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Requiem for a Pension Fund? 

Gov. Arnold Schwarzenegger launches an attack on CalPERS. The giant pension fund's Democratic allies aren't taking it lying down

Wednesday, Apr 6 2005

Page 3 of 5

He and others also insist that switching to a 401(k)-type system for future workers does nothing to help the state's budget crunch in the short term, which is a chief rationale for the reform in the first place. According to the nonpartisan state Legislative Analyst's Office, the plan could "potentially" produce savings "in the hundreds of millions of dollars to over $1 billion annually" once fully phased in. But even proponents acknowledge that the phasing could take decades.

Experts estimate that a switchover to a 401(k)-type program for future hires -- existing pension recipients would have the option to switch but would not be required to do so -- would actually cost taxpayers money for the first decade or so. CalPERS actuaries estimate that the added cost of starting up and maintaining what would essentially be dual retirement programs would exceed $1 billion for CalPERS and CalSTRS combined during the first 10 years.

While such arguments are sure to get plenty of ink in the months ahead should Schwarzenegger make good on his special election threat, the governor's opponents suspect that the real aim of his newfound interest in pension reform is to reduce CalPERS's considerable influence. "There's no question that he intends to crumple the power of CalPERS," says State Treasurer and CalPERS board member Phil Angelides, a Democratic candidate for governor in 2006. Angelides and others see pension reform as the political cover for the governor's "trying to silence a leading voice for corporate reform in America."

CalPERS's power as a reform advocate emanates not only from its size but also from the way it is structured. As a defined benefit system it owns the shares of companies in which it invests on behalf of its members, and is able to vote those shares, or proxies, in corporate elections, giving it enormous clout. It has often used its influence in ways that have infuriated corporate interests, such as the decision in 2000 to sell its tobacco stocks and, more recently, helping to topple Michael Eisner at Disney and Richard Grasso as head of the New York Stock Exchange.

By contrast, with most defined contribution plans it is the individual who holds stock ownership. Thus, if reform occurs, and CalPERS's future defined contribution program is structured like many others, its days as a corporate governance player could be numbered. "It would essentially atomize CalPERS's clout on the defined contribution side of things," says shareholder rights advocate Nell Minow, "and over the long term that would be a tragedy."

The governor's supporters, including Campbell, the finance director, have suggested that under the reform measure CalPERS need not experience such a fate. They've implied that a CalPERS defined contribution program could be structured to allow the pension giant more than a mere bookkeeping role. They've suggested CalPERS might be able to offer its own family of funds in the manner of the nonprofit investment company TIAA-CREF, while retaining its proxy rights and thus its influence in corporate boardrooms. "There's nothing in the bill that precludes [CalPERS] from setting up its own programs," says Patrick Sullivan, an aide to Assemblyman Richman, who insists his boss "doesn't have issues with CalPERS." Campbell's spokesman, H.D. Palmer -- to whom the Governor's Office referred all questions for this article -- voices a similar view, saying that "a lot of people have jumped to the conclusion that the [Schwarzenegger] administration wants CalPERS out of the retirement fund business altogether, which just isn't true."

But during his visit with the pension fund's board members in February -- which sources on both sides say has been the only formal communication between CalPERS and anyone from the Governor's Office since the reform talk began -- Campbell was elusive. When pressed for specifics about CalPERS's future role, time and again he retreated to the word "if," as in "if that's how the implementing legislation is drawn," and the even more vague "if it is a desirable thing." And in what had to be little comfort to the pension fund's stewards, he acknowledged that the Richman bill and the proposed ballot initiative "permits" private managers "to take over" for CalPERS although they do not "require" it.

Campbell himself has described the proposals as "necessarily bare-bones," as, he says, is to be expected of any measures to amend the state's constitution, but others see something different. "The very fact that they have not included assurances about CalPERS leads me to believe that there's probably every intention to try to diminish CalPERS's role in the management of any future defined contribution plan," says Minow, the shareholder rights advocate. "It's a transparent political ploy to get what they want passed."

The pension board's president, Rob Feckner, is similarly skeptical: "I think the governor's mind is already made up and that he's not really interested in having discussions with us." And neither is he optimistic about a legislative compromise. "Anything short of putting the burden on the shoulders of public employees, I don't think the governor and his people are interested."

Neither the bill nor the would-be ballot measure mentions CalPERS in saying that any new employee of a public agency hired after July 1, 2007, "may enroll only in a defined contribution plan of a public pension or retirement system." Each aims to create the California Public Employee Defined Contribution Plan without specifying who would have authority over it, fueling suspicion in the pension fund camp that the governor and his backers may be intent on trying to bypass CalPERS entirely.

About The Author

Ron Russell


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