MOORLACH UPDATE — SB 185 — November 6, 2015

California Watchdog.org attempts to determine the reverberations of the passage of Senate Bill 185 (De Leon), which directs how the state’s pension funds should manage assets with regards to coal. Senate Bill 574 (Pan) was on the Senate Floor just three days prior, which would have required more disclosure on alternative investments for the University of California pension system. Let me provide the drama.

For SB 574, on the Floor, I inquired of the author if the requirements he was imposing on the UC pension system were different than those that were required of CalPERS and CalSTRS. Senator Pan, from Sacramento, stated that his bill would require the UC system to mirror the policies of the state’s largest two systems.

I also asked about particular money managers, like Kleiner Perkins and Sequoia. I was told that they were in the two state systems and were complying (see https://youtu.be/_BMHk-SRdas). Consequently, instead of opposing SB 574, I voted to support it. Regretfully, it was under a false premise, which I’ll explain later.

It is a little more daunting to address a bill that is authored by the President pro Tempore of the Senate, like SB 185. But, after he presented his bill, I stood up on the Floor and reminded my colleagues that I had the privilege of sitting on the Board of one of the largest pension systems in the nation for twelve years. I then stated that the primary rule in a pension plan is to invest for value.

I then stated that the two money managers that I inquired about on SB 574 were no longer with CalPERS and CalSTRS. That the answer that I was provided by the Senator from Sacramento was not accurate. The fact that these two money managers were gone proved my point: meddling and requiring more disclosure of private equity investments was a way to scare off astute money managers that did not want to reveal trade secrets.

I told the Senate that alternative money managers did not want Legislative meddling. Regretfully, not having such firms in the pension systems’ stables hurts the taxpayers and the pensioners (see https://youtu.be/0y9stm-LENk). (Fortunately, this bill stalled in the Assembly and looks to be a two-year bill.)

"Leave the management of portfolios to the Chief Investment Officers . . . I encourage a ‘No’ vote (on SB 185)."

SB 185 passed with 24 votes. All of the Republicans voted against, except for Senator Nielsen, who did not vote. Senator Roth voted against the bill and Senator Hertzberg also did not vote (a subtle way of opposing the bill).

I know that I am in the weeds here, but that’s my job. And I’m happy to explain and defend every vote that I make. And, on those occasions when I do lift my microphone, I’m happy to relate my arguments, either for or against, a certain piece of legislation.

Would the public employee unions have heart burn over this bill? My response was, "no." The investment holdings in coal were minimal, only $83 million. What the piece below does not mention is whether this is the cost or the current market value. If it is the cost, and it is sold for $83 million, then there is no loss and no story. If it is the cost basis and it is sold for more, there is a profit. If it is sold for less, in a fire sale, then losses are sustained. It is easy to understand that forcing a sale is imprudent.

The public employee unions are the ATM for the Democrats. That makes them very influential in Sacramento. If they really had a problem with this bill, they would have had it killed long before it reached the Senate Floor.

As one of the few legislators who has served on a pension board (probably the only one – I’m not aware of any other current legislators who have been on a pension board), let’s hope that my counsel will be given more credence in the future. But, when the President pro Tem authors the bill, it has to be very difficult for my colleagues on the other side of the aisle to oppose his efforts.

The second piece is on the website of the LA Times and covers the current intrigue about the re-election efforts of my seatmate, Senator Cathleen Galgiani.

I enjoy sharing a paired desk with her and we have established a healthy relationship. We enjoy good discussions and she has a fantastic sense of humor. The difficult component of building good relationships with those on the other side of the aisle is that I will have to support their opponents in the upcoming election cycle.

The piece provides another perspective on the power base known as the "third house." Lobbyists and businesses contribute to candidates and incumbents who share their interests and if they have a member who will vote with them when they need it, they will generally continue to support that candidate. And they must be communicating that they have built a good relationship with Senator Galgiani. The fun and intrigue never seems to stop. At least you can obtain a glimpse, from another angle, of my new world.

California pension systems stand to lose millions by divesting from coal

By Rob Nikolewski

No coal will likely translate into less money for the nation’s largest pension fund for state employees.

But at least for now, it appears the unions representing members of the California Public Employees’ Retirement System aren’t kicking up a fuss about the potential financial hit from a law calling for CalPERS to sell its holdings in companies that derive at least 50 percent of their revenue from coal mining.

“The CalPERS board has done a good job over the years,” said Carroll Wills, communications director for California Professional Firefighters, the largest firefighters union in the state with 30,000 members. “We trust their judgment on these things.”

Last month, Gov. Jerry Brown signed a bill calling on state pension funds to divest from 24 coal mining companies that have $83 million in holdings.

