Reform package would change makeup of board

by Brian Leubitz

Pension reform is always a thorny issue, and when you just defeated the Assemblyman who was supposed to be the chair of the public employees retirement committee, the issue might become a little more salient. And so, it shouldn’t come as a huge surprise that Asm. Marc Levine (D-San Rafael) is spending some of his time on the issue. In this case, he is putting forward a bill on the makeup of the CalPERS board, primarily drawn from Gov. Brown’s 14 point plan he released back in 2011:

Assemblyman Marc Levine, D-San Rafael, an upset victor last fall in a new election process, has introduced a bill containing Gov. Brown’s stalled proposal to restructure the CalPERS board, adding financial expertise and loosening labor control.

The proposal to change the board, which needs voter approval because of a labor-backed initiative in 1992, would double the number of gubernatorial appointees to six, matching the number of labor representatives. (CalPensions)

The bill, as currently proposed, seems unlikely to pass without some discussions with stakeholders, particularly labor. For his part, Gov. Brown has been forced to put aside the pension issue as he has been fighting for Prop 30 and other budget priorities. However, even with its doubtful future status, whether Levine’s bill is a prompt for additional conversation on the issue is an open question.

Relatively minor investment change, with big symbolism, made at the behest of Treasurer Bill Lockyer

by Brian Leubitz

With Newtown still less than two months ago, and the state and federal government still working on how to reduce gun violence, Treasurer Bill Lockyer has a simple idea for CalPERS: Ditch the manufacturers. Back in December, he called on both CalPERS and CalSTRS to sell their investments in major manufacturers. And both had some in their portfolios.

First, CalSTRS decided to drop their $2.9mil in investments in Smith&Wesson and Sturm Ruger, made through index funds, last month. Now, CalPERS has joined them in the decision.

The California Public Employees’ Retirement System’s board voted to divest its $5 million in shares of Smith & Wesson Holding Corp. and Sturm Ruger & Co. because the companies make weapons banned in the state.

California Treasurer Bill Lockyer, a member of the fund’s board, proposed that the state’s public pensions sell the shares after the Dec. 14 killings of 20 children and six adults at Sandy Hook Elementary School in Newtown, Connecticut. The move has been mirrored by public funds across the U.S.(Bloomberg)

The sales won’t do much to the stocks of either company, as fear continues to swell their sales figures. However, perhaps the statement the stock sales make will last longer than the upsurge in gun sales as we work towards a safer America.

And no, it’s not their fear of seeing their heads on a stick. And don’t believe that the ransom list had anything to do with their real issues. Restoring 23 million in cuts to rural state fairs? Please.

Republicans never wanted to agree to pension reform because it was the only single issue where the public agrees with them.

If Republicans were at all serious abut solving problems, they would have jumped at the deal that Jerry Brown had negotiated.

There was a  significant package of reforms agreed to by the Brown Administration that would have made a huge dent in California’s pensions problem. And let’s make it clear that there is no crisis but there are some serious problems, particularly with the unsustainable costs of public safety pensions for local governments.

The package that Brown had agreed to would have made major progress towards reducing long-term pension costs and bringing some of the worst-hit pension funds into balance quickly. Judging from the Republicans’ release of their ransom demands, here are the pension areas where there was agreement;

o No purchases of Air-Time (Admin: OK)

o Highest 5-year average. (Admin: Highest 3 year average, with CalSTRS exception for 25 years of service)

o Base pay [salary only – no vacation, overtime, car allowance, uniform allowance, etc.] used for determining final retirement benefits. (Admin: Base benefits on regular, recurring pay)

o No Double-Dipping /Revolving Door (Admin: Allow retired annuitants (cost effective for state), but forbid drawing a full-time salary and a pension from the same employer).

o Cap Final pension amount (Admin: Ok w/Cap of $106K w/COLA – same as Social Security – and additional 12.4% for non-SS employees.)

The biggest of these, if applied statewide, would be the use of regular recurring pay without overtime in calculating pensions rather than adding in overtime. A pension cap would also save real money, and move higher-paid employees into a hybrid plan if they wanted to maintain their income in retirement. Rank and file workers and teachers are protected. Overly generous benefits for public safety come back down.

So why wouldn’t Republicans agree to fix the biggest problem?

The answer is very easy. Anger about overly generous public employee pensions is the only single issue where the Republicans’ messaging polls well.

