require pension fund trustees to use shareholder voting rights to influence companies to work against the South African government’s policy of racial separation.

One question raised by Reidhaar, who has been assisting the UC Board of Regents in attempting to determine what kind of policy might effectively address the question of apartheid and at the same time protect pension fund assets, is what long-term effect the legislators’ policy would have, because the budget expires after only one year.

Legal Issues Studied

Reidhaar appeared more concerned, however, with broader legal issues.

Pension trustees, for public employees and teachers as well as the university, are given state constitutional independence to carry out their fiduciary responsibility to protect pension money. Like other pension fund trustees, they are personally liable to make up losses if they act imprudently.

A UC study determined that full divestiture could cost the university pension system $100 million, although this conclusion has been widely disputed.

“If the policy were construed in such a way as preventing the university from making investment decisions deemed appropriate by the regents and consistent with their fiduciary responsibility, then it could cause legal problems,” Reidhaar said.

Language Was ‘Hurried’

Reidhaar said of the budget committee’s proposal, “Obviously this language was put together hurriedly” and reserved further comment until he had a chance to study what the policy meant.

Judith Powell, chairwoman of the board of trustees of the State Teachers’ Retirement System, said she had not read the policy.

She and other members of the board, like UC pension officials, have been wrestling with the issue of South African investments for months. A staff analysis said that selling off securities and redirecting the teachers’ fund’s massive investment portfolio would be costly.

Powell said that most of the companies affected by earlier divestiture plans were major corporations like General Motors, General Electric and IBM and that the sale of stocks and bonds in those firms might require the teachers’ fund to take greater risks by purchasing stocks in smaller companies.

Controller Ken Cory, who sits on the board of both the public employees’ and teachers’ boards, strongly supports divestment, claiming that it would strengthen the funds’ portfolios because of the uncertain political climate in South Africa.

“He is convinced that the short-term gains from these investments will be more than offset by the upheaval that will surely occur,” said Cory aide Tom Moore. “It is a bad business gamble. He doesn’t think the white government will last.”

Corbett, the consultant who helped draft the policy, said that its authors were aware of the trustees’ fiduciary responsibilities and that by giving pension systems until next January or July to adopt the policy, ample time is allowed to sell securities without adverse effect on the pension funds.

Deukmejian, who sits on the university Board of Regents, has reserved comment. There is substantial speculation in the Capitol, however, that he will veto the policy.

“I suspect the governor is going to veto it because he is going to find it just too restrictive,” said Sen. John Seymour (R-Anaheim), chairman of the Senate Republican Caucus.

“There’s no basis for speculation at this point. He hasn’t reviewed all the language,” said Bob Taylor, a Deukmejian press aide.