News about your retirement system, CalPERS. If you have news to share, please send it jm@perswatch.net. See also the Corporate Governance News.

2009

PERSWatch.net Supports OAL Determination for CalPERS Regulations

James McRitchie, publisher of CorpGov.net and PERSWatch.net, filed comments in support of a request for determination by the Office of Administrative Law by Keith Paul Bishop dated September 23, 2009, under the provisions of California Code of Regulations, Title 1, Section 122, concerning policies adopted on May 11, 2009 and amended on November 16, 2009 by the California Public Employees’ Retirement System (CalPERS) outlining procedures to be followed “For Disclosure of Placement Agent Fees, Gifts, and Campaign Contributions.” (see California Regulatory Notice Register, 12/11/09, p. 2143)

While we entirely agree with the stated goal, “to help ensure that CalPERS investment decisions are made solely on the merits of the investment opportunity by individuals who owe a fiduciary duty to CalPERS,” we find it ironic that CalPERS has repeatedly failed to comply with the Administrative Procedure Act, even when adopting regulations governing its ethics and those with whom it contracts.

Both the legislative process and the APA offer important protections for public participation and oversight not available to Board adopted policies.

The Board’s frequent claim that their Constitutional authority exempts them from state laws may lead the Board down a slippery slope, which should be stopped before the consequences become costly. For example, a Sacramento Bee editorial, “Low road at PERS” (November 2, 1999), threatened reexamination of Proposition 162. The more frequently CalPERS is seen as abusing its authority, the more likely such a reexamination will occur, perhaps with unintended consequences.

"What the board needs to do is figure out what it is it’s trying to do and then write a regulation to do that," says J.J. Jelincic. "My belief is what they are trying to do is make the Sacramento Bee happy, and they are not going to do that." (CalPERS winner wants investment change, CalPensions, 12/12/09)

Just as I was posting this item, I received an e-mail from CalPERS with their response. The good news is they plan to go through the rulemaking process in 2010. The bad news is that they claim they "will not issue, use, enforce, or attempt to enforce" the policy dated May 11, 2009. Of course not, instead they'll enforce the amended underground regulation they issued on November 16, 2009. While I am delighted they now plan to go through the rulemaking process, it is disappointing that they continue to violate the law by utilizing underground regulations.

The response from CaPERS appears to hope OAL will dismiss Mr. Bishop's request for determination, since they will not enforce the May policy. As I indicated in my comments, "failure to address subsequent amendments would defeat the purpose of Government Code section 11340.5, since an agency could easily keep a step ahead of determinations by simply revising its underground regulations." If OAL were to dismiss Mr. Bishop's request, requiring him to refile naming the November policy, the whole regulatory scheme of California would be placed in jeopardy.

CalSTRS adopted regulations on placement agents three years ago. CalPERS should stop dragging its feet. As they move forward, they should consider AFSCME's recent publication, Enhancing Public Retiree Pension Plan Security: Best Practice Polices for Trustees and Pension Systems. For example, the AFSCME report proposes banning current and former pension trustees and staff from providing placement agent services at any system where they were previously employed. "When vendors gain access and have inside knowledge because of their placement agent's relationships within any given pension system, investment decisions are not made on purely fiduciary grounds," said AFSCME President Gerald W. McEntee. "This lifetime ban would protect the fiduciary integrity of the system."

Jelincic Wins

J.J. Jelincic received 51 percent of the 213,744 ballots cast to narrowly defeat Cathy Hackett for an at-large seat on the pension fund's 13-member board. CalPERS distributed 1.3 million ballots to members. Jelincic will replace Charles Valdes in January.

Jim McRitchie will meet with Board members of CalPERS to try and convince them that all future elections should include at least one candidate's forum sponsored by CalPERS. PERSWatch spent hundreds of dollars this year to ensure members had an opportunity to meet the candidates in a neutral setting, where each could be asked the same questions. CalPERS first allowed us permission to hold the forum in their auditorium, then refused, then allowed it but at a substantial fee plus high insurance requirements. Were they expecting a riot? We held the forum elsewhere but not all candidates were able to attend... Mr. Jelincic did. We were able to get Mr. Jelincic and Ms. Hacket together in one forum later during the runoff. Both were heard on Jeffrey Callison's show, Insight, on November 16th. The official results of the runoff election, certified by the Secretary of State, will be posted online in January 2010.

Election Runoff

November 2009 update. There is a runoff between JJ Jelincic, who got 37% of the vote, and Cathy Hackett, who got 28%. (unofficial results) Ballot packages will be mailed beginning November 9, 2009. Voted runoff ballots must be postmarked or received by CalPERS on or before December 4, 2009. The unofficial election results will be available online in mid-December 2009. The official results of the runoff election, certified by the Secretary of State, will be posted online in January 2010.

There is a runoff between JJ Jelincic, who got 37% of the vote, and Cathy Hackett, who got 28%. (unofficial results) Ballot packages will be mailed beginning November 9, 2009. Voted runoff ballots must be postmarked or received by CalPERS on or before December 4, 2009. The unofficial election results will be available online in mid-December 2009. The official results of the runoff election, certified by the Secretary of State, will be posted online in January 2010.

With my encouragement, both candidates agreed to appear on Jeffrey Callison's show, Insight, on November 16th. Listen on the internet at http://www.capradio.org/programs/insight/. (Look for Nov 16 under "Recent Shows" on the left.) The CalPERS portion runs about 17 minutes and starts about 12 minutes into the show. We will continue such efforts in future elections and hope candidate forums and radio interviews will become a routine part of campaigning.

Finally, Some Attention on the Activities of CalPERS' Charles Valdes

Years after one of my last contests to try to get on the CalPERS Board, the FPPC and the press are finally paying attention. In an exclusive to the Sacramento Bee, Andrew McIntosh notes Chuck Valdes' bankruptcies and $38,600 in campaign donations from companies and individuals doing business with the pension fund after the 2005 contest.

"Valdes, who was chairman of the multibillion-dollar pension fund's investment committee at the time, has never had to account for how – or whether – the funds were spent because of an exemption in state regulations for retirement board members and candidates.... Valdes also received 2005 donations from a prominent Los Angeles developer, Richard Meruelo, who earlier that year had secured a rare $150 million line of credit from CalPERS." (FPPC probes campaign donations to CalPERS board member with money woes, 8/21/09)

I wish someone had sponsored a CalPERS Candidate Forum back in 2005. I would have loved to hear Valdes explain why, with double bankruptcies, he was qualified to head the Investment Committee. I argued that since California laws would prevent him from acting as a trustee for a will going through probate, he wasn't qualified to sit on the CalPERS Board. However, the Board defended him, arguing they were exempt from California laws because their authority was derived from the Constitution. They gave the same reason for not following the Administrative Procedure Act. Fortunately, that issue was taken to court and they found CalPERS did have to follow the APA. No one ever went to court on the applicability of trust law to the Board. I couldn't afford to take the issue to court but wondered if Board members ever got out of speeding ticket by arguing they were exempt from traffic laws when on the way to a Board meeting. I do remember one member billing for the hours he was sleeping because he was "dreaming of CalPERS." Few seemed to care about this attitude of entitlement that once seemed to pervade the Board.

Unfortunately, the press largely failed to inform the public of problems at the CalPERS Board and organizations that endorse candidates too often failed to hold them accountable. With this report and with the Sacramento Bee co-sponsoring an upcoming CalPERS Candidate Forum, past neglect may be turning around. A further step would be for the Bee to investigate each candidate after the Forum and to make endorsements. Ideally, the 1.6 million members of the System, who are eligible to vote in the upcoming September elections, should have several sources for information: unions, traditional press, bloggers, and various public interest groups.

Candidate Forum

PERSWatch.net and the Sacramento Bee will co-sponsor the first ever CalPERS Candidate Forum on the evening of September 2, 2009 in Sacramento at the Dante Club. Download a press release on the event with all the details. Come join us.

CalPERS is believed by many, and for good reason, to be a paragon of virtue with regard to its advocacy of good corporate governance. Yet, their own election process has long been criticized as making it nearly impossible to unseat incumbents. At one point, the Board voted in favor of regulations prohibiting criticism of the Board in candidate statements, which were to be strictly limited to biographical information. Until recently, Board members were elected on a plurality basis, so candidates could win with as little as 5.5% of the vote in a large candidate field.

PERSWatch.net has been a force behind reforms. After convincing the Board to adopt majority voting, we have recently been urging them to use "instant runoff voting," to avoid the expense of up to $1 million for runoff elections. On September 2nd PERSWatch takes another step, increasing democracy at CalPERS by paying for and co-sponsoring, with the Sacramento Bee, the first CalPERS Candidate Forum. The League of Women Voters of Sacramento has agreed to moderate the event.

Member-At-Large Board ballots will be mailed to each eligible member's home address beginning September 4, 2009 and must be received by October 2, 2009. The Forum is offered to give eligible CalPERS members and the interested public an opportunity to see, meet, and question the candidates, resulting in a more informed vote in the upcoming election. All candidates have been invited.

Those attending will have an opportunity to submit written questions on cards distributed and collected by League of Women Voter volunteers so that the moderator can group and ask questions, as time permits. After a ten minute intermission, each candidate will be given an opportunity to respond to questions from the Sacramento Bee. Each candidate will have two minutes for an opening statement and one minute for a closing statement.