Without pensions as a rallying cry, Republicans are left with a series of positions that are wildly unpopular with Californians;

   Gutting environmental regulation and increasing off shore drilling

   Bigger tax breaks for the largest corporations at the expense of small business

   Massive cut backs to public education and public safety

   Maintaining a judicial-prison-industrial complex that most Californians want to cut

   Immigrant bashing

Republicans could have eliminated the most obvious form of waste and corruption, redevelopment agencies and enterprise zones. While both of these have supporters, and occasionally have great results, they are tremendously inefficient and frequently just result in a race between cities as to who can come up with the worst deal for taxpayers as they scramble to lure big box retailers, auto malls, the hotels near convention centers, and businesses located in nearby cities.

The savings that local governments would have had on pension reforms would have more than made up for any of their losses from new pet redevelopment projects.

Cynical Republican politicians have never wanted to eliminate waste or corruption or reform pensions. They only want to be able to win enough elections to exercise a minority veto power over what most Californians want.

In the past year, we’ve gone from crisis to crisis to crisis. Never really producing a clear picture for the general public of the direction of the state.  Truth be told, most of the people who are running the show in Sacramento are being tossed by these swells as well.  It’s not really their fault, it’s just a tough situation into which they’ve been elected.  Term limits give some really bad incentives to kick the can down the road, and the can is looking pretty beat up these days.

Of course, if you are attempting to shock doctrine a nominally progressive state out of its progressive views, well, hell, this seems like a great pattern. And time after time, it has succeeded. Arnold plays the hesitant soldier, just doing what he has to do. Sure, he says, it’s terrible that we have to destroy the master plan, the social safety net, or whatever it is at the time, but we have to “live within our means.” And he says that platitude, over and over, until the Democrats in the legislature relent, and Arnold and his corporatist friends take one more spoil of what was once a proud state.

And so it is with the pension issue. Until this point, debate has been pretty exclusively along party lines. Arnold says the state employees are costing us too much money for their retirement plans, that the level of spending is unsustainnable. Recent news out of CalPERS seems to confirm that:

CalPERS says that when it purchased $1.3 billion worth of special securities sold only to large investors like pension funds, all that it knew about the complex financial instruments is that they had top ratings from Moody’s, Standard & Poor’s and Fitch.

Now CalPERS, which may have lost $1 billion on the deal, has belatedly learned that there were subprime mortgages and other risky assets in the “structured investment vehicles” (SIVs) purchased in 2006 from three hedge funds, two of them based in London.(CalPensions 11/25/09)

Unfortunately, that is hardly the only story of troubles at CalPERS in the news. You have stories of how they make deals, and of ugly-looking court settlements. And then you have the possibility of rising contribution requirements:

The 1.6 million-member public pension fund, the largest in the country, is expected to require additional money to help it recover from recession-fueled investment losses. But just how much and when have yet to be determined.

The 13-member CalPERS board will make the decision in May for the 2010-11 fiscal year that begins July 1. CalPERS has signaled that the employer contribution likely will not rise for that year. But increases in 2011 are expected.  State staffers familiar with the issue believe it could be in the range of $200 million to $300 million by the middle of 2011. CalPERS did not comment on the estimate. (CapWeekly)

Of course the solution is either to privatize (!) or simply slash the defined benefit into a defined contribution or something to that effect. Or so say the right-wing corporatists looking at a big pile of money to plunder.

Look, state employees take up a relatively small portion of the budget, and they do so frequently at a short-term cost.  There are no huge salaries (save for a few UC doctors, executives, and some corrections doctors), no big bonuses, but they are promised a consistent pension at retirement. While during the current economy filling jobs isn’t all that hard, that won’t always be true. Shooting for the lowest common denominator nets what you would expect.

If we are going to keep messing with state employee compensation, let’s take a holistic approach, instead of reeling from one mess to another. We can’t keep changing the rules of the road, one paving stone at a time. It’s not a viable budget solution, nor is it fair to our public sevants.

CalPERS, one of the leading advocates for good corporate governance over the past few years, is facing some questions of its own governance.  A brewing scandal of sorts is brewing with so-called placement agents. These are basically middlemen who help CalPERS find investments.  Under the old system, they got rather large chunks of money as they were paid on a commission system.  Add into that the agents weren’t required to disclose much of anything, and you had a recipe for some political headaches.  The CalPERS board is now trying to find some political ibuprofen:

Board members at California’s huge state pension fund offered support Thursday for a plan to register as lobbyists the controversial middlemen hired by private investment funds to help get lucrative business from public pension plans.

