Corporate Governance -- Enhancing the Return of Capital Through Increased Accountability

Judy Daggao, Regulations Coordinator
CalPERS
400 P Street, Room 1120
Sacramento, CA 942702

November 22, 1999

Dear Ms. Daggao:

This is in reference to the rulemaking on candidate statements, amendments to California Code of Regulations, Title 2, section 554.5.

On October 24, 1999, under the provisions of Government Code, section 11346.8(a), I e-mailed you requesting a public hearing on the above rulemaking. I have received no response to this request.

The following are additional comments on the rulemaking that would amend California Code of Regulations, Title 2, section 554.4 regarding candidate statements.

Background: Current regulations allow candidates to prepare a 150-word statement, which goes out to members with the ballot. Statements can include opinion or positions "on issues of general concern to the membership."

Prior to printing and mailing they are fact checked by CalPERS legal staff. Statements which cannot be documented as "truthful" or which are determined to be "misleading" must be edited or they are excluded from the ballot package.

The statements are the only document concerning qualifications that CalPERS publishes and distributes to voters. Since elections have traditionally received minimal press coverage, the candidate statements can be of critical importance in deciding election outcomes. There have sometimes been over 90 candidates and there are no runoff elections, so voters don't get a second chance to evaluate the candidates.

Amendment 1. The statement shall be limited to a recitation of the candidate's own personal background and qualifications, and shall not in any way make reference to other candidates for office or to another candidate's qualifications, character or activities.

Analysis: This provision would prohibit candidates from making any reference to another candidate or from including any information beyond their personal history.

Impact of Change: A challenger running against an incumbent would no longer be able to:

  1. Point out that the incumbent voted against member interests. For example, they may have voted against creating a long-term health care program or to reduce the State's contribution many times without raising the possibility of reducing the employees' contribution level.
  2. Inform voters about the conduct of an opponent, which may be inappropriate to a member of the CalPERS Board. For example, a candidate could no longer mention that their opponent used ethnic slurs in a public forum, repeatedly violated open meeting laws or declared personal bankruptcy twice.
  3. Bring possible conflicts of interest to the attention of voters such as accepting gifts from CalPERS contractors or sitting on the board of other investment boards at the same time they are sitting on the CalPERS Board.

Comment: This change is not in the interest of an informed membership and should be deleted.

Amendment 2. Statements indicating the candidate's opinion or positions on issues of general concern to the System's membership may be included, so long as they are clearly stated as the candidate's opinion or view.

Analysis: Candidates would no longer be able to inform voters what issues they believe are important and what they would seek to accomplish if elected.

Impact of Change: A candidate could not indicate they:

  1. Would propose "gain-sharing" where surplus funds are split between bonus pay for retirees and lowered contribution levels for both current employees and employers.
  2. Would try to establish an ombudsperson to help members work through red tape.
  3. Would work for a petition process, which would allow members to directly vote on policies. which the Board has failed to address, such as policies would reduce Board perks or set term limits.
  4. Would seek to have Board minutes and votes posted to the CalPERS Internet site.

Comment: This change is not in the interest of an informed membership and should be deleted.

Amendment 3. The statements must not include any remarks or questions that are inherently misleading, including rhetorical remarks and questions that are inherently misleading.

Analysis: Candidates would no longer be prohibited from including truthful but misleading information.

Impact of Change:

  1. A Board incumbent who voted against adding long-term care insurance could now include in their statement that "while I was on the Board we established a long-term care insurance program," implying that they supported it.
  2. A candidate could say, "my project saved the State $1 billion," even if they were only one of over a hundred people working on the project and played only a small part in the savings.
  3. They could write, I got my BA from Cornell, leading voters to believe they went to a prestigious university, when in fact they graduated not from Cornell College in Iowa not Cornell University in New York.

Comment: This change is not in the interest of an informed membership and should be deleted.

On October 24, 1999, I e-mailed you that CalPERS failed to comply with the requirements of Government Code, section 11346.2(b)(3) because you didn't include a May 5, 1999 staff report which contained analysis and three options concerning the rulemaking on candidate statements (attachment 1). That report was certainly relied on by members of the Board in proposing the amendment. It argued that First Amendment rights and rights under the Equal Protection Clause of the Federal Constitution would not be violated by the proposed amendments, citing the case of Clark v. Burleigh (1992) in support of that contention.

