SACRAMENTO : State Pension Fund Wants a Role on Bankruptcy Committees
The California Public Employees Retirement System has launched a drive to change federal law so that it and other government entities can serve on committees overseeing bankruptcy reorganization plans.
CalPERS is owed $25 million by Drexel Burnham Lambert Group, which filed earlier this year for protection under Chapter 11 of the U.S. Bankruptcy Code.
After a frustrating legal scramble to recover its losses, the nation’s largest public pension fund wants Congress to amend rules that prevent such “government units” from serving on Chapter 11 creditor committees. These oversight committees can have considerable sway in shaping bankruptcy reorganization plans and in trying to recover losses to creditors quickly.
The $56-billion pension fund was recently denied a seat on the creditor committee that was formed to restructure Drexel. The parent firm of the high-flying brokerage filed for bankruptcy after the junk market collapsed and small investors retreated from the stock market. The parent’s assets exceeded liabilities by more than $700 million.
Institutions and individuals quickly lined up to rescue their investments. CalPERS, which is Drexel’s fifth-largest creditor, got in line too.
CalPERS had loaned Drexel $25 million secured by junk bonds. In 1986, when CalPERS made the investment, the rate on the bonds was 2% higher than other fixed-income investments that CalPERS held in its portfolio.
“It was considered attractive for its quality,” said DeWitt Bowman, CalPERS’ chief investment officer told the state Senate Committee on Public Employment and Retirement.
Although CalPERS can monitor the Drexel bankruptcy proceedings, it can’t vote on matters related to the restructuring. In federal court in New York, Judge Howard Buschman was sympathetic to CalPERS’ appeal to serve on the committee, but federal law prohibits it.
Only “persons” with creditor claims against the bankrupt firm are entitled to serve on the committee, according to the bankruptcy code. “Persons” is defined as “individual, partnership and corporation but does not include governmental units.”
In 1984, Congress amended the definition so that a limited number of federal agencies, such as the Federal Deposit Insurance Corp. and the Small Business Administration, could serve on creditor committees. But public pension funds are still excluded, and a number of court cases challenging the law have failed to overturn it.
No federal legislation has been introduced to change the law, but CalPERS is trying to persuade the California Legislature to carry its message to Washington. State lawmakers are considering a resolution that would urge Congress to move on legislation to permit agencies such as CalPERS to serve on bankruptcy committees.
Representing more than 600,000 California public employees, CalPERS first became interested in changing the federal rules during litigation three years ago between Texaco and Pennzoil. In a takeover battle between the two oil giants, Texaco filed for bankruptcy and CalPERS was denied voting status on the creditor committee even though it was a major stockholder in Texaco.
A recent legislative hearing on the resolution gave state legislators an opportunity to inquire about the soundness of CalPERS’ investing in junk bonds.
The legislative committee learned that of the $11.3 billion CalPERS has invested in corporate and U.S. Treasury bonds, less than 16%, or $1.9 billion, is secured by company assets or by government guarantees. Moreover, CalPERS has a total of $500 million invested in high-yield junk bonds.
Unlike other states, the California Legislature has placed virtually no restrictions on CalPERS’ investment decisions. Other than a requirement that part of its portfolio go into home mortgages, CalPERS can make “any investment authorized by law.”
Measured by rate of return, that flexibility has paid off.
In the past five years, CalPERS has earned an average annual yield of 18.2%. Despite the Drexel fiasco, junk bonds yielded the pension fund a 30% annual rate of return since 1986.
Bowman won’t even second-guess the decision to get involved with Drexel. “We believe it was an appropriate investment,” he said. “If fixed-income investments are properly diversified, the return can far exceed the risk of an occasional default.”
Sales Tax Probe Targets Swap-Meet Vendors
With tax revenue in short supply this summer, the state Board of Equalization is moving outdoors to ferret out firms that avoid charging sales taxes. The board has launched an investigation of swap-meet vendors who ignore state requirements to obtain a Board of Equalization seller’s permit and collect sales taxes.
Prompted by legislation approved last year, investigators “will visit swap meets throughout California to verify that regular sellers have permits before selling merchandise,” said board spokeswoman Delena Bratton.
The board also plans to audit vendors to see if they are accurately reporting taxable sales.
While there are no reliable estimates on swap-meet sales in the state, they “have become big business in California and unique here because of our weather,” said Jay Swerdlow of the California Swap Meet Owners Assn. in Los Angeles. “Shopping outdoors has become the thing to do.”
The trade group welcomes the new law, according to Swerdlow, because it believes that a few vendors do ignore the sales tax regulations.
“Many of our sellers are store owners who know the rules and are here because they do better at a swap meet on the weekends than they do in their stores,” he said.
Swerdlow figures that results from the board’s investigation will give the fledgling swap-meet industry more “respectability.”