Reacting to continuing questions about possible influence peddling by these representatives for outside investment managers, several members said they backed the idea proposed by the board president of the California Public Employees’ Retirement System, known as CalPERS.

No opposition was expressed, and board President Rob Feckner directed staff members to draft legislation that would make the middlemen, known as placement agents, subject to the same rules as the professional lobbyists who attempt to influence the Legislature, governor’s office and state agencies. The CalPERS board is expected to formally endorse the plan at its December meeting. (LAT)

Given that we already have a system for lobbyists, implementation should be fairly straightforward.  The question is whether this really goes far enough in actually regulating how these middle men do business, and whether we need them at all. After all CalPERS has its own staff of investment people, and given solid information could probably do this a lot cheaper than bringing outsiders.

As it stands now, this seems to be the track most likely to make it into law. And at the very least, it is a good start.

People are justifiably worried that credit ratings agencies like Moody’s, Fitch and S&P have lowered California’s credit ratings to near-junk bond status.  The nature of the way we pay our bills means that we will eventually have to access bond markets to borrow, and these low ratings will dramatically increase the cost of that borrowing.  I’ve said often that the risk of default on any bond issue, as a Constitutional matter, is infinitesimal, yet in this case, the rating agencies are being overly conservative and reflecting the fears of Wall Street.

And yet the rating agencies are not independent actors.  They are owned by banks who issue the securities they rate, and throughout the financial meltdown, they continued – almost until the end – to rate mortgage-backed securities filled with subprime loans at the highest quality, facilitating the buying frenzy.  In fact, the rating agencies structured many of the deals in order to ensure high ratings, intervening in the market for those securities instead of dispassionately assessing them.  Now CalPERS, the largest public pension fund in the country, which has been hammered by losses in the stock market, is suing those rating agencies for their gross negligence.

The lawsuit blames the three big Wall Street credit rating agencies – Moody’s Investors Service, Standard & Poor’s and Fitch Ratings – for effectively luring CalPERS into a series of disastrous 2006 deals by giving the investments “wildly inaccurate and unreasonably high” grades.

The investments have gone bust at a cost of “perhaps more than $1 billion,” said the California Public Employees’ Retirement System in the suit, filed last Thursday in San Francisco Superior Court.

The losses represent a small portion of the roughly $60 billion CalPERS has lost in the past year due to declines in its stocks, real estate and other holdings. The losses are so steep that CalPERS has served notice that it will demand higher contributions from the state and the local governments that rely on the fund for pensions.

As a large industry actor, CalPERS has some ability to move policy in the financial world.  And they are hitting one of the biggest targets here.  Barry Ritholtz explains further:

Now, here comes the fun part: Calpers doesn’t give a rat’s ass about the money. Sure, the financial instruments at hand (Cheyne Finance, Stanfield Victoria Funding and Sigma Finance) have  defaulted on their payment obligations. The losses to Calpers are – $1 billion.

But that’s not what’s going on here: These Left Coasters want their pound of flesh. They don’t care for the Ratings Agency folks, and consider them a blight on the investment landscape.

The goal of the litigation (as I see it) isn’t to make the rating agencies pay a financial penalty; rather, it is to publicly try them just as the regulatory rules are being rewritten. I also predict that CALPERS is going to attempt to not just win, but humiliate these agencies, call them out in the most embarrassing way possible, trash the senior executives, and make things very uncomfortable in general for these firms.

They don’t want them to merely suffer – they want to destroy their unique position as an Oligopoly, to remove them from having a special status under the SEC rules.

The credit rating agencies are a FRAUD, and I would argue that this downgrading of California bonds regardless of Constitutional dictates represents a furthering of that fraud.  CalPERS is fighting back on principle, because the relationship between the rating agencies and the financial industry they are supposed to serve is among the sleaziest on Wall Street.

Under Phil Angelides, CalPERS used its considerable clout to move toward progressive reforms in the financial industry.  Bill Lockyer has done less of this.  But I’m glad to see the fund standing up on behalf of not only its clients, but every investor, against the near-criminal structure of these rating agencies.

…Steve Wiegand throws this in the back end of a CapAlert update:

On Tuesday, Moody’s Investors Service downgraded the state’s general obligation bond rating to Baa1, following a similar move by Fitch Ratings the week before. That’s three grades above junk bonds, and the lower the ratings the more it costs California to borrow. It’s also less likely investors will deal in California bonds, even though the state has never defaulted or even been late on a bond payment.

