Court Rules Pay Hikes by CalPERS Are Illegal

The California Supreme Court has ruled that CalPERS violated state law by ignoring salary limits for money managers -- a decision the No. 1 U.S. pension fund said Tuesday would make it difficult to attract top staff to oversee its $130-billion portfolio.

The justices, who handed down their decision last week, let stand a January appeals court ruling in a lawsuit brought by then-state Controller Kathleen Connell. Connell had challenged the authority of the pension fund’s 13-member board to boost salaries for about 30 investment managers.

The California Public Employees’ Retirement System had argued that it needed to set wages to attract top-level managers who can make far more working for private firms. Last year CalPERS boosted salaries for portfolio managers from a range of $80,000 to $95,000 to $88,000 to $105,000.

The ruling also extends to the California State Teachers’ Retirement System, the nation’s third-largest pension fund.

“This is a significant setback for CalPERS, its members and all public pension systems in California,” CalPERS spokesman Brad Pacheco said.

The lawsuit charged that the pension fund violated California’s Constitution by raising the daily payments to board members for attending meetings and awarded pay increases that exceeded state limits for civil service employees.

Controller Steve Westly, who took over the lawsuit after he was elected to the office last fall, said the decision probably will spur changes to ensure that the pension fund can hire the best possible managers.

“The court has denied past illegal practices, which now will drive us toward organizational and legislative changes to ensure that we have the best staffing and rates of return possible for our retirees,” Westly said.

The investment managers will keep their jobs and current salaries for the near future. Pacheco said CalPERS would put them in temporary positions for the remainder of the year.

That will give CalPERS, which manages benefits on behalf of 1.3 million former and current state employees, time to find a way to keep the staff.

“If we didn’t have in-house managers, we would have to rely on outside managers who would be more expensive -- and the cost would be borne by taxpayers,” Pacheco said.