Panel Attacks State Pension Officials for Stock Losses : Assembly: The $56-billion retirement system put $400 million in real estate holdings. This month the shares lost 75% of their value.


Officials who run the state’s mammoth pension system were strongly criticized Wednesday for a decision to privately purchase $400 million in real estate stock that later plummeted 75% in value as soon as the shares were traded publicly.

The $56-billion retirement system purchased 10.5 million shares in Catellus Development Corp., a real estate spinoff of the Santa Fe Pacific Railroad, in November, 1989. At the time, the state agreed to pay $37.79 a share. But this month, when the stock was publicly traded for the first time, it sold initially for about $11 a share and then dropped to $9.25 a share--a paper loss of about $300 million.

Assemblyman David Elder (D-San Pedro), who chairs a legislative committee that oversees the state pension plans, said that before funds from the California Public Employees Retirement System (PERS) were invested in such a venture, officials should have taken some step to protect their investment from so sudden a drop in value.

“Why did PERS pay roughly four times the current market rate for its stock? Or put another way, where did the $300 million go?” Elder asked at a hearing called to explore the investment.


Those connected with the purchase defended their actions, saying they had every reason to believe the investment was a good long-term risk. Officials also maintained that the loss connected with its drop in value would not have any immediate impact on employees’ retirements.

William Ramseyer, executive vice president of JMB Institutional Realty Corp., the investment’s underwriter, said the sellers would not have agreed to the kind of protections Elder was suggesting. JMB collected a fee of nearly $8 million for arranging the stock purchase and earns $2.4 million a year from the retirement fund for managing the investment. Elder called that an “unprecedented deal.”

On Wednesday, officials were called before the Assembly Committee on Public Employees, Retirement and Social Security to defend the investment which gave the state a 20% interest in the railroad’s real estate arm.

It was the latest in a series of sporadic legislative inquiries into investments made by one of the world’s largest pension funds. PERS represents more than 600,000 state and local public employees and 270,000 retirees.

While financially sound and generally considered to have earned a good return on its total investments, the pension system has been criticized in the past for individual investment decisions, including a $25-million unsecured loan to now-bankrupt Drexel Burnham Lambert Inc., an investment company that specialized in the sale of junk bonds. The system also held more than $500 million in so-called high-yield bonds that suffered $87 million in paper losses with the collapse of the junk bond market.

In 1988, the pension system was roundly criticized in a report by the same Assembly committee for taking unnecessary risks in the stock market. Together, the State Teachers Retirement System and PERS had 40% of their money in the stock market at the time of the 1987 stock market crash and lost a combined total of $7.6 billion. Those losses were later recouped and the fund managers have since trimmed their stock portfolios.

Elder said he was concerned that the system had made many investment decisions during a robust economy and had not considered how these investments would weather an economic downturn.

Stephan Roulac, managing partner of Roulac Consulting Group, a firm hired by PERS as its real estate adviser, said he had recommended the purchase because he considered it a “singular opportunity” and an investment that would be “advantageous to the system.”


The Santa Fe real estate and land holdings--consisting of 2 million acres of property mostly in California--had the potential to produce a highly favorable long-term return, Roulac said. The property, he said, was acquired by the railroad over many decades and included some parcels in downtown Los Angeles, San Diego and San Francisco and others in rural and desert areas that were undeveloped.

Roulac acknowledged that he had anticipated the value of the stock might drop as much as 30% when it was publicly traded, but he conceded he had not expected it to dive nearly 75%. Even so, he told the committee, he considered it a good investment decision. He said the railroad had the capital to “defer development” and wait out any downturn in the real estate market.