CalPERS in Business Week

Now that CalPERS is in the barrel (reporters are crawling all over them), the ironies are coming out.  One of the biggest ironies is that CalPERS always lectured some publicly traded company on how it could better manage itself.  Oops.

It has become a running joke about the silliness of CalPERS taking corporate America to task, when its own behavior has been so disappointing.  Now the world is getting a glimmer of their hypocrisy.

The latest edition of Business Week addresses this matter.

We have another outing invitation, an opportunity to share your thoughts with our Health Care Agency, a few Look Backs, and a condolence.

Yesterday Dr. Jan Vandersloot passed away.  Jan was with us on our Fairview Park outing.  He was very proud of the indigenous plants garden that he started at Fairview.  He was also an elder statesman in our discussion on Banning Ranch.  And, he was very complimentary of the relationship we enjoyed as we addressed the critical environmental concerns in my District.  It was our last conversation together and one I will never forget.  Our office expresses its deepest sympathies on this big loss to his family and our community.  See http://www.dailypilot.com/articles/2009/11/06/blogs_and_columns/rhoades_less_traveled/dpt-rhoades110609.txt.

INVITATION – SATURDAY, NOVEMBER 28 – LIMITED CAPACITY

Our Fairview Park and Tustin Blimp Hangar outings were a blast.  Our next outing is on the Saturday after Thanksgiving.  We’re taking a morning hike.

The hike date and description are now up on the Irvine Ranch Conservancy website to view. 

Saturday, November 28th at 9:00 a.m. for 3 hours. 

We’ll hike 6 miles round trip from Limestone Canyon to Dripping Springs, with 475 feet of elevation change, and is described as a nice, leisurely stroll.

Because this schedule is viewable by the general public, the hike currently shows as FULL, so that random people won't try and sign up.  It's not full. 

If you wish to sign up for the hike, please contact the Irvine Conservancy directly by phone and ask for Meghan Sherburn, at 714-508-4767, and give her your information.

They will enter your reservation into their computer.  This is how they do it with hikes that are open to select groups only. 

The website will then generate a confirmation to you by email that will allow you to verify your information and be reminded of the hike.  It will also generate an e-mail if our hike needs to be cancelled due to weather conditions (Santa Ana winds or rain).

It will also pre-print the liability waiver, with all the names on it, so on the morning of the hike all you have to do is sign it and we're off!  

As soon as we hit our capacity we may have to close registration.  Consequently, only register if you are really going to join us.

The web address for the description of the hike is:  http://www.irvineranchwildlands.org/activities/index.asp?col=&srt=&area=&pn=6&month=11&year=2009.

Mike O’Connell, Executive Director of the Irvine Ranch Conservancy will be leading our group.


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Michael O'Connell
Executive Director
Irvine Ranch Conservancy
moconnell@irconservancy.org
Phone 714.508.4750 • Fax 714.508.4770
4727 Portola Parkway • Irvine, CA • 92620-1914

EXERCISE – INVOLVEMENT OPPORTUNITY

The Orange County Health Care Agency is planning to apply for federal stimulus funding through the Communities Putting Prevention to Work (CPPW) grant program, a program to target obesity and tobacco use.  Staff is working on specifics of the proposal and is currently soliciting input from the community through an online survey posted on its website.  Details of the program and survey can be accessed at www.ochealthinfo.com/public/cppw-funding.htm . Please consider visiting the site and taking the survey.  The County is interested in knowing how constituents want Federal money to be spent locally.  Here’s an opportunity to get involved.

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Is It CalPERS' Turn to Clean House?

The powerful California pension fund is catching flak for not practicing what it preaches

By Christopher Palmeri

The California Public Employees' Retirement System has long pushed companies to clean up their acts. Now the nation's largest pension fund is getting flak for its own governance practices. But while other pension funds are overhauling their policies on hot-button issues—including campaign contributions and investment middlemen—CalPERS is making only marginal changes.

The worry among shareholder activists is that this new perception may hamper CalPERS' ability to enact change elsewhere. "It's embarrassing for CalPERS," says Charles M. Elson, chair of the John L. Weinberg Center for Corporate Governance at the University of Delaware. "What's the old saying about people who live in glass houses?"

