Firms Lobby, Woo State Pension Officials, Win Pacts
Trustees of the country’s largest public pension fund a year ago committed $225 million to high-risk investments in the emerging countries of Asia.
The deal, the largest of its kind by the California Public Employees’ Retirement System (CALPERS), was spawned at a series of exclusive conferences that featured crab and oyster feeds on the rugged Oregon coast.
Attending were top CALPERS officials and executives of Lombard Investments, the San Francisco-based firm that stood to make millions from the transaction.
The sessions were sponsored by a nonprofit institute headed by a Lombard consultant and housed in Lombard offices in the Transamerica Pyramid.
The Lombard investment and several other lucrative deals examined by The Times show that the CALPERS board has failed to insulate itself from the influence of companies vying for pension fund investments.
A state law was designed specifically to stop contact between board members and those trying to sell investments to the $128-billion pension system. And the 13-member board is legally required to consider investments solely on their merits.
But records and interviews reveal that the pension system committed hundreds of millions of dollars in discretionary investments to companies that had privately lobbied the board or had political or personal ties to some board members. For example:
* CALPERS allocated $60 million to a real estate partnership that employed the son-in-law of a board member, who participated in a board decision to eliminate a more highly rated competitor.
* A pension fund trustee, who was also a top deputy to Los Angeles Mayor Richard Riordan, took the lead role in committing $75 million to a Los Angeles firm co-founded by the mayor.
* The board, which is dominated by representatives of government workers and retirees, authorized $200 million for loans on construction projects that pledged to use only union labor.
* And the board agreed to invest $75 million with a New York firm after lobbying by the company’s partners, including a former secretary of commerce.
Most of these decisions were made against the advice of professional staff who cautioned that the board was squandering better investment opportunities. And some of the deals have performed poorly.
But critics say they all raise questions about the integrity of the decision-making process and show how susceptible CALPERS trustees are to private interests, especially those who court them at conferences, over meals and in private meetings where no records are kept.
The direct contact with board members “creates a process that is not kosher,” said Robert Fellmeth, who heads the nonprofit Center for Public Interest Law in San Diego. “This is why we have due process [for making decisions]. When you don’t, it’s who you know and who you have access to.”
In contrast, the State Teachers Retirement System has long discouraged direct contact between board members and those pitching investments. At the $80-billion fund, investment firm officials instead are channeled to the system’s professional staff and consultants, Chief Executive Officer James D. Mosman said.
A 1991 law prohibits CALPERS board members from communicating with contractors whose “investment products” are being considered, according to the law’s author.
CALPERS officials contend that the law applies only when the board is considering competitive bids--and not to individual investment decisions.
Board members defend their outside contacts with investment firms as educational opportunities that help them make wise decisions on behalf of the 1 million government employees, retirees and their families covered by the system.
“The fact is we’ve got a pretty damn good system,” said Charles P. Valdes, chairman of CALPERS’ investment committee. “Generally, I’ve always thought our board is pretty clean.”
The board’s investment decisions have prompted law enforcement inquiries. After a Times story last September, the Los Angeles County district attorney’s office asked CALPERS for information about a controversial $100-million investment in a Texas firm that followed private lobbying by a state senator and a former board member. And the FBI has interviewed at least one board member and a former board member about the deal.
Federal agents also are looking into potential conflicts of interest on the part of elected officials who sit on pension boards and solicit campaign contributions from investment-related businesses.
CALPERS’ performance generally has ranked in the middle of the pack of the country’s largest public pension funds.
The 20.1% overall return on its investment portfolio for the last fiscal year ending June 30 is far more than the 8.5% rate of return needed to ensure the solvency of the pension system.
But the gain is not so impressive when compared to the Standard & Poor’s 500 stock index, which surged 32% during the same period.
Most of the CALPERS money is invested automatically in stocks and bonds. However, $9 billion has been placed at the discretion of the board in private partnerships. And those investments have absorbed most of the board’s time and stirred controversy.
