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Analysis
Tables turn for activist public pension funds

By Tom Petruno
Los Angeles Times

Sean Harrigan, ousted president of Calpers

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Public-employee pension funds had corporate America on the run for most of 2002 and 2003. As leading activist investors, they were among the most vocal large shareholders demanding business clean up its act in the post-Enron world.

But this year, it's the pension funds that find themselves on the defensive. Corporate lobbying groups are pushing hard to halt what they consider to be the funds' unwarranted meddling in business affairs.

More worrisome to the pension giants is a legislative movement that threatens their very existence, by proposing to bar new workers from enrolling in public retirement funds.

Critics say the funds' investments are unlikely to earn enough to cover the benefits promised to public workers. That could leave taxpayers on the hook, big-time.

A number of states have moved to address this risk in recent years by offering workers the option to manage their own pension money rather than participate in a state-run fund.

The debate now moves to California: Yesterday, Republican Assemblyman Keith Richman introduced a constitutional amendment that would shut the door on the state's public-pension funds beginning in 2007.

Starting then, new workers could enroll only in so-called defined-contribution plans, similar to company 401(k) savings programs.

Richman's amendment is hardly a slam-dunk. But pension funds are taking it very seriously: On Friday several public-employee groups, including state firefighters and sheriffs, gave the news media their "perspective on the California pension debate."

The call capped a week in which Sean Harrigan, president of the $177 billion California Public Employees' Retirement System (Calpers), was unseated.
 
As the leader of the nation's biggest public-pension fund, Harrigan became a champion of shareholder rights and one of the loudest critics of what he considered to be anti-investor conduct by corporate managers.

His business critics viewed Harrigan, a union officer, as out of control, and said he epitomized a growing abuse of power by many pension officials in their efforts to mold corporate behavior.

David Hirschmann, senior vice president at the U.S. Chamber of Commerce, described Calpers' policies under Harrigan as "a labor agenda in corporate-governance clothing."

Gleeful as they were over Harrigan's ouster, the chamber, the Business Roundtable and the state Republican Party insisted they had not lobbied the state personnel board to choose a rival as its Calpers representative.

Although it's all making for great drama at the moment, it may be a side skirmish in a far bigger battle.

Richman contends California and its counties and cities can't afford to maintain their traditional pension systems, which promise benefits as long as public workers live, regardless of what they've paid into the systems.

Many such public plans nationwide are underfunded, meaning they don't currently have the assets needed to pay out benefits in the long term. A report in Pensions & Investments magazine last month estimated the average major public plan nationwide was just 88 percent funded.

"I think it's critical to stop the hemorrhaging," said Richman, who is considered a likely candidate for California state treasurer in 2006.

Forcing new state workers into a 401(k)-like savings plan would leave them responsible for their retirement nest eggs — the same as many private-sector workers are. If they saved enough and invested wisely, it's conceivable they could get better retirement benefits than what the state plan would pay.

But those are big "ifs." Many people don't invest retirement dollars well.

Worse, giving workers total control of their pension money means they have the ability to spend it before retirement.

Whether Richman is correct that governments can no longer afford open-ended pension plans, may depend largely on the stock and bond markets and the returns they generate in the next decade.

Calpers, in building its assumptions about what benefits it can pay, assumes its portfolio overall will earn 7.75 percent a year.

That looks modest compared with the double-digit annualized stock and bond returns of the last two decades. But what if the best the markets can do over the next decade is returns in the mid- to low single digits?

Despite the stock market's rebound since late 2002, Calpers' annualized rate of return in the five years through Aug. 31 was a mere 3.3 percent, less than half its long-term earnings assumption.

In their conference call Friday, state and local officials said public funds' under-funding problem could be addressed without terminating the plans for new workers. John Gioia, a Contra Costa County supervisor, described Richman's proposal as an overreaction — "using a cleaver instead of a scalpel" to fix what's wrong.

Gioia and other proponents of traditional pensions say the public sector needs the plans to lure well-qualified people who might otherwise choose higher-paying jobs in the private sector.

The question is whether that would resonate with the electorate if they were asked to vote up or down on public pensions in a ballot proposition.

For activist funds such as Calpers, there is a certain irony in this budding debate over their future.

Calpers has said its main focus on corporate governance in 2005 would be to address executive pay levels that it believes can't be justified.

The fund's critics may now attack in a similar fashion, arguing that public-pension benefits can no longer be justified.