HUGE SUMS AT STAKE

The main concerns center on the pension fund industry's relationship with money managers. CalPERS and the like dole out huge sums of money to financial firms to invest. Some worry that money managers are making campaign donations to elected officials to win lucrative state investment contracts with CalPERS and other pension funds. Others take aim at so-called placement agents, middlemen who get paid for steering those contracts to outside investment firms. As the largest—and one of the most powerful—pension funds, CalPERS is a prime target for critics. CalPERS defends its policies. Chief Investment Officer Joseph Dear says the pension fund takes great care to avoid potential conflicts of interest.

Over the years, the $200 billion pension fund has used its hefty financial clout to push for change at the companies in which it owns shares. It has railed against excessive pay for CEOs, campaigned to eliminate conflicts of interest on Wall Street, and lobbied to give investors a bigger voice at annual meetings. "It's always fun to hear them take companies to the woodshed," says John M.W. Moorlach, a county supervisor in Orange County, Calif. CalPERS called for the ouster of Walt Disney (DIS) Chairman Michael Eisner in 2005 over weak stock returns, as well as New York Stock Exchange (NYX) Chairman Richard Grasso, whose pay the fund called excessive in 2003.

Now CalPERS, which provides retirement and health-care benefits to 1.6 million state workers, is feeling the heat. Prosecutors, regulators, and lawmakers are taking aim at state pension funds for a broad range of ethical issues. For example, New York Attorney General Andrew M. Cuomo earlier this year announced an investigation into pension fund abuses. Other big pension funds are changing their ways in response to the pressure. But CalPERS seems to be resisting.

Consider the issue of campaign contributions. Some money managers with state contracts donate to the campaigns of elected officials, who typically populate the boards of pension funds like CalPERS. The concern is that these contributions could influence how officials award pension fund investment contracts.

The Securities & Exchange Commission is considering a ban on such donations to elected officials. While CalPERS says it supports the SEC's proposal, it has asked in comments to the agency that the ban not apply to political action committees (PACs), political parties, or charities associated with officials, unless the officials are soliciting the contributions. Other states have already implemented these sorts of restrictions. In New Jersey, the donation ban applies to 120 state officials and their PACs. CalPERS says the current disclosure requirements for board members are sufficient.

That may be, but such contributions are raising eyebrows. Former board member Sean Harrigan, for example, solicited large donations from money managers for a union fund while at CalPERS. The longtime union official has been subpoenaed by the SEC and the California attorney general as part of a broader probe into pension fund abuses. "He has absolutely done nothing unethical or illegal," says Harrigan's attorney, Mark Byrne.

Critics say CalPERS' response to the debate over placement agents is even more disappointing. Placement agents, the middlemen who direct state investment contracts to money managers, have been the subject of state and federal probes in recent months. The SEC is considering an outright ban on these players—and several pension funds have preemptively decided to restrict their money managers from using placement agents.

CalPERS hasn't. The California pension fund's official position on the SEC proposal is "neutral." "If the only way you are able to get access is to pay someone to use their connections, then you shouldn't get that business," says Mercer Bullard, a law professor at the University of Mississippi and advocate of pension fund reform. "It's morally wrong."

CalPERS' Dear says placement agents play a useful role in connecting big funds with small money managers, who don't have ample marketing staffs. CalPERS recently hired the law firm Steptoe & Johnson to review its relationship with these middlemen. It also asked investment bank Houlihan Lokey to assess the pension fund's lineup of outside money managers to see if they're doing anything improper or charging too much for their services. "One of the major expenses of running a fund is fees," says Dear. "I'm determined to get a deal for our fund."

These sorts of issues have been dogging CalPERS of late. In October the California pension fund disclosed that Arvco Financial Ventures, a placement agency run by former CalPERS board member Albert Villalobos, had received $50 million in fees for winning state investment contracts on behalf of money manager Apollo Global Management (AINV) over a five-year period. Even Dear said the sum "amazed" him. Villalobos didn't return calls.

WEDDING FAVORS

Adding to the controversy, Villalobos hosted a wedding in 2004 at his Nevada mansion for CalPERS then-Chief Executive Fred Buenrostro, according to a Nov. 3 article in The Sacramento Bee. Buenrostro said he didn't have to disclose the wedding under state rules. "It's not whether it is right or wrong, it is the appearance of impropriety," says William J. Pollacek, treasurer for California's Contra Costa County.

Meanwhile, CalPERS' practices seem to be at odds even with its own advice for companies. In recent years the pension has fought hard to get companies to hold annual elections for the entire board so that directors will be held more accountable. That means getting rid of so-called staggered terms in which only a handful of board members come up for a vote each year. At CalPERS' urging, hospital bed maker Hill-Rom Holdings (HRC) announced on Oct. 6 that it would eliminate staggered terms for its board.