This is an historic event, since it may be the first such Forum, even though CalPERS has operated for more than 75 years, provides health benefits to nearly 1.3 million members, pension benefits to more than 1.6 million and administers a trust fund of more than $190 billion. The impact of decisions by Board members is felt locally, state-wide, nationally and internationally. For more information, see the invitation to candidates to participate and the press release.

At-Large Elections This Year

The 2009 elections are almost here. See CalPERS announcement. Ballots will be mailed September 4, 2009 and due October 2, 2009. Eligible active and retired members not receiving a ballot by September 18, 2009 should contact the CalPERS Board Elections Office at (916) 795-3952 or (800) 794-2297.

PERSWatch has already surveyed the candidates. Download a pdf that includes their responses to ten critical questions, as well as contact information for each candidate.

What else you need to know about the candidates? We'd like to be able to help you vote intelligently in this crucial election. Please let us know if you see any coverage of the candidates or issues in the press. We'll be making several efforts to get them to finally pay attention. E-mail: jm@corpgov.net.

Preservation Ranch

I sent a comment letter to the Sonoma County Permit and Resource Management Department in Santa Rosa regarding "Preservation Ranch" and a scoping document for a draft Environmental Impact Report on this project funded by CalPERS. I'm concerned this project is wrong for CalPERS. Not only does it appear to be environmentally destructive but a potential financial catastrophe. The letter was as follows:

Please add me to the mailing list for all future notices of this project. I wish to participate in your agency's administrative review process in order to preserve my right to bring possible legal action under provisions of the California Environmental Quality Act (CEQA). I just became aware of this mountain top removal project and of the involvement of the California Public Employees Retirement System (CalPERS) in the project. At this point, I can do little more than register my shock that my retirement system, which is widely known for its environmental stewardship and whose CEO co-chairs Ceres, is so heavily invested in a project that appears like to have significant adverse effects, such as:

• aesthetics, with what amounts to mountain-top removal
• reducing the habitat of rare or endangered species
• the movement of migratory fish and wildlife
• quality of water supply, resources and recharge
• substantial increases in traffic in comparison to the existing traffic load
• encouraging the use of large amounts of water and energy in a wasteful manner
• causing substantial erosion and siltation
• conflicting with established recreational uses of the area

Due to the complexity of the project, I recommend your agency engage a blue ribbon scientific peer review panel to ensure adequate evaluation by independent and qualified experts in the areas of needed expertise. With the scope of the project changing several times, the dEIR should analyze all potentially significant foreseeable impacts, regardless of whether or not the applicant is currently proposing them. In the current economic environment it is not difficult to imagine project changes necessary to ensure economic viability. Your analysis should also include an evaluation of impacts likely from project failure. I will be especially skeptical of claims of infeasibility due to additional cost or lost profits. Additionally, I am skeptical of mitigation reporting conducted by others, unless the dEIR includes clearly enforceable monitoring by your agency and enforceable agreements with any third parties to ensure compliance.

The DEIR should provide substantial evidence of the efficacy of a two-for-one conversion provision of the County’s conversion ordinance as specific mitigation for the loss of ridge top acreage. With its unique ecology, especially with regard to the watershed and migration patterns, it would be helpful to provide examples of how these restoration methods have proven effective. In my understanding, this has not been the case with mountain-top mining in the Appalachians. For example, the Federal EPA recently announced they will review 200 permits in process under the Bush Administration. The EPA said the projects "would likely cause water quality problems in streams below the mines, would cause significant degradation to streams buried by mining activities, and that proposed steps to offset these impacts are inadequate."

Since the "Preservation Ranch" project involves almost 20,000 acres, your analysis should include in its baseline conditions not only the project's immediate footprint but the surrounding watersheds and biological areas. Your alternatives analysis should include off-site locations and reconfigurations such as milder terracing and a more compact footprint to reduce impacts to the watershed and migratory movement. Such alternatives analysis is especially important for almost 600 acres with slopes ranging from 30 to 38% on highly erodable soils. Due to the prospect of erosion on these steep slopes a reduced project alternative should also be analyzed. An alternative to 83 miles of largely unbroken fencing should consider incorporating several corridors for migration, although that would do little to address the impact on fish migration.

For more on this project, see Friends of the Gualala River, Redwood Chapter of the Sierra Club, and Russian River Residents Against Unsafe Logging. (5/26/09)

CalPERS Bonuses Can be Improved

While nothing like the bonuses coming under criticism at AIG and elsewhere, the bonus structure CalPERS uses for internal fund managers could still use improvement. PERSWatch publisher, James McRitchie, testified to the Performance and Compensation Committee on March 16, 2009. Download a slightly revised pdf version, based on additional information obtained in Committee. Staff and Committee members appear receptive to our recommendations.

California Public Pensions Under Attack... Again

Forbes magazine ran an attack against all public pension funds. "Four in five public-sector workers have lifetime pensions, versus only one in five in the privates sector . The difference shifts huge risks to private-sector workers." (Gilt-Edged Pensions, Forbes, 1/22/09)

The California Secretary of State's office recently released notice of a new initiative entering circulation, The McCauley Public Employee Pension Reform Act would allow the renegotiation of public employee pension contracts, including those already vested.

As David M. Greenwald points out in New Initiative Retroactively Threatens Public Employee Pensions (California Progress Report), "Under this scenario, faced with possible cuts for existing workers, negotiators could instead negotiate a contract that protects their current members but completely erases the retirement benefits for those people over the age of 75."

Such a change would not only invalidate past contracts, it would make future contracts meaningless. The value of any negotiated benefits would fall dramatically, since their value could be changed at any time. Employees covered by CalPERS have been putting in about half of the contributions that sustain the system. The other half comes from employers. With no guarantee employees would even get their own contributions back, it is likely they would opt out and our current pension systems would be destroyed.

As one commentator noted, "Mr McCauley's dark vision, for California's retirees, is clear. In the movie, Soylent Green, the disillusioned elderly, could check into suicide centers called "Home" and self administer a poison to, slowly, die and become one less statistic in an overburdened, surplus population. From there, they were processed into a foodstuff known as Soylent Green for consumption by the existing population." (Paul McCauley and Elder Abuse)

Who's behind the current attack? Paul McCauley, CPA of Santa Monica is the petitioner. I don't know who is behind him but plenty of people would benefit from the demise of California public pensions. Past attacks have come from Keith Richman, the U.S. Chamber of Commerce, the California Republican Party, Governor Arnold Schwarzenegger, and the Howard Jarvis Taxpayers Association, among others.

It costs 0.37% to administer the CalPERS defined benefit (DB) plan, but will probably cost more than 1.5% per year as a defined contribution (DC) plan, with no death/disability benefits or inflation protection. If California funds have assets of approximately $500 billion (CalPERS and CalSTRS alone have $300 billion), the yield to money managers will be an extra $5.65 billion every year while earning $10.2 billion less for public employee retirements every year.

Additionally, pension funds are the primary check on the power and greed of corporate CEOs. CalPERS has been a leader in the effort to bring accountability to corporate boardrooms.

I find it interesting that all of the CEOs in the S&P ExecuComp database have defined benefit plans. Of course, qualified pension plans (exempt from taxation) are limited to about $200,000 a year and the average S&P 500 CEO earns much much more. Supplemental executive retirement plans, known as SERPs, are an inefficient way to compensate CEOs but they come with one great benefit - camouflage. “Neither the increase in value of the SERP plan before retirement nor the amount of payments after retirement appears in the compensation tables, the existence of SERPs, and the formulas under which payouts are made must be disclosed in the firm's SEC filings.” (Lucian Bebchuk and Jesse Fried, Pay Without Performance) While CEOs want to keep their owned defined benefit plans, they want to outlaw them for public employees.

For additional information, see Myths and Facts about Privatizing Public Employee Retirement in California and Making Corporate Governance Decisions That Work for Whom? presented by James McRitchie at the 6th International Conference on Corporate Governance 2005.

2008

CalPERS: The Opposite

"The Opposite" was a famous Seinfeld situation comedy episode where George Costanza decides that every decision he has ever made has been wrong and resolves to do the complete opposite of his normal instincts. He suddenly begins to experience good luck -- getting a girlfriend, moving out of his parents' house, and even landing a job with the New York Yankees. Maybe CalPERS should use the same tactic with regard to its own governance.

When it comes to advising corporations, CalPERS emphasizes transparency, getting input from shareowners and a wide variety of good governance measures. (As I began to write this, I got a press release from CalPERS on improving governance at La-Z-Boy.) I applaud these efforts, which have been widely credited with moving directors to action and increasing shareowner value. Yet, when it comes to their own governance, perhaps CalPERS should adopt the strategy of doing the opposite of what Board members want to do instinctively.

I've tangled with CalPERS over many internal governance issues, as documented at PersWatch.net. The latest involves AB 2940, scheduled for hearing in California's Senate Appropriations Committee. The bill, authored by Kevin de Leon and sponsored by the New America Foundation, would set up a low-cost IRA option administered by CalPERS. The Program would facilitate the ability of millions of Californians to save for retirement, reduce future dependency on taxpayers, increase California's tax base, and broaden the base of CalPERS stakeholders, thus decreasing vulnerability of the System to attack by those who have sought to reduce or eliminate our defined benefit plans.