The Initial Statement of Reasons makes no reference to this supporting document but merely contends the amendments are needed to "apply the policy that candidate statements should be a brief, biographical description of the candidate's education and background."

Government Code, section 11346.8(d) prohibits any state agency from adding any material to the record of the rulemaking proceeding after the close of the public comment hearing or comment period, unless adequate provision is made for public comment on that matter. Therefore, as noted in Government

Code, section 11346.9(a)(1), CalPERS cannot simply include mention of the staff report in the Final Statement of Reasons.

Again, as I did in my e-mail of October 24, 1999, I respectfully request the 45-day notice be reissued. Information concerning the availability of this report should be included in the Initial Statement of Reasons so that interested parties have adequate time to review all materials relied on by the Board in making this decision to deny information to members, while allowing candidates to now include misleading remarks.

As mentioned above, staff analysis of the proposed amendments revolved around the California Supreme Court case of Clark v Burleigh [No. S020854. Dec 24, 1992] (attachment 2) which involved a candidate for superior court judge. By statute, candidate statements were limited to 200 words and could not refer to the background or qualifications of other candidates; the CalPERS proposal extends this limitation by also prohibiting the inclusion of "the candidate's opinion or positions on issues of general concern to the System's membership." The Court's decision centered, in part, around two findings:

Finding 1. Since the voter's pamphlet was found by the State Supreme Court to be a "nonpublic forum," any restrictions or limitations on expression need only be reasonable and "viewpoint neutral." Clark v Burleigh found that the statute limiting candidate statements for judges was "not an effort to suppress expression merely because public officials oppose the speaker's view. There is neither claim nor evidence that the Legislature was so motivated when it adopted section 10012.1, and the statute necessarily operates in an evenhanded fashion." (p. 494)

    Comment: In contrast to the case of Clark v Burleigh, the proposed regulations regarding CalPERS elections are being sought to suppress views which certain members of the Board oppose. It is clear from the transcript of the May 18, 1999 meeting of the Benefits and Program Administration (attachment 3) that several Board members objected to my candidate statement in the previous election because it was critical of the Board's actions and of the incumbent's potential conflicts of interest.

For example, on page 213 of the transcript Mr. Valdes states, "Mr. McRitchie, you are the reason that this whole item is up here." He then appears to go on to imply that my candidate statement included rhetorical questions concerning intimidation of staff, wife beating and graft. Of course, my statement included no such remarks. (see attachment 4) Such remarks would not have stood the current test that they not be misleading. The proposed regulation is designed specifically to exclude discussion of any issues of general concern to the System's membership because any such discussion may prove embarrassing and detrimental to members of the Board.

Finding 2. "Section 10012.1 restricts only this one channel of communication with the voters; there remain substantial alternative channels open for local judicial office that do not bar criticism of opponents - e.g., advertisements or interviews in local newspapers or on local radio and television programs, direct mailings to the community, neighborhood distribution of handbills, and personal appearances at local functions." (p. 494-495)

Comment: In government elections, and even in corporate elections, one of the most critical pieces of information for any campaign is a list of eligible voters. Such lists are used for direct mailings, phone banking, to walk precincts, etc. However, this avenue is closed to CalPERS candidates because CalPERS has refused to grant access to mailing lists of eligible voters. Even if CalPERS did grant access, the cost of mailing to all members would be prohibitive for most candidates, myself included. In addition, note the repeated use of the word "local" by the Court. CalPERS elections are not local elections. They can involve more than a million members who are scattered all over the world. Neighborhood distribution of handbills is not practical.

Press coverage by the commercial media is unlikely because only a small fraction of any geographic community can vote in the elections. For example, in the fall election of 1998, when I ran against incumbent Dr. William Crist, the Sacramento Bee ran two articles on a protest I filed because the incumbent was allowed to dramatically change his statement about a month after the deadline. (Note: CCR, Title 2, section 554.4 mandates that "once filed, statements may not be changed or withdrawn except by the election coordinator.")

Compare his original statement (attachment 5) with that which appeared on the ballot. (attachment 4) As far as I know, there was no coverage by the press in any other geographic locale and most CalPERS members do not reside in Sacramento. In addition, I don't recall ever seeing coverage of CalPERS elections, even in the Sacramento Bee, prior to the 1998 election.