CalPERS itself has no such policies. None of its board members sit for an annual election; most serve four-year, staggered terms. CalPERS says its board election process is far more democratic than that of the typical company, where even getting on the ballot can be difficult. Nonetheless, says a CEO at a large company that has been targeted by CalPERS over this issue: "I don't think they have the moral high ground. They have a lot of issues in their shop."

Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau. Follow him on Twitter @chrispalmeri.

FIVE-YEAR LOOK BACKS

October 31

1999

Congressman Chris Cox had a guest editorial column in the Sunday edition of the LA Times, titled “Internet Tax Freedom Act Proves a Successful Start-Up:  A year after its inception, the Web is bigger and better than ever, and sales tax revenue is climbing.”  He was kind to include me in those that endorsed the legislation.

Then-Gov. Pete Wilson and current Gov. Gray Davis both have endorsed the Cox-Wyden law, as did state Treasurer Kathleen Connell.  Locally, our county tax collector, John M. W. Moorlach, told Congress that it should pass the Internet Tax Freedom Act because “our county’s future tax base will depend increasingly on job creation and productivity gains from technology.”

November 1

1999

The lead editorial in the OC Register was titled “Tobacco funds prove to be burning issue.”  It was the result of “an editorial board meeting with” their editorial board the previous Thursday.  Here are the final two paragraphs:

Even though the legal actions that produced the settlement are based on the shoddiest reasoning, it would be foolish for Orange County to balk at these funds.  The crucial issue, at this point, is how to plan for the use of the money in the most responsible way.

The county is correct to get its house in order, to resist the demagoguery of those who equate government spending with compassion and to spend these funds to pay down the debt and finance a desperately needed jail.  But it needs to move slowly and heed the advice of Mr. Moorlach, whose previous financial cautions have been prescient.

2004

The November issue of Orange Coast Magazine had a piece by Jerry Hicks on a retrospective, titled “Riches to Rags—To Riches Again?  Ten Years After OC’s Unprecedented Municipal Bankruptcy, A Decidedly More Cautious Approach To Investing Is Helping To Make Up Lost Ground—But Our Financial Stewards Say The Future Is Still Uncertain.”  My warning about the pension plan enhancement was spot on.  And Jerry provides an explanation for my grizzly bear.  My wife and I had looked everywhere for a serious grizzly.  We finally found it in San Francisco.  Here are selected portions:

This time of year 10 years ago, Orange County was embroiled in a shocking, embarrassing, debilitating, $1.74 billion bankruptcy.  Based on bad advice from the brokerage firm Merrill Lynch, Citron took on investments in high-risk securities that depended on interest rates remaining low.  When interest rates shot up, those investments tumbled.  Only one lone voice in the public eye warned of the danger—[Orange County Treasurer John M. W.] Moorlach, a certified public accountant who was running against the six-time incumbent [Robert L.] Citron in 1994 and lost.  Moorlach wrote to the Board of Supervisors six months before the December 1994 bankruptcy that under Citron’s investment plan, the county should be prepared for “a worst case scenario.”  No one even answered his letter.

Ten years later—with an all-new Board of Supervisors, Moorlach in place now as county treasurer-tax collector, and other new top executives—Orange County has managed to lift its head above water.  The county is still paying off its bankruptcy debt–$900 million left, plus interest.  But safeguards are in place to prevent future catastrophic financial failures.  And investors who had dropped out in droves are slowly rejoining the county’s investment pool.  Moorlach . . . invests the county’s $5 billion pool in only short-term, low-risk investments.

“I think Mr. Citron’s problem was he adopted an investment strategy, but then he became married to it instead of managing it,” Moorlach says.  “Since then we’ve concentrated on three things:  disclosure, accountability, and oversight.  You can’t protect the county’s resources without them.”

Moorlach, however, may be less optimistic than the others about the county’s future.  His concern is that the gap between what the county makes and what it spends keeps closing.  Safeguards are in place, post-bankruptcy, to control the county’s use of investment pool funds.  But he isn’t always pleased with spending decisions made by the Board of Supervisors.  For example, Moorlach is disappointed that the county put up little struggle when the city of Irvine wrestled control of the old El Toro Marine Corps Air Base . . . the county should have gotten some compensation from the deal.  Moorlach is also unhappy the county did not hold back some of its $700 million-plus in tobacco settlement money to help reduce the bankruptcy debt.

