Archive for April, 2011

Will pension funds unite to invest in job creation?

April 28, 2011

Using their massive investment funds to create jobs might be a way for embattled public pension systems to aid the struggling California economy, while also generating some sorely needed good publicity.

Gov. Brown may propose a job-creating pension investment program, state Treasurer Bill Lockyer’s representative, Steve Cooney, told the CalPERS board this month.

Cooney said after the meeting the treasurer’s office has not been told that Brown will make the proposal. He said Brown expressed interest in harnessing pension investments near the end of his last term, and the current situation points in that direction.

“I think it won’t be long before we are going to be asked by this governor, who wants to figure out how we can do a better job delivering state services to business and to increase the impact the state actually has on economic development,” Cooney told the board.

He said the California Public Employees Retirement System should designate a California investment coordinator to speak to government, business and labor “to figure out what an appropriate role may be for public pension funds, particularly for CalPERS.”

For example, Cooney said, pension funds may be able to “move the needle” in infrastructure. If conventional financing is lacking, pension funds could back renewable energy and transmission lines, getting a guaranteed return through regulation.

Cooney said CalPERS, the nation’s largest public pension fund, should not “go it alone.” Among the state’s 85 public pension systems is the nation’s second largest, the California State Teachers Retirement System.

“I think we should be talking to the other pension funds,” Cooney said. “They are all going to get talked to pretty soon, anyway. We are all in the same boat in terms of the public perception of what we are here for.”

As never before, public pensions are under fire. Their costs, which can’t be cut, are going up as state and local governments struggle with deep budget cuts during a weak economy.

Investment earnings expected to pay for generous pension increases became massive losses during the stock market crash, requiring taxpayer money to help cover the shortfall.

Pension costs said to be “unsustainable” are being reduced by some labor contracts. But savings from lower pensions for new hires (pensions promised current workers can’t be cut) and higher employee contributions are slow and may fall short.

Reports of padded government pensions, a few paying retirees more than they earned on the job, and long lists of the “$100,000 club” are appearing at a time of dwindling retirement security for workers in the private sector.

Polls show voters favor cutting public pensions. Brown and Republican legislators, whose votes are needed to place a tax extension on the ballot, have been talking about cost-cutting pension reform.

A long-term death blow for public pensions, a proposal to switch new hires to 401(k)-style individual investment plans, may be placed before San Diego voters next year — perhaps voters statewide, depending on a reform group’s initiative decision.

Times are particularly tough for CalPERS, which has aspired to be an industry leader. A former board member and a former chief executive are in a bribery-related investment scandal, hit with a state civil lawsuit and facing possible criminal charges.

CalPERS sponsored a major benefit increase for state workers, SB 400 in 1999, that legislators were wrongly told would be paid for by investment earnings. The bill is said to have touched off a statewide round of unsustainable pension increases.

CalPERS investments have been hurt by well-publicized real estate blunders and other problems. Among public pensions with more than $10 billion in assets, CalPERS five-year earnings rank in the bottom 10 percent, a Wilshire report said last month.

In response, the CalPERS board, led by Chairman Rob Feckner, has brought in new top staff and investment management and taken other corrective steps.

It was CalPERS’ own probe, launched after a pension scandal in New York, that revealed that former board member Al Villalobos was paid more than $50 million by firms receiving CalPERS investments.

A law firm hired by CalPERS found that former chief executive Fred Buenrostro pressured investment staff to give money to Villalobos clients. CalPERS has made more than a dozen internal reforms recommended by the law firm.

At a forum this week, several candidates running for a CalPERS board seat abruptly vacated by Kurato Shimada, who once worked for Villalobos, mentioned the need to counter media “scare tactics” and negative publicity about public pensions.

Demonstrating that public pensions are not just a burden for taxpayers is one of the past attempts at positive publicity.

A think tank-like organization formed by CalPERS and CalSTRS and other public pension funds issued a report two years ago on the economic importance of monthly pension checks.

Public pensions in California paid $23.5 billion in benefits to nearly one million retirees in fiscal 2005-06, said the National Institute on Retirement Security, which when spent had a “multiplier effect” producing a total economic impact of $34.5 billion.

The institute said monthly pension checks can be an “automatic stabilizer” in a down economy. Retirees with pensions can continue to spend, while retirees relying on shrinking 401(k) investments or Individual Retirement Accounts may cut back.

Using pension investments to improve the California economy was proposed by former state Treasurer Phil Angelides in 2000. The “Double Bottom Line” was aimed at getting solid investment returns while promoting economic growth in low-income areas.

The Angelides proposal cited two successful CalPERS investment programs for California — a $525 million housing program launched in 1992 when financing was scarce and a $350 million venture capital program for small firms in 1998.

An update of California investments given to the CalPERS board this month mentions two private equity programs — the $475 million California Initiative launched in 2001 and $500 million to the Golden State Investment Fund in 2006.

The update also listed about $17 billion in CalPERS investments in California as of last June 30. It’s the California share of a diversified portfolio of stocks, bonds, private equity, real estate, infrastructure and other investments.

Concentrating investments in one area could violate sound practice, not to mention the legal “fiduciary” obligation of the CalPERS board to protect member benefits. Uniting with other pension funds would amplify modest increases.

“We are going to get asked in the next few months,” Cooney told the board, “and I hope we are prepared in some strategic way to begin to answer those questions.”

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Posted 28 Apr 11

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