Coverage of candidates is sometimes provided in noncommercial media. For example, CalPERS provided Dr. Crist with extensive coverage during the 1998 election by spotlighting him in its "CalPERS Employer News" with a three page interview, including the cover. (attachment 6) However, I have never seen CalPERS provide such coverage to a challenger.

Similarly, in the case of Clark v Burleigh the court held that "personal appearances at local functions" was an avenue still open to candidates. Once again, in the case of CalPERS elections, this avenue is open on an unequal basis because the elections are not local. While CalPERS incumbents can travel around the state meeting with voters at member expense; challengers cannot.

The one avenue open to all candidates is the candidate statement. It is of critical importance that candidates be able to continue to contrast their own positions and records against that of other candidates. I do not see any inherent necessity in censoring out truthful information; nor do I see the necessity of including "inherently misleading" remarks.

I suggest, instead, the following amendments to existing regulations regarding CalPERS elections:

§554.4. Candidate Statements

Each candidate for an elective Board member position may provide a statement including the candidate's name, the word "Incumbent" when the candidate is the incumbent in the position for which the election is being held, job classification, employer (or employer at retirement), years of CalPERS-covered service, and a brief factual, biographical description of no more than 150 200 words of the candidate's education and background, and a list of organizations to which the candidate belongs, and positions held in those organizations. Statements indicating the candidate's opinion or positions on issues of general concern to the System's membership may be included, so long as they are clearly stated as the candidate's opinion or view. The statement must be truthful, and shall not include other information. The statements must not include any remarks or questions that are inherently misleading, including rhetorical remarks and questions that are inherently misleading.

The statement shall be filed with the Election Coordinator at the time the candidate accepts nomination. Once filed, statements may not be changed or withdrawn at the request of candidates except by the Election Coordinator. The Election Coordinator shall reject or edit any statement which contains obscene, vulgar, profane, scandalous, untrue, libelous or defamatory matter or which does not meet the statement limitations stated above. The Election Coordinator may request the candidate to verify the truthfulness of any remarks, which are presented as factual statements. The candidate shall provide timely verification upon such request. The Election Coordinator shall remove from the ballot the name of any candidate who fails to respond to such a verification request. Nothing in this section shall be deemed to make candidate statements or the authors thereof free or exempt from any civil or criminal action or penalty because of any false, slanderous or libelous statements offered for printing or distributed to voters. Information contained in the statement is the responsibility of the candidate and the Public Employees' Retirement System accepts no responsibility for the validity of the statement or the contents thereof.

§554.6. Ballot Counting. 

Signed ballot envelopes shall not be opened until the deadline for final receipt of valid ballots. On the date specified in the Notice of Election at the location designated by PERS, the sealed signed envelopes containing the valid ballots shall be opened and canvassed publicly by the System. The candidate having the highest number of votes, or the winning lot as drawn by the Secretary of State in case of a tie vote, if there are only two candidates for the same office, or the single candidate as provided in section 554.5(b), shall be certified by the Secretary of State as having been elected. If there are more than two candidates for the same office, voters will be instructed to rank candidates in order of preference. The candidate who receives the fewest number of first choices from the voters is to be eliminated in the first count and all his or her ballots are to be redistributed to the voters' second choice. Each successive count eliminates the next lowest polling candidate, transferring his or her ballots, until one candidate achieves a majority. That candidate shall then be certified by the Secretary of State as having been elected.

§554.9. Protest of an Election.    

  1. The filing of a protest shall not delay the seating of an elected Board member. Such elected Board member shall take office, in accordance with the published election schedule, subject to the potential termination of such Board membership as a result of the protest.
  2. Any party who is an active or retired member of PERS, eligible to vote in the applicable Board member election, may protest an election. A protest shall be filed with the Election Coordinator at the Sacramento Office of PERS Attorney General within ten working days following the mailing of the certified election results. A protest shall be in writing, shall be identified using the word "protest", shall specify the election, and shall state the grounds of the protest and suggested remedy.
  3. Upon receipt of a valid and timely protest, the Board's General Counsel Attorney General shall determine whether the protest will be resolved by the General Counsel Attorney General or by a Protest Panel designated by the General Counsel Attorney General. In either event, the decision of the General Counsel Attorney General or Protest Panel shall be final. If a Protest Panel is designated, it shall be comprised of no less than three people, all of whom are neither employed by PERS nor otherwise interested in the outcome of the election that is the subject of the protest. For purpose of the foregoing sentence only, membership in PERS does not, by itself, constitute an "interest in the outcome of the election." The General Counsel Attorney General or Protest Panel shall consider written and/or oral arguments submitted by the protestor and any other interested party, including the Board's staff. Other procedures for receiving and considering arguments and factual allegations shall be determined by the General Counsel Attorney General, or Protest Panel as applicable, in their sole discretion. A protest shall only be granted upon a finding that Board-adopted election procedures were not substantially followed and that, without this lack of substantial compliance, the election outcome would may have been different.