The trouble is, as a condition of neutrality, CalPERS asked the author to amend the bill to permanently exempt the Board from contracting and rulemaking laws with respect to the Program. Unfortunately, de Leon was forced to accept those changes if he wanted to see his bill pass. In contrast to CalSTRS, which recently adopted regulations to guard against the appearance of "pay to play" on investment decisions, the proposed new law would open the CalPERS Board to the increased likelihood of such dishonest behavior.

In my letter of opposition for an otherwise excellent bill, I wrote, "One major 'pay to play' scandal involving a large sole-source contract could put the whole System in jeopardy, making CalPERS politically vulnerable. Additionally, what moral authority would CalPERS have in advising corporations to be transparent, if its own contracting procedures were suspect?" Additionally, "The language exempting the Board from the APA disenfranchises millions - ironically, the same Californians which the bill seeks to empower through an inexpensive and convenient savings program."

For many years, CalPERS claimed California Constitution, article XVI, section 17, exempted the agency from the Administrative Procedure Act and other laws that apply to state agencies. That claim was thoroughly rejected by Connell v. CalPERS in appellate court. The APA offers an opportunity to comment and have those comments addressed in a legal framework that includes many protections for public involvement.

I understand the need to keep costs low, especially during start-up. I even suggested that initial contracts could be noncompetitively bid for up to two years and that initial rules could be adopted as permanent “emergency” regulations. However, any such exemptions should be temporary. These suggestions have been rejected by a Board that too often sees itself as above the law.

If successful, the new fund will quickly have assets in the millions, if not billions. Don't sacrifice good governance for expediency. CalPERS Board members should consider a new mantra with regard to their own governance, "Do the opposite."

CalPERS Seeks to Exempt Itself From Good Governance Requirement

AB 2940 (De Leon) is a very innovative measure to facilitate the ability of millions of Californians to save for retirement through low cost IRAs administered by CalPERS under a newly authorized California Employee Savings Program (Program). The Program will reduce future dependency on taxpayers, increase California's tax base through responsible investments, and broaden the base of CalPERS stakeholders, thus decreasing vulnerability of the System to attack by those who have sought to reduce or eliminate its corporate governance activism and defined benefit plans for public employees. Unfortunately, the bill was recently amended, at the request of CalPERS, to exempt the Board from the Administrative Procedure Act (APA).

It is ironic that CalPERS is famous for championing shareowner rights, corporate compliance and transparency but seeks to exempt itself from good governance. For many years, CalPERS claimed the Constitution exempted the agency from the laws of California, including the APA. That claim was thoroughly rejected by the Office of Administrative Law (OAL) and by the courts (see 1999 OAL Determination No. 18). CalPERS now seeks to obtain in part, through AB 2940, what it was denied in the courts.

OAL's authority to review proposed regulations does not allow it to interfere with the substance of proposed regulations, but, along with the APA's provisions, does afford CalPERS members, Program participants, taxpayers, and other interested parties several benefits, including:

• Public notice, disclosure of studies relied upon, opportunity for comment and public response to comments for initially proposed regulations and subsequent amendments.
• Consideration and disclosure of fiscal and economic impacts.
• Review for necessity, authority, clarity, consistency, reference and nonduplication.

Exempting the Board from the APA disenfranchises potentially millions of Californians - ironically, the same Californians which the bill seeks to empower through an inexpensive and convenient savings program. Shouldn't Program participants, current CalPERS members, and California taxpayers and other interested parties be able to have some say over how the program is shaped over time? The bill is scheduled for a hearing before the Senate Public Employment and Retirement Committee on Monday, June 23, 2008. The proposed exemption should be removed. (Download PERSWatch letter in Word to the Committee suggesting amendments.)

BPAC May 13, 2008

AB 2940 was heard in BPAC on 5/13/08. Yes there are some legal and financial barriers that must be overcome if CalPERS members can be expected to support this bill, which would allow the System to offer IRAs to private sector employees. I argued in committee that, if these obstacles can be overcome, the enactment would expand the base of support for CalPERS and make the System less susceptible to political attack. I would also strengthen CalPERS' voice in corporate governance if contractors passed through voting rights. Additionally, I would love to see the bill amended to also move benefit programs (Savings Plus, dental and vision) from DPA to CalPERS.

BPAC also got a status report on CalSTRS gift and campaign contribution regulations that have been in effect for about six months. I agreed the direction Anne Sheehan seemed to be headed, that disclosure of investment contacts should be just as stringent as those at CalSTRS. Secondly, with regard to recusal obligation, the staff proposal doesn't make any sense that Board members can get a gift valued at $390 and not trigger recusal but a $250 campaign donation does trigger recusal.  A gift sets up more of a personal obligation in my mind and those limits would apply to more Board members. In general, I'd like to see CalPERS regulations in this area be at least as stringent as those of CalSTRS. CalPERS should be second to none. 

Let's See if We Get Caught: An Unworthy Strategy for CalPERS

The Office of Administrative Law determined several CalPERS election rules were unenforceable "underground regulations." (see 2007 OAL Determination No. 1) In response, CalPERS now proposes a rule to authorize setting the number of signatures required in nomination petitions “at a noticed public meeting,” rather than through the legally required APA process. Staff advised the new language would give the Board "flexibility." The legality of the process used in changing the number of signatures required in future elections could be addressed after the fact, if and when objections are raised. See McRitchie's March 18, 2008 comments.

It wasn't a total loss. In response to comments by James McRitchie and other PERSwatch members (testimony and prior written comments), CalPERS pulled back on proposed rules that would have put CalPERS members at risk for identity theft by requiring members to include up to eight digits of their Social Security Number on nomination petitions. Only 4 digits will be required in future elections. See proposed election rules.

Essentially waiting to see if they get caught isn't a good governance strategy, especially for a fund that has been so Instrumental in raising corporate governance standards. Years ago, the courts ruled CalPERS must comply with the Administrative Procedure Act. It's the law; CalPERS should follow it.

2007

Jones Wins Election Runoff

Henry Jones, retired Chief Financial Officer for the Los Angeles Unified School District won election to the Retiree's seat.

PERSWatch.net has been working to avoid the need for a runoff in future elections by instituting "Instant Runoff Voting," which would allow voters to rank candidates in order of preference. This could save CalPERS up to $1 million dollars by avoiding the costs of runoff elections. The Board directed staff to review IRV but when staff learned the process would require certification by the Secretary of State, they gave up. We're still working on it with a potential contractor, TrueBallot.

CalPERS Sees the Light

When I testified before a committee of the CalPERS Board this morning (9/11/07) on proposed regulations that would have allowed directors to set eligibility standards for candidates and information required to validate member petitions without going through the rulemaking process, I half expected arguments. After all, what politician wouldn't want to be able to survey the potential opposition before writing the election rules before each round.

In the past I had to obtain a determination that CalPERS is not exempt from California's rulemaking laws (1999 OAL Determination No. 18) to convince them they aren't above the law. Still, my petition to put several election procedures in regulations was summarily rejected. After I obtained a decision that CalPERS election rules were not legally adopted (2007 OAL Determination No. 1), the Board proposed rules to allow them to set the rules at a duly notified board meeting before each election, without going through the legally required rulemaking process. See written comments and proposed amendments.

This time staff recommended they work with my suggested changes and put the rulemaking out for an additional 15-day comment period. Perhaps the Board has grown tired of trying to place themselves above the law. Maybe they finally recognize democracy has a place in government agencies as well as corporations. Maybe the old guard is fading. Whatever, the reason, it is a welcome development.

Still no word on following CalSTRS' lead with regard to severely limiting potential pay to play. When the Sacramento Bee carried the news (CalSTRS votes to limit political gifts, 9/7/07), it appeared on the front page as the top article of the day, although in archives it appears in the business section. I thought severely limiting campaign contributions by money managers to the governor and other elected officials would have gotten more press outside California's capital. One step at a time for our local public pension funds. Eventually, their own governance standards may be the best they can be. Meanwhile, most others are far behind.

In other CalPERS news, trustees signaled a further push into infrastructure by tagging $1.5 - $2.5 billion for investment into building bridges, power generating plants and other government rebuilding projects. (CalPERS paves way for $1.5 billion investment in infrastructure, SacBee, 9/10/07) “We hope to generate stable, attractive investment returns with low to moderate risk as we deploy capital to meet a reported need of $1.6 trillion for U.S. infrastructure projects over the next five years,” said Rob Feckner, CalPERS Board President. “These pilot programs are our first step toward recognizing that opportunity and a step toward further diversifying our portfolio.” (CalPERS press release, 09/10/07)

CalPERS Puts Retirees at Risk: Henry Jones Speaks Out

Roughly 445,000 retirees across California received brochures announcing an upcoming election to fill a vacancy on the CalPERS Board. "All or a portion of each person's Social Security number appeared -- without hyphens -- on the address panel," reports the Sacramento Bee. (Apology sent over CalPERS privacy error, 8/22/07) Retirees are outraged.

CalPERS has long set high standards in the area of corporate governance. Yet, their own practices, especially with regard to careless use of Social Security numbers, have long been in need of reform.