The law also affects the California State Teachers’ Retirement System.

CalPERS holds more than $300 billion investments, the biggest in the country, while the investments at CalSTRS are worth nearly $191 billion.

Coal is “a nuisance to public health and it’s inconsistent with our values as a state on the forefront of efforts to address global climate change,” said state Sen. Kevin de León, D-Los Angeles, who spearheaded the effort to pass the law. “California’s utilities are phasing out coal and it’s time our pension funds did the same.”

The divestment effort will probably cost the CalPERS fund millions, according to a financial expert.

Andrew Junkin, president of Wilshire Consulting, told the CalPERS investment committee Oct. 19 that previous divestment actions based on political motivations — such as withdrawing from funds in South Africa, Iran and Sudan — cost CalPERS between $4 billion and $8 billion.

The $83 million CalPERS holds in coal investments reportedly include thermal coal mining companies Peabody Energy and Arch Coal.

With coal companies under pressure from new regulations from the U.S. Environmental Protection Agency, the industry is going through its worst slump in decades and coal companies’market values have dropped nearly 90 percent since 2011. That means divestment will almost certainly mean a financial loss for CalPERS and CalSTRS.

“CalPERS has a propensity to get out of markets right at the wrong time,” said Marcia Fritz, a certified public accountant and president of the California Foundation for Fiscal Responsibility, a nonprofit that has developed a reputation as a fiscal watchdog of the California pension system.

“They did that with real estate and I think they’re doing it with energy as well,” Fritz told Watchdog.org. “And I think they’re getting out of (coal) because it’s a political hot potato to stay in it when the governor is so pro-clean energy.”

Despite the potential losses, the response from some of the largest unions in the state has been muted.

“Those are judgments made by the (CalPERS) board are not things we have generally have gotten involved with,” Wills told Watchdog.org. “It’s been their call.”

Watchdog.org contacted some of the other public employees unions in the state, including the 7,000-member California Statewide Law Enforcement Association, the California Association of Highway Patrolmen, the California Correctional Peace Officers Association and the SEIU Local 1000 in Sacramento, but did not receive any responses.

While CalPERS pensioners will likely end up losing money in coal divestment, the $83 million holdings in coal represent just 0.00028 percent of the entire $300 billion in the entire CalPERS fund.

“It’s a pimple,” said state Sen. John Moorlach, R-Costa Mesa.

But Fritz said since California taxpayers pay for state employees and their pension systems, every dollar counts.

“They’re basically making a decision to reduce their returns on their pension assets and taxpayers have to back that,” Fritz said in a telephone interview. “It’s no different than spending money on something that’s not going to give us anything.”

Moorlach doesn’t like the coal divestment idea, either.

“It is not the role of the governor or the the state legislature to say how a pension invests this money, I’ve always said that,” Moorlach told Watchdog.org. “This is not our role. What are we doing having politicians getting involved in this? They can’t even balance their own budgets.”

Junkin told the CalPERS investment committee the pension can more effectively influence coal companies by staying financially involved with them.

“By divesting you are really giving up your voice, your ability to influence change,”Junkin said, according to Reuters. “And you’ve just sold it to somebody else. Those shares are going to get voted by somebody else now instead of by you, and you don’t get to advance your goals.”

CalPERS and CalSTRS do have an escape hatch: The law Brown signed says the funds should only go through with coal divestment “if the action is consistent with the board’s fiduciary responsibilities.”

Fritz thinks the pensions should pass on divesting from coal.

“That would be the fiduciary thing to do,” Fritz said, noting the boards are political animals. “You’ve got people running for office, people up there because they’re paid by unions, people who are there because they want to win an election, or they want to say, ‘I got my pension fund out of coal.’ ”

In a statement, CalPERS praised Brown and de León but did not commit itself to definitely divest.

“Climate change represents risks and opportunities for a long-term investor like CalPERS,” said Anne Stausboll, chief executive officer for the pension fund and co-chair of the Ceres Board, the nation’s largest coalition of investors, environmental groups and nonprofit organizations advocating for sustainable business practices. “We have a fiduciary duty to protect the pension fund and mitigate the effects of climate change on our investments.”

Environmental groups have cheered the divestment law.

“This is a big win for our movement, and demonstrates the growing strength of divestment campaigners around the world,” said May Boeve, executive director of 350.org, after Brown signed the bill, adding that it’s time “to keep building on today’s news, and take every possible step to prevent climate catastrophe — including divesting California from oil and gas, and banning extreme energy extraction techniques like fracking.”

According to the law, a decision on coal divestment has to be made by July 2017.

