Pension Experts Troubled by Plan to Tap CalPERS
California Gov. Pete Wilson’s plan to use part of the state’s huge public employee pension fund to help close the budget gap would be unprecedented in scope and, if successful, could lead other states to take similar measures, pension fund managers and other experts said Tuesday.
Fund managers said they also feared that Wilson’s plan could jeopardize public employees’ retirement benefits.
The plan calls for taking $1.6 billion from the California Public Employees Retirement System. CalPERS has $62.4 billion in assets and is the biggest public employees’ pension fund in the United States.
With California’s record as a trend-setter on issues such as the property tax revolt, fund managers said they feared that Wilson’s move might inspire other state and local governments facing financial crises to raid their pension funds.
“There is great concern that there could be a domino effect,” said Harold Schaitberger, legislative counsel to the National Conference of Public Employees Retirement Systems.
Wilson spokesman Franz Wisner insisted that the governor’s move “would do absolutely nothing” to lower pensions. He said the plan simply would draw from excess funds. “Currently they (CalPERS) take in far in excess of what they need and they force the taxpayer to foot the bill,” Wisner said.
Local public employee pension funds have helped out in the past when cities such as New York and Philadelphia have gotten into fiscal trouble. And just last year, California used subtler methods to put off payments of about $300 million to CalPERS and about $475 million to the separate California State Teachers Retirement System.
But Carlos Resendez, executive secretary of the organization that represents state and local public pension funds across the country, called Wilson’s move “absolutely unreasonable.”
Resendez said using money earmarked for pension funds to close budget deficits may leave funds unable to pay full retirement benefits in the future--especially if there is a sustained downturn in the securities markets.
“To officials confronted with an ailing economy, it is very easy to think short term, raid the assets, and forget about the liabilities because they (the officials) will be out of office by the time they come due,” said Resendez, who is also the executive director of the San Antonio Fire and Police Pension Funds.
Under Wilson’s plan, the state would get at least $1.6 billion toward closing a $14.3-billion state budget deficit by redirecting money earmarked for CalPERS accounts that cover cost-of-living increases to pensioners.
Wilson’s budget package also includes a bill that would allow him to abolish CalPERS’ current 13-member autonomous board and replace it with a nine-member board under his control.
The governor also recommended arbitrarily raising projections of the annual profit on CalPERS’ investments to 9.5% from 8.5%. Although pension experts and some members of the CalPERS board disputed the validity of changing the estimates, the effect would be to further reduce the state’s required contribution to CalPERS.
On Tuesday, Wilson rejected a $1.6-billion CalPERS loan to the state meant to head off his plan to seize control. He also announced that he will go ahead with efforts to replace the board. Board members had said the loan offer would have provided additional guarantees for pension fund assets that are absent in Wilson’s plan.
CalPERS has been a leader in the recent movement by big pension funds to make the corporations whose stock they own more responsive to their interests. In recent months the pension fund took on Sears, Roebuck & Co., General Motors and ITT Corp., among others, on issues such as explaining poor performance and limiting fat salaries and bonuses to top executives.
Activists involved in the movement said they feared that the move to oust the CalPERS board could undermine their efforts. Some Wilson critics have charged that the governor’s motivation for changing the board came from a desire to win favor with big companies that have been the target of these efforts.
Howard D. Sherman, vice president of Institutional Shareholders Services, a Washington, D.C., organization, said Wilson’s move could discourage directors of other big public pension funds that have sought concessions from corporations.
State Controller Gray Davis, who is one of two Democratic state officials who would be ousted from CalPERS board under Wilson’s plan, called the governor’s move “naked aggression.”
“Hussein wanted Kuwait, so he took it,” Davis added. “The governor wants CalPERS, and he’s trying to take it.”
CalPERS’ 13-member board now includes a majority of directors elected by the fund’s beneficiaries. But while most state pension fund boards are basically autonomous from states’ executive branches, not all of them are.
In New York, the state controller, an elected official, is the sole trustee of New York’s mammoth public retirement fund. And in California, the board of the smaller Teachers Retirement System is controlled by the governor.
The move to stop the Wilson plan received unexpected aid Tuesday from an influential national organization representing large corporations. The organization, the Business Roundtable, said in a letter to CalPERS Chief Executive Dale M. Hanson that Wilson’s proposal “may run counter” to federal pension standards.
In addition, the organization said “our reaction is that the proposed changes would not be in the best interest of CalPERS, the State of California” or the Roundtable’s members.
CalPERS and Shareholders Rights CalPERS has been a leader among pension funds pressing corporate managements to be more responsive to shareholders. Some of its actions in recent years have involved the following companies:
Exxon: Last April, CalPERS joined with two other major public pension funds to demand stronger action from Exxon Chairman Lawrence G. Rawl. The funds wanted Rawl to correct the company’s poor and potentially costly environmental record.
Lockheed: CalPERS took a stand against Lockheed management in backing corporate raider Harold Simmons’ attempt at a takeover of the company. The fund sought to eliminate the company’s anti-takeover plan and create a shareholder advisory committee. The battle was decided in favor of Lockheed management.
Occidental Petroleum: A proposal to create a watchdog advisory committee to Occidental’s board was dropped in March, 1990. The company agreed to meet twice a year to review corporate strategy with CalPERS representatives.
Sears: CalPERS publicly supported shareholder activist Robert A. G. Monks in his bid to gain a seat on the company’s board. Monks failed to win enough shareholder votes. Earlier this year, CalPERS withdrew its proposal for a Sears shareholders advisory committee after the company’s chairman agreed to more frequent meetings with the fund’s officers.
CalPERS has also fought, to date without success, to establish shareholder advisory committees at Avon Products, Texaco and TRW. In Texaco’s case, CalPERS withdrew its proposal once the company agreed to appoint a board member of whom CalPERS approved. Senior managements at USAir, Consolidated Freightways and Halliburton have also come under scrutiny by the pension fund.
Largest U.S. Pension Funds The 10 largest pension funds in the United States
Assets Fund (in billions) Teachers Insurance and Annuity $83.10 -College Retirement Equities Fund California Public Employees Retirement System 62.38* N.Y. State & Local Retirement System 43.74 New York City Employees Pension Fund 40.76 California State Teachers Retirement Fund 30.14 New York State Teachers Retirement Fund 26.69 New Jersey Division of Investment 26.61 Texas Teachers Retirement Fund 23.73 Ohio Public Employees Retirement Fund 20.60 Florida State Board of Administration 19.27
* As of June 14
Sources: Pensions & Investment Age, CalPERS
CalPERS At a Glance What: California Public Employees Retirement System, the nation’s largest public employees’ pension fund
Investment portfolio: $62.4 billion
Beneficiaries: State workers, some school employees and local government workers. About one-quarter of those are retired.
The Biggest California Funds 10 largest public pension funds in California Assets (in billions) California Public Employees Retirement System: $62.38* California State Teachers Retirement Fund: 30.14 University of California Pension Fund: 12.47 Los Angeles County Employees Pension Fund: 10.36 San Francisco City/County Employees Pension Fund: 4.33 Los Angeles Fire and Police Pension Fund: 3.46 Los Angeles City Employees Pension Fund: 2.62 Los Angeles Dept. of Water and Power Pension Fund: 1.85 Orange County Employees Pension Fund: 1.42 San Diego County Employees Pension Fund: 1.06 *As of June 14, 1991 Source: Pensions & Investment Age, CalPERS Compiled by researcher Melanie Pickett
THREAT OF SANCTIONS
Economic sanctions threatened on retirement fund issue. A3