For years, James McRitchie, the publisher of PERSWatch.net, railed against "underground regulations" at CalPERS which put members signing candidate petitions at risk because the Board requires them to identify themselves with the last six digits of their Social Security numbers. Such petitions are widely circulated and subject members to identity theft because if you know where the person registered for their SSN, or can guess, then you know the first three digits and the whole number.

We appealed to CalPERS to discontinue this practice. When they repeatedly refused, we petitioned the Office of Administrative law, which issued a determination that the regulations had not been legally adopted (2007 OAL Determination No. 1). Now the CalPERS Board is proposing regulations requiring the use of up to eight digits of the SSN (Amended Board Election Regulations).

Unfortunately, careless use of SSNs is the norm at CalPERS. Try going to their internet site and asking a simple question, such as when the next board meeting is; the form asks your for your Social Security number!

Not only do the currently proposed rules put members at risk from identity theft, they also allow the Board to set the number of signatures required to become a candidate and other conditions of candidacy without going through the rulemaking process. Want to limit the competition? Raise the number of signatures required. If you agree that the CalPERS Board should not put their own members at risk from identity theft and should place all requirements to run for office in regulations, send an email to Joe Parilo, Acting Regulations Coordinator, at joe_parilo@calpers.ca.gov. Mr. Parilo will present all comments, any proposed amendments, and suggested responses to the Board. The public comment period ends August 27, 2007.

Henry Jones is the one candidate who appears to care about protecting CalPERS members from such unnecessary risks. The following is part a recent email from Mr. Jones:

I was apprised by a concerned retiree last week of the issue re: Social Security Numbers on the CalPERS mailers. I promptly notified CalPERS who was unaware of the error. They assured me that they would be sending out a letter to all retirees who'd received the mailer with their apology and information on contacting the three credit reporting agencies re: the error.
 
I chose not to alert the media because I'm concerned that any story right now may also alert potential identity thieves who may not be aware that the number listed on the mailer is in fact a Social Security Number. I'm also concerned about those retirees who have other folks opening their mail.
 
I, too, share your concern about the privacy and protection of retirees.

Read what other supporters are saying about Henry Jones

• Retired Public Employees Association
• California Highway Patrolmen
• California Association of Psychiatric Technicians
• Retired Peace Officers Assoc. of CA
• California State University Emeriti and Retired Faculty       
• Peace Officers Research Association         
• CA Faculty Association         
• SEIU 721
• Under the radar, behind the scenes: Capirol Weekly, 8/23/07
• Retirees vie for CalPERS opening: Sacramento Bee, 8/17/07

CalPERS May Hold IRV Elections

At their August 10th meeting, the Ad Hoc Board Member Elections Committee instructed staff to take a serious look at instituting “instant runoff voting” (IRV) for the election of Board members at CalPERS. The move could save up to $1M in election costs. See the rest of the story, see August 2007 corpgov.net news.

CalPERS Board Votes to Exempt Itself From the Law

2007 OAL Determination No. 1, filed by James McRitchie, found that the CalPERS Notice of Election, governing CalPERS elections, contains underground regulations and cannot be legally enforced. To address that problem the CalPERS Board proposes Amended Board Election Regulations. Unfortunately, the newly proposed amendments risk identity theft of members who must include the last six digits of their Social Security number on circulating nomination petitions. Additionally, the proposed rules attempt to allow the Board to change nomination requirements, such as the number of signatures required, without a 45 day comment period and other safeguards required by law. It is ironic that the Board's response to the Determination finding certain requirements to be "underground regulations" is to propose to be able to write new "underground regulations." James McRitchie the moderator PERSWatch.net submitted public comments on August 8, 2007, including proposed amendments in double underline and strikeout format.

CalPERS has a well deserved worldwide reputation for advocating good corporate governance practices, so why does the Board seek to exempt themselves from legal requirements that govern the rulemaking process? They have no authority to do so. Board members argued for years that the Constitution exempted them from rulemaking requirements. However, that argument was thoroughly rejected by the Superior Court in Connell v. CalPERS and 1999 OAL Determination No. 18, filed by James McRitchie. Board members also have a fiduciary responsibility to members. Why are they putting members at risk of losing thousands of dollars to identity theft by requiring that widely circulated nomination petitions include the last six digits of member Social Security numbers? If you know or can guess where the member lived when they registered, you know the whole number, since the first three digits are assigned on that basis.

If you agree that the CalPERS Board should both follow the law and not put their own members at risk from identity theft, send an email to Joe Parilo, Acting Regulations Coordinator, at joe_parilo@calpers.ca.gov. Mr. Parilo will present all comments, any proposed amendments, and suggested responses to the Board. The public comment period ends August 27, 2007.

CalPERS Decreases State Contribution

For the first time in five years, the CalPERS Board ruduced the state's contribution. By smoothing out the impact of investment returns over a 30-year period, calculating the value of local retirement plans over 15 years instead of three, and requiring a minimum contribution even when there is a surplus, the Board hopes to placate Republicans who have been advocating lower benefits or converting to a defined contribution plan. (CalPERS cuts state payment, Sacramento Bee, 8/08/07)

What Happened to Triple Bottom Line Returns?

CalPERS is partnering with Premier Pacific Vineyards to clear-cut 2,000 acres of forest in northern Sonoma County, the state's largest single conversion of forestland to vineyards ever. (Forestlands to vineyards: CalPERS, what about water and principles?, Sacramento Bee, 8/08/07) CalPERS usually does a better job of considering environmental, social and governance concerns. What happened to seeking triple bottom line returns? Where is Phil Angelides now?

CalPERS Moves Profitable Strategy to Emerging Markets

"There are few business areas where morality and money overlap, but Calpers has for years deftly used one to corner the market on the other, writes Heidi Moore for Financial News.

"At $245bn, Calpers is the largest and most stable of US pension funds and it has blazed a trail by teaming up with activist hedge funds such as Breeden, Relational Investors and Hermes in the UK. It expects to put more money into corporate governance – an estimated maximum of 8% of its $150bn equity portfolio – recruit staff, buy equity stakes in activist managers, such as Breeden and Shamrock, and continue investing in companies in partnership with activists... Its corporate governance fund is up fivefold over five years."

The article goes on to recount several of CalPERS' partnerships, noting that much of their corporate governance efforts have centred on the US and other developed markets. Focus is soon expected to include international emerging markets. CalPERS "has moved from an antiquated model of grading and banning investment in countries such as China, Russia, Venezuela, Pakistan and Egypt, which may have resulted in the pension fund losing out on $200m in potential profits, according to consultants." (Calpers sets benchmark, 8/6/07) That's something I recommended in my Asian Development Bank speech of 2002.

2006

CalPERS Staff Seeks Delegations Re Director Nominations

Empirical research has documented staff’s successful engagement of companies through the Focus List Program and its positive impact on the Total Fund. An expansion of delegated authority to the Focus List Program and non-Focus List Program company engagements will provide staff the resources necessary to interact more effectively with portfolio companies and to potentially have a greater positive effect on the Total Fund.

Staff recommendations seek to expand the Corporate Governance engagement process at:

(1) Focus List Program companies by providing for the ability to nominate up to two directors at individual Focus List and Monitoring List companies.
(2) Up to ten non-Focus List Program companies per fiscal year by providing for the ability to use those engagement tools currently available for Focus List Program companies in addition to the ability to nominate up to two directors at the ten individual companies.

If staff recommendations are accepted, expect to see CalPERS' influence in corporate governance expanding through quiet diplomacy and also by pushing shareholder nominees. This move would be all the stronger if the SEC decides to let the AFSCME v. AIG decision stand, although that appears unlikely.

Westly Seeks More International Options

California State Controller Steve Westly proposes that CalPERS relax its rules on investing in emerging markets. Currently, various countries are blacklisted based on a combination of market factors and country factors involving political stability, human rights and labor practices.

Westly's letter argues, much as I have done for the last several years, that investing in "select public companies – those serving as models for governance and operations – could act as a catalyst to improve political and economic conditions. This approach would also enable us to reduce investment risks and take advantage of global economic growth."

Westly mentions his previous efforts to allow investments in companies which trade on exchanges with strong investor protections, and urges the Committee "to move forward in this direction through a pilot initiative." He then goes on to urge investments in public companies if they adhere to the Global Sullivan Principles, International Labor Organization standards and the United Nations principles for responsible investment.

I hope these elements are taken in combination. I would hate to see investments based on adherence to the Sullivan Principles, without adequate investor protections.

CalPERS Healthcare Trust Fund Vetoed

SB 1729 (Soto) would have provided the legal framework for CalPERS to set up a healthcare trust fund for local governments. Arnold Schwarzenegger's veto message claims "the bill is drafted in a manner that could create new healthcare benefit obligations into the future that do not exist today. I look forward to working with all interested parties on legislation to create a structure for the state and local governments to prefund non-pension post-employment benefits. I am directing my staff and the Department of Finance to work with the parties interested in the bill before the new Legislative session convenes so the Legislature can address this issue early in the 2007-08 legislative session, possibly with urgency legislation. I am confident that by working together, all the interested parties can craft a structure that meets the needs of employers and employees without creating any unintended consequences."