Rationale for suggested amendments.

§554.4. Candidate Statements.

a brief factual, biographical description of no more than 150 200 words of the candidate's education and background…

Allowing candidates 200 words would conform to California Election Code, section 13307. This would provide members with additional information about the candidates, resulting in a more informed electorate and better alignment of the values of members and their elected representatives.

Once filed, statements may not be changed or withdrawn at the request of candidates except by the Election Coordinator.

Until 1998 the current language was interpreted by CalPERS to prohibit changes made by candidates to improve their statements. During the 1997 election cycle, for example, CalPERS staff sent letters to at least three candidates denying their requests to make changes to their statements. (attachments 7, 8 and 9) The letter to Marion Isom (attachment 8) is illustrative.

Since the changes you submitted were editorial in nature, we will not be making the changes you requested…we do not provide any special privileges nor accommodation for any person, including our Board incumbents. We denied requests from other candidates for editorial changes, and to be consistent, we must deny your request for editorial changes.

Note the minor changes Ms. Zachery was denied (attachment 9). Among other changes, she requested that a hyphen (-) replace a comma (,) and that 5.3 years replace 5+ years. Both requests were denied.

However, in 1998 when an incumbent submitted extensive editorial changes to his candidate statement (see attachment 10) after the submission deadline in 1998, his statement was changed.

The style of his revised statement moved from passive voice to active voice. He opened with a rebuttal to my own statement (which became all the more effective, since most readers would assume he had no prior knowledge of my statement). He then stated that he had authored ethics policies on gifts and campaign contributions. Had I had the same opportunity to read his statement and change my own, I might have pointed out the irony that both "ethics" policies were illegally adopted and one had already been thrown out by the court. The incumbent also indicated he was endorsed by the California State Employees Association, something he did not mention before, perhaps because he received documentation of their endorsement after submitting his statement. In addition, he made formatting changes and other revisions to make his statement much more readable.

The rationale for accepting the changes was that instructions to candidates contained some "ambiguity." Actually, the instructions were less ambiguous than similar instructions in 1997. Compare attachments 11 and 12. Note the 1998 instructions emphasized that only changes due to "errors or omissions" would be made. "No other changes will be made in the text."

This was commonly understood by other candidates to mean errors or omissions by CalPERS in transcribing the statements, not errors or omissions by the candidates. If "errors and omissions" of the candidates were to be corrected, the sentence which followed, regarding "no other changes," would not have been included. However, the incumbent and Legal Counsel ignored these common interpretations. Additionally, the incumbent's changes were allowed "because staff's general direction is to support candidate free speech (restricting only factual inaccuracies)…" (see attachment 13)

In her declaration to the Protest Panel which she subsequently appointed, Legal Counsel further elaborated on the her decision to allow the incumbent's changes in violation of the existing regulations. "I made my determination in the context of the overarching principles that the First Amendment applies to political speech, and that the purpose of the candidate statements is to permit the voters to make an informed choice." (attachment 14, top of page 5)

It is ironic that in 1997 candidates were denied the right to make minor changes in punctuation but in 1998 regulations were waived for an incumbent so that his First Amendment rights were not violated. Now CalPERS argues that prohibiting candidates from expressing their opinions and the record of their opponent is not a violation First Amendment rights. (attachment 1, page 2) Clearly the regulations are being used to favor incumbents over challengers.

The proposed amendment would put an end to this pattern of favoritism by clarifying that candidate statements will not be changed at the initiation of candidates themselves. Errors and omissions by candidates would be required to stand and would provide additional information to voters concerning the candidate's attention to detail or lack thereof. Untruthful statements would still be subject to verification.

The Election Coordinator may request the candidate to verify the truthfulness of any remarks, which are presented as factual statements.

