From: James McRitchie <jm@corpgov.net>
Subject: letter to the editor
Cc: SHemmeri@crain.com
Date: Mon, 2 Mar 1998 19:02:01 -0800
Steve Hemmerick is right, public pension funds should stop accepting "freebies." He also points out, correctly, that CalPERS shouldn't be expected to earn more than the S&P 500. However, that cheap shot by the LA Times shouldn't obscure what is going on at CalPERS.
"There has been no evidence or even suspicion of corruption by any CalPERS fiduciaries because of political contributions or gifts," President William Crist announced in a recent press release. "Nevertheless, we have taken the extreme measure of banning political contributions and requiring the fullest disclosure possible (of gifts)." Another board member was quoted saying, "the new policies elevate CalPERS from the middle of the pack to the vanguard of ethical conduct and public disclosure in government."
It's ironic that CalPERS has been such an effective leader in the area of corporate governance, yet its own board seems to deviate so clearly from the high principles of independence and absence of conflicts of interest they seek in others. The recent action to ban political contributions and report gifts were only taken after CalPERS came under siege from the press, FBI, and Legislature. Deals involving relatives and former board members, the personal bankruptcies of the chairman of the investment committee, gifts, high living, extensive travel, campaign contributions funded by those doing business with CalPERS -- these and other disclosures should not be discounted.
Do the recent measures adopted by CalPERS really put them in the ethical vanguard? I doubt it. First, California Government Code, section 11340.5(a) provides that policies adopted by agencies, such as CalPERS, aren't enforceable unless adopted as regulations. The CalPERS policies were not.
Second, a cynic might believe the majority of the board imposed a solution to appease critics, but which has no real impact on them. Treasurer Matt Fong, for example, is running for U.S. Senate. Under the new CalPERS policy, he can't raise any campaign contributions from those who do business with CalPERS. His opponents, however, are under no such restriction.
The campaign contribution language impacts only the State Treasurer and the State Controller. Board members elected by CalPERS members traditionally have modest campaigns, funded by friends and employee organizations. Other board members are appointed by elected officials who do not come under the new restrictions. So, the only new policy which impacts most board members is the requirement to report gifts.
But are the Gifts Legal? Section 19990(f) of the California Government Code prohibits state officers or employees from receiving any gift from those they do business with if "it reasonably could be substantiated that the gift was intended to influence the officer or employee in his or her official duties." Case law shows that an Alcohol Beverage Control official was disciplined for accepting a free drink from a bartender; CalPERS officials routinely accept gifts of much higher value, such as expensive junkets. Wouldn't most such gifts be "intended to influence?"
It is not clear what authority has allowed CalPERS board members and staff to accept gifts. Now, the new policy says the System's "fiduciaries" must report them. It will be interesting to see who reports the next first class trip with all expenses paid by a CalPERS contractor. The new policy may make it easier to collect the evidence and show the conflicts of interest that could easily be avoided if CalPERS took the good advise offered by your editorial.
James McRitchie, Editor
Corporate Governance
URL: http://www.corpgov.net
The following was subsequently published as a letter to the editor of Pension & Investments on May 4th:
I would like to correct an inaccuracy contained in a letter to the editor, published under the byline of James McRitchie, which appeared in the March 23 issue.
Mr. McRitchie wrote that "The campaign contribution language (which ban political contributions by CalPERS contractors) impacts only the state treasurer and the state controller."
This is an error. The policy adopted by the board bans any board member, candidate for the board of administration, senior staff, or other fiduciary from accepting CalPERS contributions for any office from CalPERS contracotrs or potential contractors of CalPERS. The policy addtionally requires that contractors or those seeking to do business with CalPERS must report any solicitation attempts by any board member, candidate for board office, senior manager, or fiduciary.
A summary of the board's ethics policies can be obtained from the Office of Public Affairs, 400 P St, Sacramento, CA 95818.
Patricia K. Macht
Chief, Office of Public Affaires
California Public Employees' Retirement System
Sacramento, Calif
McRitchie responds:
Of course, Ms. Macht's clarification published on May 4, 1998 is technically correct, the policy adopted by the board of CalPERS does apply to more than just the state treasurer and state controller.
However, the majority of the members of the CalPERS board do not raise campaign funds from contractors or those seeking to do business with CalPERS in their efforts to get on the board, since they are either appointed or are elected from among the membership. Traditionally, those elected by CalPERS members have conducted very low key campaigns. Their campaign contributions, if any, come primarily from fellow CalPERS members. The largest contributions are probably from employee unions in the form of in-kind services.
I stand by the thrust of my original letter; "a cynic might believe the majority of the board imposed a solution to appease critics, but which has no real impact on them." Instead of banning gifts, which many board members have routinely accepted from those doing business with CalPERS, the board chose to require disclosure. The only ban embraced was on political contributions; this action has little or no real impact on most board members.
Contact: 
jm@perswatch.net