The most recent controversy is over the board’s 3-2 decision to approve a new, upgraded pension fund for county employees that amounts to about $700 million.  Though the employees pay for the fund themselves—and even agreed to forego pay raises—that agreement runs out in three years and will have to be renegotiated.

Moorlach is among those who believe the new pension leaves the county vulnerable, that a downturn in the market could turn that $700 million into well over $1 billion, with the county winding up paying most of it instead of the employees.  “Then we’d be getting back close to those bankruptcy numbers,” he said.

In the meantime, Moorlach keeps a foot-tall replica of a snarling bear, standing on its hind legs, overlooking Moorlach’s . . . office, watching him as he pores over those . . . Wall Street numbers changing moment by moment.

“The bear is there as a constant reminder to me to be aware of the dangers of bear markets,” Moorlach says with a grin.  “No one wants to go back to what we went through 10 years ago.”

The November issue of Global Pensions had an article by Rachel Alembakis, titled “Bond issuers seek pension openness,” dealing with the recent increase in pension obligation bond (POB) issuances and the City of San Diego’s travails in delaying the issuance of its financial reports.  The article concluded with the following three paragraphs:

John Moorlach, treasurer of Orange County, California – which famously went bankrupt in 1994 – strongly recommended greater transparency in pension fund and city government finance, but noted that swift publication of annual reports is not always possible.

“Maybe you could cut down the time between the end of the reporting year and the publication of the audit by a couple of months, but that’s it,” Moorlach said.  “The big issue is that pension plans have allocated 10% or more of portfolios t alternative investments and real estate, and you don’t get valuations at the last day of the calendar year.”

Moorlach also noted that administrative burden and cost is not an excuse for avoiding stricter reporting.

November 3

1999

It’s not too often that the endorsement of a candidate for office makes a headline.  But an endorsement of a political unknown ten years ago, who now serves as a United States Representative for Orange County, garnered this headline “Moorlach endorses GOP Assembly candidate,” for S. J. Cahn’s article in the Daily Pilot.  Here are some selected paragraphs:

John Campbell, Republican candidate for the 70th Assembly District, has received one of the county’s more conscientious endorsements:  County Treasurer John Moorlach.

“I feel real comfortable with John,” Moorlach said, adding that he had met with Campbell several times.  “I certainly like the fact that he’s a [certified public accountant].  That makes him kind of a kindred spirit.”

Moorlach said he hopes Campbell will bring a conservative fiscal perspective to Sacramento.

Campbell said he was “thrilled” to win Moorlach’s support.

“John is about as bright and energetic and principled fiscal conservative out there,” Campbell said.

November 4

1999

Proposition 26 would be on the March 7, 2006 ballot and it would authorize local voter approval of school bond measures by a majority vote.  The OC Register’s editorial section jumped on the proposition early in “Maintain two-thirds vote.”  The measure narrowly failed, garnering 48.8% of vote.  The previous day’s election results formed the outline for their arguments.

Two local school bonds passed yesterday by a two-thirds vote and by doing so, affirmed that California doesn’t need to and shouldn’t change the threshold for how many voters it takes to pass a bond.

But the two-thirds requirement, we think, made both school districts work harder to craft financially viable proposals.  It also helped that the county’s treasurer-tax collector John Moorlach stepped in last summer and outlined five criteria for responsibly structured bonds.  He gave both districts’ bonds a “B” rating based on criteria such as setting aside money for maintenance and establishing an oversight committee.

November 6

1994

Gebe Martinez of the LA Times, who covered me during the Treasurer campaign, did a pre-election piece titled “The Issues Are There—but O.C. Voters Might Not Be;  Elections:  Political observers aren’t sure whether hotly debated initiatives will spur a large turnout at the polls.”  Proposition 187 was on the ballot.  So was the Governor Wilson’s re-election bid against challenger Kathleen Brown (Jerry’s sister) and Michael Huffington’s attempt to unseat U.S. Senator Dianne Feinstein.  (Three days earlier The Bond Buyer warned that OCTA wanted to pull funds out of Citron’s Investment Pool—but that matter was lost on the local press.)

“I don’t have a written goal (for turnout).  I just want to make sure that our percentages are good,” said John M. W. Moorlach, this year’s precinct advisory committee chairman for the Orange County Republican Party.

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