Decisions about such investments have been made behind closed doors, under an exemption to open meeting laws that permits--yet does not require--executive sessions when considering investments. And the records have been kept secret indefinitely.
CALPERS officials point to recent reforms following Senate hearings and news reports about CALPERS investment practices. The changes would discourage closed-door sessions and usually make transcripts and minutes available within 12 months.
But officials acknowledge that not all decisions will be made in public. And potential business partners still will be allowed to contact trustees without public disclosure.
Meetings at the Beach
For the past several years, H. Lawrence Hull Jr., a Lombard Investments consultant who serves as president of the Pacific Pension Institute, has hosted conferences at a Gleneden Beach, Ore., resort for public pension fund officials and experts from government, the private sector and academia.
Participants and spouses socialized at Hull’s nearby house and at a restaurant where they played “two truths and a lie,” a game designed to help them get acquainted.
CALPERS investment committee Chairman Valdes has served as an institute director. CALPERS board President William Dale Crist has agreed to join the institute’s board. Several other CALPERS board members, including Robert F. Carlson and state Treasurer Matt Fong, have attended the conferences. And CALPERS chief investment officer Sheryl Pressler was a speaker.
Records show that the institute sometimes has paid the expenses of CALPERS officials.
Peter Ashe, former director of the institute, says Lombard provides office space, secretarial help and telephones for the institute. But Ashe said he tried to build a “firewall” between Lombard and the institute and “not even for one nanosecond allow PPI to be used as a marketing tool.”
Hull refused to answer questions about the relationship between Lombard and the institute. Lombard managing director Joseph Chulick Jr. did not return calls.
CALPERS investment committee Chairman Valdes said it was at the institute that pension fund officials “were introduced to the principals involved” in the Lombard investments.
When asked if the meetings had given Lombard an advantage, Valdes said, “Yes, it’s a leg up if you get the opportunity to talk to the right people, if you have the right package and the right personnel.” But he stressed that CALPERS’ professional staff--some of whom also attended institute sessions--liked the Lombard partnerships.
In December 1996, state Treasurer Fong moved that CALPERS commit $225 million to Lombard for expanded investments in Asia, and the motion was approved overwhelmingly.
Lombard officials, their relatives and business associates have contributed $32,000 to Fong’s political campaigns, including $12,000 to his current race for the U.S. Senate. Fong, who denied that he was influenced by the contributions, said he generally follows the advice of CALPERS’ staff.
He said it had been useful to meet with Lombard officials in Oregon: “You want to know the people you are dealing with and make sure they are people of integrity and you can trust them.”
The lone holdout on the board was state Controller Kathleen Connell, who has not attended the conferences.
“The partners had no record of performance and . . . the structure of investment had never been tested in the market before,” Connell said in an interview. “If it is such a good deal, why aren’t there [other pension funds] in it?”
It is too soon to know how the $225-million investment will fare. But CALPERS approved another $75-million deal with Lombard in 1995--and the small amount invested thus far shows a loss. CALPERS rates an earlier $25-million investment with a separate Lombard partnership as “below expectations.”
Trustee Relative Profits
Lombard is only one of several well-connected concerns that obtained substantial investments from CALPERS in recent years for everything from real estate to corporate buyouts.
In 1994, the pension fund allocated $60 million to Olympic Realty Advisors, a partnership that employed the son-in-law of board member Jerry Cremins.
At one meeting, Cremins participated by conference call, voting on matters that eliminated some of Olympic’s competitors, including one of the highest-rated companies in the competition.
Later, when the final decision was reached, Cremins announced that he would be recusing himself from further participation to avoid “the slightest hint of irregularities” after the board’s legal counsel raised the issue.
The law does not prohibit a public official from making a decision affecting an in-law. However, ethicist Michael Josephson, who has advised the Legislature on standards of conduct, argues that public officials should observe a higher standard than the law specifies. “CALPERS board members are responsible for making independent professional investment judgments, just like a court judge who should not have any relationships with the people most affected by their decisions,” he said.