Over the next two years, states and local governments must start complying with new accounting rules requiring officials to list the long-term cost of health benefits for retirees on the balance sheets and reveal how much is needed to fund the entire obligation. Most governments, including the state, are paying the current year's health care cost and not setting aside money for the future. In California, some experts estimate the tab could near $100 billion. (Health-care fund expansion vetoed by Schwarzenegger, SacBee.com, 9/30/06)

I am familiar with SB 1729. When CalPERS sponsored language to address the need for a trust fund they included language that would have exempted the board from any oversight by members or the public as rules governing the fund were adopted. I convinced the legislature to amend the bill to require the normal rulemaking protections.

Over the long term, prefunding healthcare liabilities would allow investment earnings to pay the bulk of healthcare costs, just as they currently pay the bulk of pension costs. However, to do so governments must, as the Governor's veto message indicates, "create new healthcare benefit obligations into the future that do not exist today." They do so, by essentially suing themselves in court, creating a scheduled liability of future fixed costs, rather than a liability that can be adjusted during periods of fiscal stress.

However, on the plus side, local governments can issue bonds to fund all or a portion of their plan's unfunded liability. Investment returns on the retiree medical plan trust funds will often exceed the interest expense on the bonds and can be used to reduce current or future costs. Of course, if they don't, future plan expenses will be higher than actuarial estimates.

Although local governments can go through this type of court validation process, state governments are not eligible to do so. Perhaps Schwarzenegger will seek amendments to allow the state government access to the same process...or perhaps he will seek to reduce the likelihood of increased healtcare costs by reducing future obligations. We will be watching closely. In the meantime, the huge $210 billion CalPERS fund will grow more slowly than it otherwise might have but will continue to wield clout in the area of corporate governance.

McRitchie Petitions CalPERS to Limit Gifts, Campaign Contributions and Comply With Governance Standards

On September 18, 2006, James McRitchie petitioned the CalPERS Board to adopt regulations similar to those proposed by CalSTRS limiting gifts and campaign contributions. Additionally, the petition requests CalPERS to set forth in regulations requirements that members of the board of administration comply with the same governance standards CalPERS attempts to impose on corporate boards.

For example, CalPERS prefers corporate directors serve on no more than 6 other company boards. Yet, one CalPERS director also sits on the board of 13 mutual funds, according to recent filings. It is hypocritical of CalPERS board members to call on corporate directors to limit the number of boards they serve on, while violating such guidelines themselves.

Those who have pushed to convert defined benefit plans for public employees to defined contribution plans have been motivated mostly by political ambition, the prospect of increased money management fees, and a wish to end the influence of public pension funds on corporate CEOs and boards of directors who do not wish to be held accountable by shareholders. However, these same forces frequently use real or perceived conflicts of interest by CalPERS board members as justification for their proposals.

Let’s not give those who seek to do away with public pension funds any reason to attack the funds on the basis of the possible influences of “pay to play” or possible conflicts of interest. By enacting regulations at least as stringent as those announced by CalSTRS and by complying with the governance standards it seeks to impose on others, CalPERS can ensure against any perception that gifts or campaign contributions will be rewarded by access to the nation's largest pension fund or that CalPERS does not live up to its own standards. (CalPERS Petitioned on Gifts Campaign Contributions and Governance) Compare with previously rejected petition, filed on 8/5/98. See also, State disclosure laws should apply to all seeking office, DailyBreeze.com, 8/19/06.

CalPERS Should Limit Gifts and Campaign Contributions

Clamping down on "pay-to-play" practices, trustees of the California State Teachers' Retirement System moved to rein in political contributions and gifts from investment managers who do business with the giant fund.

Trustees agreed to craft rules or legislation that would place strict limits on donations -- campaign contributions of no more than $250 and meals and gifts valued at no more than $50 -- for not only the 12-member board but also the governor and gubernatorial candidates. (CalSTRS looks to restrict gifts, Sacramento Bee, 9/8/06; Limits on Firms' Donations to California Pension Panel Eyed, LATimes, 9/8/06)

CalPERS should follow the example set by CalSTRS in clamping down on "pay-to-play." I was among those pushing CalPERS to adopt more stringent limits in the late nineties. As reported, when they did adopt policies they did not go through the legally required rulemaking process. CalPERS argued the Board did not have to comply with the Administrative Procedure Act, which requires public notice, response to comment, etc.

When I sought and obtained a determination from the Office of Administrative Law that the CalPERS policies were illegal, I did so not to repeal the underground regulations but in order to have them formally adopted into law through regulations. I also hoped to move the rules from mostly increased reporting to the type of strict prohibitions now being considered by CalSTRS.

Unfortunately, since both the LATimes and Sacramento Bee had concluded their investigatory articles on "pay to play" and gift taking by CalPERS board members at the time of the court decision and OAL’s determination, the Board simply repealed the illegally adopted policies and fell back to the relatively ambiguous language of Government Code section 19990.

That law prohibits gifts "under circumstances from which it reasonably could be substantiated that the gift was intended to influence the officer or employee in his or her official duties or was intended as a reward for any official actions performed by the officer or employee." Of course, it is extremely difficult to substantiate “pay to play.” Board members frequently argue no gift of any value can sway them in their decisions.

Soon after the press announced the initiative by CalSTRS, their CEO, Jack Ehnes called to ask a few questions about the policies enacted by CalPERS. I quickly gave him a link to the relevant court decision, the OAL Determination I obtained, a copy of the cover letter for my request (which gave him the policy numbers to obtain from CalPERS, so you should be able to easily get copies from CalPERS), my letter to  Kayla Gillan re CalPERS denial of my petition on board resolutions and my petition to rescind.

As I recall, the campaign contributions only applied to entities doing business with CalPERS, or perhaps extended to the type of entities doing business with CalPERS.  Effectively, the policy only applied to Connell because it didn't cover federal elections and Matt Fong was running for the Senate.  It didn't cover the governor and gubernatorial candidates, nor did it have any effect on directors elected by members because they typically have not obtained contributions from those doing business with CalPERS.

However, I'd like to see CalSTRS consider a strict $250 limit campaign contribution limit from any source.  That kind of limitation would have a huge impact on CalPERS elections.  In the current election, for example, George Diehr would be unable to raise the hundreds of thousands of dollars he has in $250 chunks. An additional factor is "in kind" contributions of printing, mailing, phone banking, passing out flyers etc. Until my challenge of Bill Crist 8 years ago, these "in kind" contributions constituted the bulk of campaign spending.

The CalPERS Board should introduce limitations on gifts at least as stringent as those adopted by CalSTRS. Trustees should be of the highest moral character and should not, in general, be accepting gifts from individuals or firms where there is any possible conflict of interest. Let’s not give those who seek to do away with public pension funds any reason to attack the funds on the basis of the possible influences of “pay to play.”

Guest Commentary

The following guest commentary appeared in the September 14th edition of the Sacramento News & Review.

Don't overlook CalPERS election

Election to the CalPERS board shouldn’t be a lifetime appointment, but that’s the net result if unions, the press and members remain complacent.

When I requested the SEIU Local 1000’s endorsement in the current CalPERS election, an official asked if the incumbent “had killed his mother or something.” The union wasn’t about to switch, unless the incumbent was completely unelectable

When I asked The Sacramento Bee to consider making an endorsement, they told me the fall elections would “demand our full attention during the political season.” The paper only had time to focus on elections of importance to its readers.

But CalPERS members are readers of both the Bee and SN&R. A large number of CalPERS members live in the Sacramento area. Further, CalPERS invests a disproportionate amount of its $205 billion here. The recent $100 million stake in The Towers at Capitol Mall is an example. CalPERS forced tens of thousands of Sacramento residents to change health-care providers when it dropped Sutter hospitals.

Decisions by the CalPERS board obviously have a tremendous impact, not only on CalPERS members, but also on all taxpayers. We all benefit from local investments, and we all help fund pension and health-care programs administered by CalPERS. Yet, neither SN&R nor the Bee has ever endorsed a candidate in these important elections.

Most CalPERS members only see short ballot statements written by the candidates and campaign materials from their own union. The public sees even less. The press should provide an independent analysis of candidate positions on the issues and then should endorse candidates who will best serve both members and the public.

Review the candidates and their records. I am the only candidate with a clear record of challenging the board, when necessary, to protect the rights of members and the public.

Additionally, I am the only candidate who has spelled out plans to create a trust fund to eventually pay most health-care costs through investment earnings; increase health-care choices and decrease expenses by fostering competition among a greater number of providers; and increase earnings by tilting investments in favor of companies with excellent environmental, corporate-governance and workplace-practice records, and reducing investments in those with poor records.

The press is failing its readers and its important public-service function when it fails to make endorsements in CalPERS elections.

Radio Coverage of CalPERS Campaign

At my urging, all three candidates for the CalPERS Board appeared on the KXJZ radio program Insight. See the listing for CalPERS under recent shows.

McRitchie Calls for Increased Choice and Lower Healthcare Costs

Capitol Weekly recently published two articles on CalPERS overpaying for healthcare by Ken Mandler, Editor Emeritus. (see CalPERS' purchasing practices encourage high state-health-care costs, 8/17/06 and State needs to change approach when purchasing health care for employees, 8/24/06) Mandler compares the price of health insurance to flying. We all know the person sitting next to us may have paid half as much for the same flight…and the person on the other side may have paid three times as much!

In comparing healthcare insurance prices, Mandler found that while the state pays $759 a month on each employee's behalf for a family membership and members pay another $189, “the price Kaiser is charging the general public for essentially the same service is $361 a month.”

