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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
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"If CalPERS were left in the position where it still got to vote the proxies [at shareholder meetings], that might not accomplish what the governor is up to, which is to silence the [corporate] activism," says former CalPERS President Sean Harrigan, who was ousted from the board in January and replaced with a Schwarzenegger ally. Harrigan speculates that Schwarzenegger would like to prevent CalPERS from overseeing any future defined contribution program "and put it with the [Department of Personnel Administration] or somewhere else under the governor's control. It really does depend on any implementing legislation. I'm not ready to predict that's what they'll try to do, but I wouldn't put it past them."


Despite its hard-earned reputation as a corporate reform advocate, CalPERS has governance issues of its own. One of the world's largest investors in the secretive venture capital industry, it grudgingly began to disclose information about some -- but not all -- of such investments in 2003 only after the San Jose Mercury News filed a lawsuit aimed at forcing it to do so. It similarly rebuffed requests by SF Weekly last year for information about its investments in funds controlled by two powerful Democratic Party patrons, Los Angeles billionaire Burkle and San Francisco investment banker Blum.

As the Weekly disclosed, the funds controlled by the men -- infused with money from CalPERS -- are among the owners of an upstart cable TV enterprise for young people whose principals are former Vice President Gore and his business partner, Joel Hyatt. CalPERS's stake in Gore's San Francisco-based TV venture -- originally dubbed INdTV and scheduled to take to the air in August as Current -- came from an investment program ostensibly intended to foster economic development in "underserved areas" of the state.

It wasn't the first time that a CalPERS investment relationship struck some observers as perhaps a bit too cozy. In 2002 the pension fund put $100 million into Premier Pacific Vineyards Inc., a company buying land for growing grapes. The CEO of the firm, Richard Wollack, was a major fund-raiser for then-Gov. Davis, who at the time controlled three appointments to the CalPERS board.

CalPERS's relationship with Democratic megadonor Burkle, in particular, raises questions as to whether the board has a blind spot when it comes to potential conflicts of interest. Since 2001, CalPERS has invested at least $760 million in private equity funds controlled by Burkle, whose Yucaipa Cos. has former President Bill Clinton on its board. Records show that Burkle has contributed to the political campaigns of both Treasurer Angelides and Controller Westly, as well as to that of former Controller Kathleen Connell, who also sat on the CalPERS board. He has also employed former San Francisco Mayor and Assembly Speaker Willie Brown, who is an attorney, to do legal work; and he hired former board member and actuary Sidney Abrams as a consultant.

As governor, Schwarzenegger is helpless to do much about CalPERS's Democratic leanings. In January he appointed Republican insurance industry executive Marjorie Berte to the board, joining ex officio member Michael Navarro, his appointee to head the Department of Personnel Administration. As part of the political maneuvering that resulted in the recent ouster of former board President Harrigan, Schwarzenegger installed another Republican, real estate developer Ron Alvarado, as the state personnel board's designated representative. But it may be a while before he gets to name someone else to his liking. The other slot reserved for gubernatorial appointees is occupied by Democrat Brown, whose term doesn't expire until 2007.

While cozying up to its friends appears to have become the norm, it is the pension fund's aggressive corporate reform agenda that has most angered Republicans and their business allies. CalPERS has relentlessly campaigned for such things as curbs on executive salaries, boundaries between the research and sales departments of investment banks, and new rules to allow shareholders to nominate their own company directors. "There's no question [CalPERS] has been a major force in those areas, and it undoubtedly has contributed to a backlash," says Charles Elson, who teaches corporate governance at the University of Delaware.

At times its actions have seemed blatantly political, such as when it adopted an anti-torture policy in response to the Iraq prison scandal and, more recently, urged companies to disclose financial risks from global warming. Last year the pension fund's critics cried foul after it voted its shares in a failed attempt to remove Safeway's CEO, Steve Burd, from the Safeway board only months after a bitter labor dispute in Southern California that pitted Burd against the grocery workers' union headed by then-CalPERS President Harrigan. (Harrigan's ouster from the CalPERS board was widely seen as payback on behalf of the union leader's opponents.)

That episode caused discontent even among the pension fund's allies. "I do think it has become too political, and I've told them so," says Rich Koppes, CalPERS's former general counsel. Still, he opposes the pension reform proposal. "I don't think you heal the patient by killing it."


Whether the governor and his backers get the chance to reshape CalPERS will depend largely on how political events play out in the next few weeks. Pension reform supporters say that barring a compromise with the Legislature, Schwarzenegger is likely to issue his call for a special election by the third week in April, if he decides to try to get an initiative before voters in November. Reed Dickens, the spokesman for Citizens to Save California, the umbrella group Schwarzenegger is using to push each of his reform measures -- and which has been circulating petitions since February -- says that collecting the needed 600,000 signatures "will be no problem."

Citizens to Save California is a who's who of Team Schwarzenegger. Its board includes California Chamber of Commerce President Allan Zaremberg; William Hauck, president of the California Business Roundtable; Joel Fox, president of the Small Business Action Committee; and Jon Coupal, president of the Howard Jarvis Taxpayers Association, among others. But the team isn't restricted to California's borders. Grover Norquist, who runs the influential Americans for Tax Reform in Washington, D.C., and who has close ties to the Bush administration, has said that his group will help promote and finance the measure should it reach the ballot.

About The Author

Ron Russell

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