Cremins left the board last year and died recently after a lengthy illness. But his son-in-law, labor union activist Daniel Weinstein, said he and Cremins were open about their familial tie. Weinstein noted that his 2.5% interest in Olympic was disclosed to CALPERS, although he could not recall if he personally pitched the investment to board members.
Records show the investment has been making about 9% a year--far less than the 22% average for such investments.
Riordan Links to Deal
When the CALPERS investment staff first reviewed a proposal to invest $75 million with a Los Angeles firm called Freeman Spogli & Co., they concluded that the proposed partnership “does not represent an attractive opportunity.”
The investment, in a firm co-founded by Riordan, was made after he withdrew as a general partner. But city records show the mayor holds a $3-million stake in one of Freeman Spogli’s other investment funds.
The investment was championed by then-CALPERS board member Alfred Villalobos, who was a top Riordan deputy when he pushed for it in 1993 but had left the mayor’s office when the deal was finalized several months later.
And one of Freeman Spogli’s partners, William Wardlaw, has been a political advisor to both Riordan and former state Treasurer Kathleen Brown, whose representative on the CALPERS board voted for the investment. Wardlaw and other officials of the firm contributed at least $16,500 to Brown’s campaign committees in 1993 and 1994.
Wardlaw did not respond to calls. Brown, through a spokesman, said she did not remember anything controversial about the investment and thought it made sense.
Ethicist Josephson said Brown should have removed herself from the decision-making because of her political ties to Wardlaw. “Do I worry that it might have influenced her decision? Absolutely.”
In an interview, Villalobos said he simply disagreed with the staff and thought the deal “was outstanding.” He said he had no conflict in arguing for the investment because the mayor no longer had an ownership interest. A spokeswoman said the mayor had placed his investments in a blind trust and was unaware of Villalobos’ involvement in the investment decision.
As of the end of June, the partnership was still a money loser, but it was expecting returns of 12% and was “performing adequately,” according to the most recent CALPERS quarterly report available.
Union Ties to Deal
A few years ago, pension board members were anxious to invest in “labor-oriented” real estate deals that would encourage use of union construction workers.
However, the board’s staff reacted negatively to the few proposals that materialized and questioned how the board could justify giving priority to labor-oriented projects over “financially stronger” companies.
Nonetheless, the board committed $200 million to a real estate development project called “J for Jobs,” a subsidiary of ULLICO, a union-based insurance and investment company. The executive representing ULLICO was Michael Steed, once a top Democratic National Committee executive with close ties to state elected officials then on the board.
“I pulled no strings to get this approved,” Steed said through a spokesman.
In two years, records show, CALPERS has invested $39 million in “J for Jobs.” Its one-year return of 12.8% is somewhat higher than the 10% average for other CALPERS mortgage investments.
Board Lobbied
In late 1993, the pension fund’s staff and outside consultant rejected an investment proposal from Blackstone Capital Partners. So the top executives at Blackstone--including Pete Peterson, a former U.S. secretary of commerce--took their case directly to individual board members. Although records show some trustees raised concerns in a closed-door session about the lobbying, the board eventually approved a $75-million investment.
The Blackstone partnership has proved highly successful, with an annual return estimated at 77%. And this year, the board committed $175 million more to the same group.
Former Assemblyman Dave Elder, a Long Beach Democrat who once chaired the Assembly’s Public Employees Retirement committee, said his 1991 legislation was intended to stop such lobbying. His bill came after the board’s ill-fated $400-million investment in Catellus Development Corp., the real estate arm of the Santa Fe and Southern Pacific railroads.
Some CALPERS staff members had warned that the real estate market was overheated and due for a fall but, according to Elder, the railroads effectively lobbied the board.