Mandler admits there are differences in the plans. The lowest general-public plan requires a $1,500 family deductible. Yes, he writes, that sounds like a lot, but right now you are paying $2,268 a year for your share of the state's Kaiser coverage. That's $768 more than the deductible.

Kaiser used to be the lowest-priced insurance offered to state employees. The state's payment was based on the average of the top 4 plans. “Since Kaiser was significantly lower, state employees paid almost none of the premium.”

Over the last 25 years CalPERS has forced each health plan to offer the same coverage to make it easier for state employees to compare values. “The health plans compared “values' as well, and essentially said if you are going to make us provide the same coverage, we will charge you the same high prices.”

Many health plans dropped out, as CalPERS “indicated a preference for large organizations offering similar services and cost structures.” Yes, homogenizing plans made it easier for us and for CalPERS to analyze cost structures but it also made it easier for insurance companies to raise prices, since they have to tailor their plan to CalPERS' requirements.

Mandler's proposed solution is to “deposit $750 in every state employee's account monthly and let them spend it however they want. Some may pass on health insurance altogether, others will purchase catastrophic insurance, others will purchase policies better designed for their circumstances.”

I wouldn't go that far. Insurance, by its nature, should consist of a large pool paying in so those who require services, especially unexpected services, won't go bankrupt paying for them. Under Mandler's plan, state employees who use services would soon find their rates going up or they'd be dropped, just as car insurance rates go up after you make several claims.

A better solution would be to foster competition. Instead of reducing our options and thinking like a “regulator” of those that remain, CalPERS should let more providers offer more options. Yes, it will be more difficult to compare plans, but you will be able to choose the services most important to you and your family. Costs will be lower when plans compete. Additionally, I will work to create a healthcare trust fund for state members, allowing investment returns to cover 80-85% of costs, just as investment returns pay most of the cost of our pensions. Beyond that, we need national health insurance, with CalPERS supplementing to pay for uncovered benefits.

Takeaway: If you favor more choice, decreased costs because of increased competition, and a healthcare trust fund to pay most of the costs, vote James G. McRitchie.

SDCERS Troubles Continue

A judge in the federal pension fraud case of the San Diego City Employees' Retirement System (SDCERS) has postponed the February trial date until May 15, 2007, after defense attorneys requested more time to prepare. San Diego city pension officials were indicted 1/6/06 on fraud and conspiracy charges. All pleaded not guilty. The indictment says the defendants deprived citizens and pensioners of their right to honest services by conspiring to illegally obtain enhanced retirement benefits for themselves in exchange for allowing the financially strapped city to underfund the pension system, which now has a $1.43 billion deficit.

Defense lawyers have said the enhanced benefits and the underfunding were not linked, and that votes for benefits took place months before the votes to allow underfunding. Finding prominent lawyers who were not already connected to the far-reaching case has been challenging; one is already on their fourth attorney. Today's pension deficit is estimated at more than $1.4 billion, though some estimates put it as high as $2 billion.

On another front, A report by consultants from Kroll Inc. accused the city of allowing pension assets to be diverted to pay for retiree health care, a practice that continued in different forms from 1982 to 2005. Such diversions are not allowed under IRS rules and could threaten the fund's tax-exempt status. San Diego's Pension Crisis is chronicled by the Union-Tribune. Also informative is The Aguirre Report, a blog by the San Diego City Attorney, who is "attempting to set aside illegal pension benefits under California's conflict-of-interest Government Code §1090, which prohibits government officials from voting on matters in which they have a financial interest."

The SDCERS scandals may add fuel to attacks on all public pension funds, including CalPERS. They add urgency to the need to ensure elected and appointed fiduciaries are of the highest moral character.

DPA Says Campaign Materials Can Be Distributed in State Buildings

According to PML 2005-034, materials that "contain a position in support" of "a candidate constitutes 'partisan political' information.  Therefore, pursuant to the clear and unambiguous language of the parties' MOUs, such materials cannot be distributed and/or posted in State owned or leased facilities, including but not limited to inside the building, within lobbies, lunchrooms or breakrooms and such materials may not be posted on bulletin boards, cubicle walls etc."
 
Additionally, as the ethics officer for my department, I received notice from the Governor's Legal Affairs Secretary, which I posted on our ethics intranet page.  That memo reminds public officers and employees that Government Code section 8134 makes it unlawful for any elected official or state employee to use or permit others to use public resources for campaign activity.  Government Code section 19990 also contains similar applicable provisions.
 
As a candidate for the state member seat on the CalPERS Board in the current elections, I have instructed  volunteers for my campaign to adhere to the provisions of the above cited laws and PML 2005-034.  Apparently, the other two candidates have not done so. George Diehr's supporters held a campaign meeting in the board room of the Department of Education (see below). I have a digital recording of the meeting.  I also have witnesses that Mr. Diehr went cubicle to cubicle in the Secretary of State's Office interrupting work, passing out flyers and shaking hands.  Additionally, I also have reports that Howard Schwartz, another candidate and former chief counsel of DPA, was seen in the lobby of the Cal/EPA building passing out flyers and that many of his flyers are openly posted within DPA headquarters. 

I want to follow the law and believe it is a slippery slope to ignore what may seem to be violations of "minor" laws.  For example, I am also concerned that Dr. Diehr's ballot campaign statement solicits e-mail to his state e-mail address (gdiehr@csusm.edu) in apparent violation of Government Code sections 8134 and section 19990. Ignoring "minor" laws fits into an unfortunate pattern for some CalPERS Board members who have argued for many years that they are exempt from the Administrative Procedure Act, which requires public notice of rulemaking, response to comments, citations of authority, etc. Of course, CalPERS is not exempt from these laws (see the Determination I obtained from OAL).  Neither do I see any exemption for CalPERS candidates in PML 2005-034. 
 
With that backgrond, I asked DPA is PML 2005-034 is in force?  Does it apply to CalPERS elections?  (Keep in mind that CalPERS elections are governed by Political Reform Act and other provisions of law in ways that are the same or similar to those governing other statewide offices.)  If PML 2005-034 does apply to CalPERS elections, what steps, if any has DPA taken to enforce this directive?  What, if any, is the penalty for violating this directive?  What, if any, Is the process to complain of violations?  

On 8/30/06 I got the following note from DPA:

Mr. McRitchie, sorry for the delay in my response but some research was required.  You inquired about whether PML 2005-034 governed the material distributed in the PERS election.  In researching this issue it appears that DPA has not in the recent past prohibited the distribution of the material.  It is the conclusion of DPA that given the voting pool is state workers and not the general populace alone, that the material is not “partisan political” and therefore also not governed by the PML you referenced.  Thanks for your concern.

Apparently, we can hand out campaign flyers in state buildings. That's fine; I think it is appropriate. I only wish they had offered such clarification earlier. So, I will now be doing that.

However, since the note was cryptic I still don't know if Government Code section 8134, which makes it unlawful for any elected official or state employee to use or permit others to use public resources for campaign activity also does not apply.  Is it okay to hold campaign rallies in state buildings, to use state e-mail and phones for campaigning, and to use state photocopiers to reproduce flyers?  Is there no line at all? I'm hoping for a quick answer to those questions as well.

Sacramento Bee Article on CalPERS Elections -- McRitchie's Response

For the first time in memory (perhaps history), the Sacramento Bee actually carried an article on the CalPERS elections before the elections are over. In "CalPERS post carries clout" (8/21/06), Gilbert Chan did a good job of laying out some of the issues in a brief article. Of course, he gave more ink to the incumbent and his short-hand references to complex issues may mislead some readers concerning candidate positions. Below is my response:

I helped George Diehr get elected because I thought he would lead. Unfortunately, the Board's underground regulations continue to put members at risk for identity theft. Language they sponsored in SB 1729 would have exempted the Board from any accountability in adopting regulations, if I hadn't intervened. Government Code section 8134 prohibits use of public resources for campaign activity. Yet, Mr. Diehr's ballot statement lists his state e-mail address.

CalPERS is being attacked by those interested in managing our $205 billion in assets. Arrogant board behavior increases the likelihood of further attacks.

CalPERS is taking the wrong direction on health care, paying double private rates for Kaiser (check the internet). Instead of reducing options, we should let more healthcare providers compete, offering different plans.

Ultimately, we need a healthcare trust fund, allowing investment returns to cover most of the costs, just as they do for our pensions. I would also move administration of dental, vision, and Savings Plus from secret meetings at DPA and the Chancellor's Office into the open at CalPERS.

My investment strategy favors “enhanced indexing.” Increase investments in corporations with excellent environmental records, corporate governance, and workplace practices. Decrease investments in companies with the worst practices.*

*"Corporate Governance and Equity Prices" by Paul Gompers of Harvard and Andrew Metrick of the University of Pennsylvania’s Wharton School found that "firms with stronger shareholder rights had higher firm value, higher profits, higher sales growth, lower capital expenditures, and fewer corporate acquisitions." Investors who bought firms with the strongest democratic rights and sold those with the weakest rights "would have earned abnormal returns of 8.5 percent per year during the sample period." Innovest, an investment advisor, found that the top half of firms ranked by environmental sensitivity outperformed the bottom half by up to 21.8% over a two year period, depending on industry. See also, The Prudent Trustee on avoiding environmental risks.

