Donations to Pension Officials Scrutinized

Two statewide elected officials who sit on the boards of California’s largest public pension funds have collected at least half a million dollars in political contributions from firms doing business with those systems--much of it from private business partnerships that received substantial investments from the funds.

A review of campaign reports shows that state Controller Kathleen Connell received more than $350,000 from those doing business with the California Public Employees’ Retirement System or the State Teachers’ Retirement System. State Treasurer Matt Fong’s campaign took in more than $150,000.

The controller and treasurer sit on the boards of the pension funds--among the largest in the country, with combined assets of almost $200 billion.

Connell and Fong say the campaign contributions have no influence on the decisions they make on behalf of the pension systems. And both point to instances in which they have voted against contributors.

The soliciting of contributions from pension fund contractors and investment partners has come under scrutiny in recent weeks at the state and national level--with some critics raising fears of “pay to play,” a system in which political donations are a prerequisite for doing business.

Currently the Securities and Exchange Commission is studying the influence of political giving on investment decisions by pension funds, and a state Senate committee has scheduled a hearing on the issue later this month.

Both probes were launched after Thomas E. Flanigan, the former chief investment officer for the State Teachers’ Retirement System, sent a letter to the SEC’s chairman in June. He described contributions to pension board members as “at best unseemly and possibly unethical,” even though they are permitted under state law.

The practice, he said, “creates more than a subtle conflict of interest” and the donations raise questions about the “credibility” of investment decisions.

Companies doing business with huge public pension funds can be intimidated into giving political donations when they are solicited, according to Flanagan, who was replaced earlier this year after guiding the teachers retirement system investments for more than a decade.

State law permits politicians to collect money from those who do business with the state. It does not require the elected officials to declare a conflict of interest and abstain from votes affecting their contributors.

The 13-member Public Employees’ Retirement System board and the 12-member State Teachers’ Retirement System board have broad powers to set investment policy, to hire and fire financial advisors and to approve, disapprove and modify specific investments.

Connell said she has voted no or abstained from pension board votes affecting contributors on almost all occasions. “My guiding principle has been when there appears to be a conflict of interest, I abstain or I vote against the contributor,” she said. “It is not what a contributor may choose to hear from an elected official.”

Connell, a Democrat, said many of her contributors were doing business with the pension systems before she became controller in 1995 and that most of their contracts or investments have not come before the board during her tenure.

Republican Fong, who also joined the pension boards in 1995, said he pays no attention to contributions when deciding an issue and that no one he deals with is required to contribute in order to get a fair hearing. “There’s no ‘pay to play’ where I come from,” he said. “All my decisions are based strictly on performance. I have examples of people who contributed to me, but I voted against.”

A leading campaign finance reformer finds the contributions disturbing, even if elected officials vote against their contributors. “Money rarely buys a vote, but a contribution buys something. Or why else would [the business interests] be giving?” said Robert M. Stern, co-director of the Center for Governmental Studies and a co-author of Proposition 208, which starting this year sets limits on political contributions. “If you are doing business with the agency, you want to maintain a good relationship with the agency. . . . It is like an insurance policy, because there may be a crisis and you may have to have access to the official.”

When board members solicit campaign contributions, it creates a dilemma for companies with pension fund business, according to the representative of one such company. “If you don’t contribute, you’re subject to concern that others might make contributions,” he said, speaking on condition that he not be identified. “In an ideal world, the contributions wouldn’t be allowed.”

In his letter to the SEC, Flanigan asked the federal agency to consider barring campaign contributions to board members from anyone who might benefit from pension fund investment decisions. He pointed out that the SEC already has implemented rules placing restrictions on campaign donations from investment banking firms that vie for a state or local government’s bond business.

A spokesman said this week that the SEC is trying to determine whether it has the authority to regulate contributions to pension board members.

Flanigan could not be reached for comment on any actions by Connell or Fong that might have prompted his concerns.

Another elected state official, State Supt. of Public Instruction Delaine Eastin, sits on the teachers retirement system board. Records show that her campaign has collected less than $10,000 from individuals and firms that do business with the board.

Several sources indicated that Flanigan was aiming his remarks at Connell, his most vocal critic on the teachers retirement board.

Connell said she had no idea what Flanigan might have had in mind when he wrote to the SEC. She said the sole issue in the decision to replace him was his tardiness in moving more of the fund’s investments to stocks as the board had directed, a failure which she said cost the teachers system $2.6 billion.

State Sen. Adam Schiff (D-Burbank), who chairs the Senate’s Public Employment and Retirement Committee, has scheduled a hearing for Monday to determine whether any investment decisions have been based on “inappropriate factors,” including campaign contributions and the wining and dining of any pension board officials. “There may be considerations brought to bear,” he said, “that don’t involve the financial well-being or long-term security of the funds.”

The stakes of pension fund decisions can be enormous.

Last year the Public Employees’ Retirement System board voted to invest an additional $250 million in Lombard/Pacific Partners, a group focusing its investments in the developing countries of Asia.