In 1990, the value of the CALPERS stock plunged $300 million, but made a recovery under new management at Catellus. However, if the pension system had invested in a broad mix of stocks and bonds, records indicate that it could have doubled its original investment.
“When I saw what happened on Catellus, I said that we’ve got to stop ex-parte communications between investment product salesmen and board members,” Elder recalled.
He won approval of his bill but was unable to win support for imposing penalties on violators.
CALPERS chief executive officer James E. Burton said pension fund attorneys reviewed the issue three times and concluded that Elder’s bill applied only to competitively bid contracts and not to decisions affecting individual investments.
However, the system’s chief counsel, Kayla Gillan, said the CALPERS lawyers were never asked about the issue because the law “is clear and unambiguous on its face” and does not apply to investment decisions.
Elder wants to toughen the law. “We don’t have penalties,” he said. “And if there is some ambiguity in their minds about when [board members can] talk to people about deals, the Legislature ought to remove the ambiguity.”
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
The Board
William Dale Crist: A professor of economics at Cal State Stanislaus who was elected by state employees to represent them at CALPERS. Board president since 1992. Works full time at CALPERS and has approval authority for travel by board members.
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William B. Rosenberg: Former CALPERS retirement specialist has served since 193. He is something of a maverick, and state’s top public employee unions unsuccessfully tried to unseat him.
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Charles P. Valdes: In 14th year on board, he chairs CALPERS’ important investment committee. He is a Caltrans senior attorney but devotes most of his time to the pension system. Past president of California State Employees Assn. and a voice for labor at CALPERS. Financial and text problems have led him twice to bankruptcy court.
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Kurato Shimada: Supervisor of operations at a San Jose school district and past president of California School Employees Assn. Has represented nonteaching school employees at CALPERS for 11 years.
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Robert F. Carlson: Former chief counsel of Caltrans has served at CALPERS for 27 years, including nine as president. Represents retired workers. Opposed the statute that forced pension fund to divest holdings in companies doing business in South Africa.
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Michael Flaherman: The Bay Area Rapid Transit District economist represents local government workers. Has been on the board just two years, but already chairs a key pension fund committee.
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Thomas Clark: Former Long Beach mayor and city councilman and a past president of the League of California Cities who was a gubernatorial appointee to the board.
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Kathleen Connell: State controller joined board in 1995. An in-house critic of board members’ out-of-state travel and acceptance of gifts from CALPERS contractors.
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Joseph A. Thomas: Appointed last year by governor to represent the insurance industry. A lawyer and director of BEST Life Assurance Co. of Irvine.
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David J. Tirapelle: Governor’s director of personnel administration has served since 1988. Responsible for negotiating labor contracts with state employee unions.
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Ronald L. Alvarado: Wilson appointee from State Personnel Board has served two years. He is also executive director of the Capitol Area Development Authority, which manages the state’s land holdings near the Capitol.
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Matt Fong: State treasurer has used his position to encourage trade with Asia. Republican is running for U.S. Senate seat held by Barbara Boxer.
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Vacancy: 13th member is selected by the Assembly speaker and the Senate Rules Committee. A union official is expected to be named as replacement for the late Jerry P. Cremins, former president of the State Building and Construction Trades Council.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Investment Performance
The California Public Employees’ Retirement System boasts a high rate of return on its investments. But CALPERS’ performance falls in the middle of the six largest pension funds in the country. As the chart shows, the more stocks, the better the overall results.
As of June 30, 1997
*--*
One-year Percent Pension fund Size* return in stocks New York State Teachers $65.1 21.9% 72.5% Florida State Retirement $67.1 21.3% 67.4% Texas Teachers $60.6 21.1% 64.2% CALPERS $119.7 20.1% 63.9% New York Common $90.5 19.3% 57.7% California State Teachers $74.8 17.4% 57.0%
*--*
* in billions
Sources: California Public Employees Retirement System, State Teachers Retirement System and State Controller’s Office records