OAL to Determine if CalPERS Election Rules are Legal

While the current CalPERS Board, including incumbent George Diehr, rejected my Draft Petition for Underground Regulations Determination to change rules that put CalPERS members at risk for identity theft, the Office of Administrative Law has agreed to make a determination as to whether or not the regulations were legally adopted. OAL will make its determination by January 19, 2007.

For years the Board insisted they were exempt from laws, such as the Administrative Procedure Act, because of direct authority granted by California Constitution. However, OAL (based on my prior petition) and the courts have determined the Board is not above the law. Continued use of "underground regulations," especially those which open members to financial risk from identity theft, is a breach of fiduciary duty, undermines the credibility of efforts by CalPERS in the area of corporate governance, and makes the entire system more vulnerable to attack by those who seek to destroy our defined benefit plan.

Yet, the Board continues to enforce underground regulations that place members at risk of identity theft. They also approved language in SB 1729 that would have exempted the Boad from accountability to members or the public in adopting future regulations. Fortunately, my amendments to protect members were accepted by the Assembly Public Employees, Retirement and Social Security Committee.

When I helped George Diehr get elected four years ago, we hoped he would make a difference. Now we know, the board still needs a member who will set the highest ethical standards.

Another Reason to Keep Public Pension Funds

I have chronicled elsewhere that the attempt to convert California's public pension funds likw CalPERS and CalSTRS, from defined benefit plans (DB) to defined contribution (DC) plans, would have caused an aggregate $10 billion reduction in income and a $5 billion increase in management fees per year. Now comes evidence that "only the major public pension funds seem to be effective monitors" of corporate mergers. In other words, public pension funds are not only good for public employees, they are good for the economy as a whole because their active monitoring discourages value-destroying acquisitions but encourages those that are likely to add value. In contrast, mutual funds, where typical DC plans are invested, were found to be the least effective monitors.

Brown University's Lily Xiaoli Qiu, studied 2,022 merger events from 1993 to 2000 and found that when the stake in a company held by its largest public pension fund investor increased 1%, the frequency of mergers declined 4% at the company. (Which Institutional Investors Monitor? Evidence from Acquisition Activity) That 1% increase also corresponded to an 8% reduction in value-destroying acquisitions, or, as Gretchen Morgenson so colorfully phrases them, "those vanity projects that chief executives pursue simply to 'buy' earnings or revenue growth rather than generate growth internally and organically." The net result is that a 1% increase in public pension fund ownership corresponded with an increase of 0.4% to 3% in subsequent 12-month performance.

Qui writes, "the evidence suggests that for firms suffering the most agency conflicts, more mutual fund ownership may insulate the management from more scrutiny and actually encourage more bad M&A." Morgenson's interpretation: There is "a tendency among mutual funds to hear-no-evil-see-no-evil, at least in mergers. One reason for that willing suspension of disbelief may be that large mutual fund concerns have too much to lose by battling with the same companies whose 401(k) business, money management services and trust operations they oversee or seek." (Mutual Funds Are Failing As Deal Police, NYTimes, 8/13/06)

The takeaway: Elminating public pension funds would not only cost billions in lost earnings and increased expenses for public employees, all investors would suffer an aggregate net loss of additional billions of dollars because these large public pension funds, which are the only funds that hold management accountable, would no longer be there to monitor mergers and aquisitions.

McRitchie Files to Protect Assets of CalPERS Members

James McRitchie, a candidate for the CalPERS Board of Administration, filed a petition with the Office of Administrative Law, seeking a determination by that agency that several regulations enforced by CalPERS concerning the conduct of elections have not been formally adopted, as required by law. These "underground regulations" expose CalPERS members to increased risk from identity theft and provide opportunities for incumbent board members to gain unfair advantages in elections.

TIAA-CREF Surveys Participants: CalPERS Should Too

TIAA-CREF, the huge provider of retirement plans in the academic, medical and cultural fields with $380 billion in combined assets, released results of a comprehensive survey of participants on issues related to socially responsible investing.

"This survey affirms that our participants want a secure retirement and investment decision making that is driven by financial returns," said Scott C. Evans, Executive Vice President and Head of Asset Management.  "It also illustrates that many participants think about the environmental and social impact of their investments."

The survey sought to examine participants' attitudes around Socially Responsible Investing (SRI), to gauge their knowledge of and commitment to TIAA-CREF's SRI strategies, and to inform the company's SRI strategies moving forward. 

"There is an opportunity to educate participants about socially responsible investing generally and about opportunities that TIAA-CREF offers," said Amy O'Brien, TIAA-CREF's Director of Social Investing. "We now have a baseline of information of how our participants view socially responsible investing and the issues and strategies they currently find most appealing." (press release, 7/13/06: report) Congratulations to Amy Muska O'Brien, who I understand deserves disproportionate credit for bringing this survey to reality.

Why don't CalPERS, CalSTRS, and others take similar surveys of their members and taxpayers? The results could provide critical support when they are frequently accused of pursuing a "social agenda" or when they are under attack to change from defined benefit to defined contribution plans. They should determine the baseline and not stray too far without educating and/or carrying out a dialogue with members and taxpayers.

CalPERS in Hole

On July 11th the Sacramento Bee published another in a long series of rants about how state employees are getting such fat pensions and the public has to pick up the tab. (State benefit system in hole) Clearly, they are contributing to misinformation and have many of those posting comments fooled. I responded as follows:

Eight years ago I took out ads in Capitol Weekly publicizing the fact we spent $500,000 suing the Wilson Administration to get raided money back. Then CalPERS essentially returned it ? reducing employer contributions by $3/4 billion…equivalent to an 8% pay raise for all state employees. In fact, the CalPERS Board reduced the state's contribution in 8 out of 11 years, while state employees continued paying our full amount. SB 400 finally gave us a well-deserved retirement boost.

There is some small truth to the Bee's articles. The Legislature does need to plug a few loopholes, especially in the growing number of safety employees, but the vast majority of CalPERS members have worked long and hard for their retirement. Many who commented point out correctly that our excellent benefits help to make up for poor salaries. I am a manager. We haven't had a raise in six years and still have none on the table.

As for converting from a defined benefit to a defined contribution plan. That makes no sense at all. The idea is being pushed by CEOs upset about CalPERS' shareholder activism and by those who want to feed at taxpayer expense.

It costs 0.37% to administer the CalPERS defined benefit (DB) plan, but will cost more than 1.5% per year as a defined contribution (DC) plan, with no death/disability benefits or inflation protection. California funds have assets of approximately $500 billion, so the yield to money managers will be an extra $5.65 billion every year while earning $10.2 billion less in aggregate for public employee retirements every year.

Don't let the Bee fool you. If you are a State employee, vote James McRitchie to the CalPERS Board in August. I'll set the record straight and fight to maintain your benefits. For more on that, see http://perswatch.net

Public Pension Funding Gap

In the late 1990s public retirement plans were flush with cash thanks to a high-flying stock market, but lack-luster investment returns and "generous" government pensions left many plans with a funding gap.  Experts on this Insight radio program on KXJZ say how California's retirement systems should respond. However, none of the "experts" point out that converting California's defined benefit plans to defined contribution plans would funnel $5 billion/year extra to corporate money managers while reducing aggregate retirement earnings by $10 billion/year. (see Making Corporate Governance Decisions that Work for Whom?)

Petition to End Conflicts of Interest, Save Money, and Protect Members From ID Theft at CalPERS Rejected

CalPERS rejected a Petition for Reconsideration and Draft Petition for Underground Regulations Determination, submitted by CorpGov.Net publisher and CalPERS board candidate James McRitchie (letter). Regarding regulations which prohibit only CalPERS staff "directly involved" in elections from using their official position to influence the outcome, CalPERS responds that "the petition ignores the principle that administrative regulations may not override state legislation." Therefore, even though the regulation may conflict with statute and mislead staff into thinking they can use their official position to influence elections, as they have done in the past, the regulation will stand.

With regard to using "instant runoff" voting, which could have saved almost $1 million in the last CalPERS election, CalPERS responded that they had already rejected a similar request in 2001. Apparently, they see no need to revisit the issue.

The petition for reconsideration also pointed to several "underground regulations," adopted by CalPERS without benefit of full public notice and other protections afforded by the Administrative Procedure Act. These regulations require circulated candidate petitions to include the last six digits of their Social Security Numbers (exposing members to the risk of identity theft, since the first three numbers are regionally based), setting the number of signatures required and the dates of the election (allowing the Board to change requirements to their advantage without substantive public input). CalPERS chose not to address these allegations. (letter of rejection)

Although CalPERS rejected each of the petitioner's suggestions, the Benefits and Program Administration Committee agreed, months ago, to consider possible changes to the elections process through a yet to be named ad hoc committee, so there is still hope that someday these issues will be given more careful consideration. Additionally, McRitchie is likely to seek another determination from the Office of Administrative Law that CalPERS failed to follow legal requirements in adopting its "underground regulations."

For years, the CalPERS Board insisted they were exempt from laws, such as the Administrative Procedure Act, because of direct authority granted by California Constitution. However, OAL and the courts have determined the Board is not above the law. Continued use of "underground regulations," especially those which open members to financial risk from identity theft, arguably are a breach of fiduciary duty, undermine the credibility of efforts by CalPERS in the area of corporate governance, and make the entire system more open to attack.