That decision followed earlier commitments of $100 million to partnerships that included Lombard Investments.

Records show Lombard executives and consultants and their families have contributed $32,000 to Fong’s campaign committees since 1994, including $12,000 this year for his upcoming U.S. Senate race.

H. Lawrence Hull Jr., a consultant to Lombard, said he has invited Lombard employees to Fong fundraisers. “We would do everything we could to support him,” Hull said, noting that he has known Fong for years. “Our family is close to his family.”

In some other instances of potential conflicts, Fong and Connell have abstained or voted against their contributors, records show. In March, for example, the state teachers retirement board voted to replace Abbott Capital Management as an investment advisor.

Connell abstained when the board voted to choose Pathway Financial Management. Records show a co-founder of the firm, Douglas K. Le Bon, has contributed $20,000 to Connell’s campaign committee since 1994--including $10,000 last December.

Connell said she abstained because of a long friendship with Le Bon and his wife, but she acknowledged that she did question Pathway representatives during interviews with competing bidders.

James D. Mosman, chief executive officer of the State Teachers’ Retirement System, said that, except for Connell, the pension board was unanimous in choosing Pathway for a three-year, $2.9-million contract--$800,000 below Abbott’s bid. “To me, it was a no-brainer,” Mosman said.

In another action, the teachers retirement system board agreed in 1995 to invest $150 million in a real estate investment fund put together by Los Angeles-based Colony Capital. The fund was the first of its kind for the teachers system, and a number of board members, including Connell and Fong, raised questions about the wisdom of the investment.

Campaign records show that from 1994 through 1996, executives of Colony contributed $20,000 to Connell and $9,500 to Fong, including some contributions in the months before the board’s decision. Connell said she opposed the investment; Fong abstained.

A spokesman for Colony said that “the contributions were personal and unrelated to business.”

Fong believes that current law, which limits and requires public disclosure of contributions, is enough to ensure that elected officials remain impartial. “Voters have a right to know and voters themselves can make the decision on whether they want to support that individual,” Fong said. However, many investment decisions are made in closed session with no public record of how the board votes or of discussions.

Connell said she has urged public disclosure of the minutes of closed-door sessions. And she has proposed that the pension funds restrict campaign contributions from contractors, if the rules also apply to the governor and legislative leaders, who make appointments to the pension boards. She said she would support change but only if there were “a level playing field.”

However, in 1995, when the Public Employees’ Retirement System board was considering a Connell proposal to require prospective contractors and investment partners to disclose their political contributions, then-Assembly Speaker Willie Brown (D-San Francisco) and Senate President Pro Tem Bill Lockyer (D-Hayward) argued that the step was unnecessary and harmful.

In a letter to the Public Employees’ Retirement System’s chief executive officer, James E. Burton, the two lawmakers wrote that applying the requirement to contributions to lawmakers “would be over-broad, intimidating, and likely to have an unintended but very real chilling effect on any contractor/partner’s constitutional free-speech right to participate in the political process.”

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Pension Funds and Political Money (San Fernando Valley Edition, A8)

Both state Controller Kathleen Connell and state Treasurer Matt Fong serve on the boards of the state’s largest public pension funds--the Public Employees’ Retirement System (PERS) and the State Teachers’ Retirement System (STRS). And both have collected substantial political contributions from those doing business with the two retirement systems. Connell has received at least $350,000; Fong $150,000. Here are some of the top contributors:

Firm: Leonard Green & Partners

To Connell: $35,000

To Fong: $0

Connection to pension funds: PERS committed $75 million to private investment fund

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Firm: Triumph Capital Group

To Connell: $9,000

To Fong: $28,250

Connection to pension funds: PERS committed $60 million investment

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Firm: Levine Leichtman Capital

To Connell: $33,000

To Fong: $0

Connection to pension funds: PERS committed $100 million

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Firm: Lombard Investments

To Connell: $0

To Fong: $32,000

Connection to pension funds: PERS committed $350 million

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Firm: Colony Capital

To Connell: $20,000

To Fong: $9,500

Connection to pension funds: STRS committed $150 million to real estate fund

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Firm: Cox, Castle & Nicholson

To Connell: $11,000

To Fong: $15,000

Connection to pension funds: Law firm represents STRS in (various attorneys) real estate litigation

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Firm: Freeman Spogli & Co.

To Connell: $7,000

To Fong: $19,000

Connection to pension funds: STRS committed $60 million; PERS $75 million

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Firm: TCW Realty Advisors

To Connell: $17,750

To Fong: $5,000

Connection to pension funds: PERS real estate advisors

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Firm: Hellman & Friedman

To Connell: $5,000

To Fong: $17,000

Connection to pension funds: PERS committed $100 million

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Firm: Pathway Financial

To Connell: $20,000

To Fong: $0

Connection to pension funds: Won $2.9 million contract to advise STRS

Source: Campaign reports filed with Secretary of State, 1993-97; PERS and STRS financial reports

Note: Contributions listed are from the firms themselves, their officers and employees, as well as consultants and relatives.