WASHINGTON, Jan. 10 (UPI) -- California Gov. Gray Davis, a Democrat, faces as host of problems as he begins his second four-year term. One of his greatest challenges is the need to reform the California Public Employees'Retirement System, something that has, to date, received scant national attention.
CalPERS is the nation's largest pension fund. In keeping with what Smart Money described as "the nation's most formidable force in shareholder activism," it has a reputation of being an international corporate governance watchdog, using its weighty economic clout to impose its will on large and small companies alike.
Yet due to what some analysts say is the the Davis administration's inattentiveness during his first term, CalPERS retirees may now be the ones needing a watchdog -- to oversee the governance of the pension fund.
Cronyism and ethical shenanigans are just the beginning. Senior executives, including the CEO, the investment committee chairman, the deputy executive officer, the general counsel, two chief investment officers have, since 2000, left their positions in the wake of stunning losses.
How big are they? Close to $40 billion at last count. The fund has dropped from a peak of $176 billion to $135.5 billion in the last three years.
In the most recent fiscal year that ended June 30th, the fund posted a nearly 6 percent loss. Unless some reforms occur soon, the hemorrhaging will continue.
How did things get so bad so quickly?
It seems that the leadership of CalPERS came to believe that its role as an "international" leader for "change" took priority over every day pedestrian matters like keeping up with the books and seeing to it that retirees got a decent return on their investments.
According to the Washington Post, the fund's managers knew -- but did nothing about -- Enron
Corporation Chief Financial Officer Andrew Fastow's self- dealing partnerships.
CalPERS also lost some $850 million from WorldCom's bankruptcy. When the stock fell below $10, rather than divest according to a generally accepted pension fund management rule, they continued holding shares up to complete insolvency at WorldCom.
Amazingly, CalPERS never even placed the company on its vaunted corporate governance watch list.
Further, a recent news report revealed five board members personally owned stock in firms held by the pension fund. This practice, which gives these investors the ability to profit from advanced knowledge of the fund's investments decisions, is banned in states like Kansas and Colorado.
While its investment performance tanked, the New York Times reports the board continued to push the social and political criteria of investments that had more to do with the political leanings of the trustees than any plan for a larger return.
Worse, the board was indifferent to actions that potentially would constitute a conflict of interest.
Still, cronyism is perhaps the largest-and most disturbing-cloud hovering over CalPERS. According to Business Week magazine, board members Philip Angelides and Kathleen Connell, not to mention Gov. Davis, all received campaign contributions from LA billionaire Ronald Burkle. And CalPERS invested $760 million in Burkle's Yucaipa Company.
A Bloomberg News report indicated that in the spring of last year, the board directed that $100 million be invested in Premier Pacific Vineyards. Coincidentally the co-CEO of Premier Pacific happened to be a major fundraiser for Grey Davis -- who under California law appoints three members to the CalPERS board.
It appears that some pretty sly foxes may have been left in charge of the henhouse.
Proving that hypocrisy may be the sincerest form of flattery, the claims that the CalPERS fund have lodged against companies they've target have started to look strikingly like the very actions that the fund itself has engaged in: Being accused of having a "rubber stamp board," engaging in conflicts of interests, and practicing "closed circuit cronyism" are just some of the charges levied against the board from a growing chorus.
In what can be viewed as a sign of good faith, CalPERS did agree recently to disclose how the pension fund's private investments were performing-but only after the San Jose Mercury News filed a lawsuit. Perhaps a few more lawsuits are in order.
Governor Davis should make clear, serious reform of the way CalPERS does business a top priority for his second term. Current and future retirees deserve nothing less.
-- Horace Cooper is a senior fellow at the Centre for New Black Leadership
-- "Outside View" commentaries are written for UPI by outside writers who specialize in a variety of important global issues.