“Our pension funds are an enormous part of our assets in California and when we lose money, we have to put the money back,” Fritz said. “But it’s hard for people to get that direct relationship. They’re going to see it when you have a loss in your asset base and the actuaries are going to come back and tell the agencies and the state that you’re going to have to put more money in because of asset losses.”

California GOP sitting out Senate race in conservative-leaning swing district

Melanie Mason – Contract Reporter

A state Senate race in the San Joaquin Valley has all the makings of a prime 2016 showdown: a swing district that leans conservative, a Democratic incumbent who notched a narrow win four years ago and a potential challenge from the leader of the Assembly Republicans.

But the California GOP plans to sit this one out.

Assemblywoman Kristin Olsen (R-Modesto) said party officials told her that if she runs against Sen. Cathleen Galgiani (D-Stockton), she’ll be getting no help from them.

"The party has made a commitment to various interests that they will not spend party resources in Senate District 5," Olsen said in an interview.

Neither state GOP chairman Jim Brulte nor Senate Republican leader Jean Fuller of Bakersfield would comment on the unusual decision to lay off a competitive race, especially one that could involve a legislative leader. But it is the latest manifestation of a new political order taking shape in the Capitol.

At a time when GOP power in Sacramento has been on the wane, many business interests — which have traditionally skewed Republican and wield considerable clout in the party — are throwing their weight behind centrist Democrats like Galgiani.

A year from election day, groups such as the California Assn. of Realtors and Chevron have told the candidates and other political players that they’re for Galgiani, a show of support from entities that routinely spend big to back their choices.

State Sen. Cathleen Galgiani (D-Stockton), here conferring with Sen. John Moorlach (R-Costa Mesa), “has consistently been ranked as one of the most business-friendly Democrats” in the Legislature, said Trent Hager, her campaign spokesman. (Rich Pedroncelli / Associated Press)

Jon Fleischman, a conservative Republican activist and former party official, said he believed the party was holding off on the race to appease business interests. The decision, he said, underscored "the party’s dependency on interest groups in Sacramento who do not share the same priorities of the party all of the time."

Business support has helped make moderates the ascendant wing of the Democratic Party, able to flex their muscle in such legislative battles as this year’s heated debate on climate issues.

Galgiani "has consistently been ranked as one of the most business-friendly Democrats" in the Legislature, said Trent Hager, her campaign spokesman.

In the Senate, Galgiani was the only Democrat to vote no in June on an ambitious bill to fight climate change, though she switched sides once a controversial provision opposed by oil companies was dropped.

The alliance between business interests and moderate Democrats has been most apparent since the demise of the party primary in California in 2010. Except in presidential races, the two candidates with the most votes advance to the general election regardless of party.

Business groups have backed centrist Democrats in contests featuring other, more liberal members of the same party, who are often supported by labor unions.

But increasingly, business is also siding with moderate Democrats over customary Republican allies. Some corporate interests were furious last year when the Republican Party tried unsuccessfully to unseat Assemblyman Adam Gray, a moderate Democrat from Merced. A group financed by Chevron, the Dental Assn. and insurance agents sprang to Gray’s defense with radio ads knocking his opponent.

Olsen, who will hold her leadership post until January, acknowledged that she and Galgiani are "political friends" on many issues. But she noted that even though Galgiani is a "mod," the senator still votes with her party on major legislation such as the budget.

Republicans in the Legislature serve as a check on the majority party, she said: "Our quality of life and our economy as a state and as a valley would be better off when there’s more of a balance between the two parties," Olsen said.

Galgiani had around $130,000 in the bank for her 2016 race as of June 30. Olsen had nearly $380,000 for a 2018 Senate run, and she could tap it next year.

The Central Valley Senate district spans all of San Joaquin County, including the city of Stockton and parts of Sacramento and Stanislaus counties. Democrats hold a four-point registration advantage, and Galgiani eked out a win over Republican Assemblyman Bill Berryhill in 2012.

In that race, it was Berryhilll who scooped up most of the business community’s support. One notable exception was the Realtors group, which spent more than $620,000 on Galgiani’s behalf.

The organization said it did not explicitly pressure the GOP to withhold money from the race next year.

"Of course we speak to party leaders about all races," said Laiza Garcia, who directs the group’s political action committee, "and no, we did not urge the [party] not to devote resources to [Senate District 5], should Assemblywoman Kristin Olsen decide to run."

There’s still potential for a costly showdown. GOP mega-donors such as Charles T. Munger and Bill Bloomfield have been willing to pump millions into independent efforts to help Republican candidates.

Olsen said she would make a decision by the end of the year. The lack of party money, she said, won’t be a determining factor.

"Will it be disappointing not having the party with me? Of course," Olsen said. "But will that convince me or discourage me from running? No."

melanie.mason

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