McRitchie Protects Member Rights on Health Care Trust Fund

SB 1729 (June 14, 2006) would create a statutory framework allowing the CalPERS Board exclusive power over the administration and investment of a health care trust fund to provide "other post-employment benefits” (OPEBs). Just as 80-85% of CalPERS pensions are currently paid by investment earnings, rather than by direct employer or employee contributions, a health care trust fund could eventually do the same once funded.

Unfortunately, the bill totally exempted the CalPERS Board from the provisions of the Administrative Procedure Act (APA). This could have permanently denied CalPERS members from substantive participation in the development of implementing regulations and would also deny us the protections of review by the Office of Administrative Law.

I urged members of the Public Employees, Retirement and Social Security Committee to adopt amendments to ensure the Board is bound by the APA. (see letter of June 19, 2006) The Committee met on June 21 and accepted the substance of my amendments with the concurrence of Senator Soto (the author) and CalPERS. Now, as CalPERS implements a health care trust fund, which could eventually rival the size of its pension fund, members will enjoy the protections of the APA, including:

• Public notice, disclosure of studies relied upon, opportunity for comment and a public response to comments for initially proposed regulations and subsequent amendments.
• Consideration and disclosure of fiscal and economic impacts.
• Review by the Office of Administrative Law for necessity, authority, clarity, consistency, reference and nonduplication.

McRitchie Files For Reconsideration of Election Rules Petition

May 26 letter to Fred Buenrostro requests reconsideration of petiton to amend CalPERS election regulations. Seeks to end increased risk of CalPERS members to ID theft, shift to instant run-off voting to save money, conform regulations with statutory requirements and end the practice of utilizing primarily underground rules in the election process. Attachments: Petition for Reconsideration and Draft Petition for Underground Regulations Determination

Pay to Play Law Needs Strengthened

Dan Morain writing Finance Law Is Virtually Ignored, for the LATimes, finds that firms seeking pension business with CalPERS and CalSTRS easily skirt a rule on revealing donations to state board members.

The laws loopholes have come into focus as Treasurer Phil Angelides and Controller Steve Westly — both members of the pension boards — vie for the Democratic nomination for governor. The law requires them to file statements with the secretary of state listing their contributors. However, those filings don't give details on donors' interests in state affairs. So Rep. Adam B. Schiff (D-Burbank) pushed in 1998, when he was a state senator, to create a parallel filing system that would do so.

Schiff wanted anyone seeking pension fund business to disclose to the pension boards any donations to board members of $250 or more. The disclosures would make clear what the donors' interests were in the board's actions. As I recall, at the hearing in 1998, Senator Schiff focused on the fact that elected officials on the boards receive substantial contributions from investment firms and other contractors and yet disclosures of potential conflicts of interest are not required during deliberations nor are votes ever made public if taken in closed session.

CalSTRS Fiduciary Counsel, Ian Lanoff, dropped a bomb on the proceedings when he indicated he has repeatedly advised CalSTRS board members that they are prohibited, by provisions in the California Education Code, from assisting contributors and should recuse themselves from such votes and deliberations. It was clear the strength of Lanoff's conviction came as a surprise to CEO James Mosman who indicated that constitutional officers on the CalSTRS Board had received different advise from their own counsels and did routinely participate in deliberations and votes involving contributors. It was also clear that potential conflicts of interest are not routinely discussed during such deliberations.

I was one of the only members of either system to testify in support of greater disclosure.

Passage of SB 1753, which took effect in 1999, hasn't helped. CalPERS, could find only two such disclosures since then, totaling $11,250, one to Angelides and one to Westly. The California State Teachers Retirement System, known as CalSTRS, found none.

Yet the LA Times found that Angelides raised $4.5 million and Westly $1.86 million from contributors with business before those boards since they took office. Unfortunately, there is no disclosure requirement if staff, as opposed to the board, decides to make an investment. And in most instances, pension fund boards delegate such decisions to the staff. See the LATimes article for details on who gave what to whom. See also Angelides a Favorite of Pension Fund Interests, LATimes, 5/25/06.

McRitchie Testifies on Risk to ID Theft and Election Rules

The Sacramento Bee's Gilbert Chan reported on one issue included in my testimony, CalPERS seeks election savings. Others were equally substantive.

CalPERS currently exposes members to increased risk from identity theft because it requires those signing nomination petitions to include the last six digits of their Social Security Number (SSN). Since the first three digits are determined by region, confidentiality is easily breached.

CalPERS rules imply that staff “not directly involved in conducting CalPERS elections” can freely use the influence of their position to sway elections, even though Government Code section 19990, subdivision (a) clearly prohibits such favoritism. This has led to what a 1999 election protest panel called “technical violations.”

Many CalPERS policies regarding elections are “underground regulations,” such as the schedule and number of signatures required. They were written when the Board thought it was exempt from legal requirements binding other agencies. However, in 1999 I obtained a Determination (No. 18) from the Office of Administrative Law that CalPERS too, must obey the law.

The Board should protect the financial assets of members from identity theft; avoid wasting money on an unnecessary second ballot; and should provide for fair elections, free from staff interference and without illegal underground regulations.

If you agree, please collect signatures in support of these changes and mail them to me before mid-June. See petition. The petition is also available for download as a Word Document.

Monitoring the Monitor

CalPERS creates billions of dollars in wealth for investors while expanding shareholder rights, according to an important new study by Brad Barber of the Graduate School of Management, University of California, Davis.

Barber's study of what is commonly termed the "CalPERS Effect," the incremental stock appreciation resulting after placement on CalPERS' annual "Focus List" of underperforming companies, found short-term benefits of at least $3.1 billion for investors over a 14-year period ($224 million annually).

Barber breaks some ground methodologically, with his construction of a calendar-time portfolio that invests in focus list firms where weights are proportional to each firm's market capitalization. His primary theoretical contribution lies in the discussion of two agency costs. The first is widely known and recognized, that being the conflicts of interest between shareholders and corporate managers. Corporate managers may pursue projects that benefit themselves, but not shareholders.

"The second agency cost, less widely discussed that the first, is the conflicts of interest between portfolio managers and investors." "Just as voting power can be used to benefit shareholders through effective monitoring of corporations, the voting power can be abused by advancing the interests of portfolio managers that are different from those of their investors and reduce the value of the portfolio they manage." He reminds us that portfolio managers and the boards that oversee them may have interests that are not aligned with shareholders or beneficiaries.

Focusing on CalPERS, his primary example of the second form of agency cost is what some would argue was their vote to oust Safeway's CEO, Steven Burd, from Safeway's board of directors in May 2004 for his harsh dealing with employee unions. Of course, this second form of agency cost is much more pervasive at mutual funds, which frequently derive substantial income from administering corporate benefit programs and are reluctant to be strong shareholder activists for fear of losing clients.

Barber's concluding admonition is one which I embrace and have emphasized frequently. "When institutional activism cannot be reasonably expected to maximize shareholder value, the preferences of investors should be given top priority. Institutions must open lines of communication with investors; they must understand how investors stand on moral issues that might affect investment policy."

Those who invest in SRI mutual funds frequently do so because their values are aligned with those of the portfolio managers. If they turn out to have serious disagreements, they can take their investment funds elsewhere...at least in theory, although it may be impossible to find true alignment anywhere. CalPERS members don't have the same choice.

Members do have opportunities to directly vote on about half the board members. However, that opportunity comes only as terms expire and factors favoring incumbents make it extremely difficult for challengers. Therefore, Barber's advice is important. Opening the lines of communication with members could not only reduce agency costs, as Barber suggests, it could serve to educate all parties involved and could help to ward off frequent political attacks.

There is one perception if the president of the board appears to be using his influence to support striking members olf his own union through the use of proxy power; quite another if members demand the system do so. The CalPERS Shareowner Forum could provide a mechanism for member feedback and for debating the issues. Instead, it has the appearance of an elephant graveyard where readers are presented with largely ageing material and no meeting place for open discussion among experts or members. CalPERS should revitalize this "forum," which could be a gathering place for the exchange of important ideas leading to greater portfolio returns, education, and increased legitimacy for what are sometimes seen as politically motivated investments and votes.

Barber makes one last point, which I believe, is not highlighted enough. Because CalPERS owns only a small fraction of the equities market, members enjoy benefits of only $1.12 million annually of the benefit from the pension fund's activism. Barber notes long-term benefits from CalPERS activism of as much as $89.5 billion. Of that, only .5% accrue directly to CalPERS. Of course Barber's figures don't take into account the deterrent effect and the ability of CalPERS to "drive the herd." However, his point emphasizes the need for a greater role by organizations such as the Council of Institutional Investors and the Investors for Director Accountability Foundation so that costs and benefits can be more equitably distributed.

By working more closely with these and other organizations, CalPERS could reduce "free rider" issues where 95.5% of the value they generate goes to others. Funds could, for example, coordinate by using the Council to consider proposing replacement corporate directors under the SEC rules that took effect on January 1, 2004. Disclosure Regarding Nominating Committee Functions and Communications Between Security Holders and Boards of Directors, requires corporations to disclose if their nominating committees have received a recommended nominee from a 5% shareholder or group and the disposition of that request.  Editor's note: The CalPERS

Contact: jm@perswatch.net