This amendment would provide clarification that remarks presented as factual are subject to verification, not the opinions of candidates. 

§554.6. Ballot Counting. 

In 1993, 96 candidates ran for two Board positions. One of the winning candidates received less 5.5% of the vote. (see attachment 15) We certainly can't say this was the candidate most voters wanted. Theoretically, a candidate in such a two position race may need only slightly more than 1% of the vote, if voting were more evenly distributed. CalPERS elections are expensive so holding a second, runoff election, may not make the best use of our retirement funds.

The proposed amendments would institute instant runoff voting (IRV) which expands the range of voter choice, eliminates the "spoiler" impact of long-shot candidacies and is a practical solution which avoids the expense of runoff elections. IRV is equivalent to a series of runoff elections conducted by allowing voters to rank the candidates in order of preference, 1, 2, 3, and so on. The candidate who receives the fewest number of first choices from the voters would be eliminated in the first count and all his or her ballots would be redistributed to the voters' second choice. Each successive count eliminates the next lowest polling candidate, transferring his or her ballots, until one candidate achieves a majority.

§554.9. Protest of an Election.    

The majority of amendments suggested to this section are designed to move decision-making authority for reviewing protests from the Board's General Counsel to the Attorney General. As was mentioned in the updated final statement of reasons for the 1998 rulemaking on candidate statements, "in practice, the Election Coordinator seeks the review and approval of other CalPERS staff (e.g., in the Legal Office) before taking final action to revise an election document…" (attachment 16)

The Board's General Counsel obviously has a conflict of interest, since they make decisions on the legality of issues that arise during the election. Such conflicts are even greater when election protests involve incumbents. For example, in 1998 the incumbent sat on the Executive Performance and Compensation Committee responsible for recommending the compensation to be paid key personnel such as that of General Counsel. Moving responsibility for deciding protests to the Attorney General would allow CalPERS to contract with an office that is more likely to remain impartial to manipulation by incumbents.

It should also be noted that the updated final statement of reasons for the 1998 rulemaking (attachment 16) also explains the necessity for excluding misleading remarks as possibly leading "the voting member to come to an inaccurate conclusion or misjudgment." Yet, the current initial statement of reasons appears to argue that misleading remarks are necessary "to apply the policy that candidate statements should be a brief, biographical description of the candidate's education and background."

Perhaps members of the CalPERS Board voting for the current amendments believe it is impossible for candidates to describe their education and background without including misleading remarks. I don't see how this kind of logic, or lack of it, can meet the necessity standard of Government Code, section 11349. Section 17(b), Article XVI, of the California Constitution mandates that "a retirement board's duty to its participants and their beneficiaries shall take precedence over any other duty. How can the exclusion of opinions of general interest to the membership, the exclusion of important information regarding their opponents, and inclusion of misleading remarks be in the interest of members?

A protest shall only be granted upon a finding that Board-adopted election procedures were not substantially followed and that, without this lack of substantial compliance, the election outcome would may have been different.

In the 1998 election protest, the protest panel found that although "acceptance and distribution of Mr. Crist's July 20 revised statement arguably was a technical violation of Section 554.4's ban on permitting a candidate's statement to be 'changed,' it was not a failure to 'substantially' follow that regulation…and (was) unlikely to be deemed significant by more than a handful of voters, even assuming the candidate statements were widely read." (pp. 8-9, attachment 17)

The protest panel's estimate that the rule violation would have likely resulted in five or less people changing their votes had no basis in fact but was a matter of sheer speculation, as was their implication that candidate statements may not be widely read.

When election procedures are not followed it may be possible to verify that the election outcome would not have changed. For example, if ballots did not get delivered to certain zip codes, one could count the number of members who did not get their ballots, add this number to the second place candidate and verify that even if all ballots had been cast in favor of the protestor they still could not have won. In other cases, however, it will not be possible to verify that the outcome would not have changed. For example, if staff intentionally edited candidate statements to favor one over the other. Under such circumstances there would be no way of knowing the impact on the election. In such cases, where it is clear that election procedures are not substantially followed, the election results should be thrown out.

I will submit additional comments at the hearing. If you have any questions, please contact me at 916-452-5338 (home), (916) 327-1194 (work), e-mail: jm@perswatch.net or at the address above.

Sincerely,

James McRitchie

 

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