Outright thievery.

Last week, Julio Ramirez, an investment banker and former politico in the LA area (he managed Richard Riordan’s successful LA Mayor campaign), turned himself in to New York Attorney General Andrew Cuomo as part of a widening state pension scandal that has engulfed virtually every public pension fund in America.  The short version of this is that a network of state officials, investment bankers and various go-betweens concocted a scheme where the officials would place their pension funds in the hands of particular firms in exchange for campaign or just personal cash, and the firms who got the contracts would skim a few dollars off the top to give to the “placement agency” who got them the work.  Ramirez worked for Wetherly Capital Group, one of the placement agents, who secured what looks to be billions of dollars in pension fund money for its clients, and received millions back in finder’s fees.  One of them was CalPERS, to which Wetherly delivered about $300 million to its money managers.  

It’s a complicated story, but it comes at a time when CalPERS and other public pensions are struggling with all their stock market losses and increasing burdens as more employees hit retirement.  The sale of access to the pension funds raises all kinds of ethical questions, and has clearly made the middlemen and the controllers of the purse strings for the investments ridiculously rich at state employee expense.  The Carlyle Group, a major investment partner in CalPERS, just settled out of court for $20 million dollars to avoid charges in the probe.

This fits in with the general crisis in confidence that California citizens are having with their government.  Keep an eye on this, because it will continue to reverberate over the next several months.

Enjoy your weekend, and that is a direct order.  Some items:

• The Obama Administration is finalizing the formulas for how much stimulus money will get delivered to each state, and based on my press releases from the White House, it looks like so far, we’re getting $42 million dollars from the Dept. of Transportation to fund airport repairs across the state, $48 million from HHS to expand and support community health centers, and $351 million in block grants from the Dept. of Energy to support energy efficiency measures.  This last part includes retrofits of community buildings, projects to capture methane from landfills, and financial incentives for weatherization and efficiency projects.  Further, the Obama budget would provide direct college aid to 27,547 additional students if passed with current language.

• In other White House news, on May 16 First Lady Michelle Obama will deliver the very first commencement address at UC-Merced, which opened in 2005.  Hopefully that will be all right with Darrell Issa.

• In CA-32 news, Judy Chu received a few endorsements.  She earned the support of the League of Conservation Voters.  Then the California Teachers Association endorsed, though given their financial commitment to Prop. 1B it’s unclear whether the endorsement will come with any resources.  The other was from Baldwin Park Unified School District Board President Blanca Rubio, who had previously announced as a candidate.  She dropped out and endorsed Chu.

• Southern California Reps. Howard Berman and Lucille Roybal-Allard introduced this year’s version of the DREAM Act in the House, which would offer a path to permanent residency for undocumented students who have spent most of their lives in this country, and would like to apply for college or serve their country in the military.  These are good quotes by Berman:

“It makes no sense to me,” said Berman, “that we maintain a system that brings in thousands of highly-skilled foreign guest workers each year to fill a gap in our domestic workforce, and at the same time do nothing to provide an opportunity to kids who have grown up here, gone to school here, and want to prepare themselves for these jobs or serve their country in the military.  This is the illogical outcome of our current immigration laws that the Dream Act will fix.”

“The issues addressed in the American Dream Act”, continued Berman, “are just a fraction of the problems in our immigration system.  This bill came about because our immigration laws are, and have been for some time, broken.  It is my great hope that we will put together a comprehensive immigration reform package that includes the Dream Act as it was introduced today, and it is my intention to work for and pass that comprehensive immigration reform package this year.”

• Please read Charles Lemos’ amazing post about recent events in Oakland.  And by the way, the Modesto Bee Ed Board gets it completely wrong – the fact that Lovelle Mixon responded violently because he missed a parole meeting doesn’t argue for more stringent parole, it argues for a less insane system where parolees don’t feel like hopeless fugitives because they miss one meeting.

• This is completely embarrassing work by the LA Times.  Apparently they’ve fired all the headline writers or something.

• John Myers is up again with your second favorite California politics podcast. This week he and Anthony York discuss the special election amongst other topics.

• CalPERS wants a better deal on its hedge fund investments. They are demanding lower rates and more transparency from funds in which the massive pension fund invests in.

• OC Progressive has more than you need to know about Rep. John Campbell and his friends the Ponzi schemers, including Asm. Diane Harkey.