SACRAMENTO, Calif. — In 1932, in the midst of the Great Depression, what would become the country’s largest and arguably most influential pension plan was born.
The California Public Employees Retirement System has moved into its 75th year with a record $241.7 billion in assets under management as of May 2. In three quarters of a century, the pension industry bellwether has paved the way for corporate governance reforms, trod into diverse asset classes and staved off political attacks from state officials.
It took 11 years to create CalPERS. In 1921, a group of state employees talked about setting up a retirement system, but doing so required a change in the California Constitution, said Chris Castaneda, chairman of the history department at California State University, Sacramento, and a CalPERS historian. It was a hard sell to voters. “At that time, there were people who saw pensions as welfare or handouts,” he said.
The years leading up to the vote were considered the “Progressive Era” and the talk of the day was about making government more efficient, Mr. Castaneda said. The purpose of the retirement system was to provide a practical way for elderly workers to retire and make room for younger ones, he said.
During the fund’s first 18 months, the state contributed $1.4 million to shore up assets. Like many funds at the time, CalPERS was originally bound by law to invest only in bonds. In 1953, legislation was passed allowing the fund to invest in real estate. Common stocks were added in 1967, although the fund could only invest up to 25% of its portfolio in these securities.
Although CalPERS is now the largest pension in the country in terms of assets, it took until 1996 to reach $100 billion. One of the main drivers behind the growth was Proposition 21, which removed the fund’s investment limitation, said Robert Carlson, a CalPERS board member for the past 36 years.
Once Proposition 21 passed in 1984, CalPERS staff and board members covered the globe to meet with managers and discover the best way to diversify the fund’s assets.
On his first trip to Tokyo in 1984, Mr. Carlson sat with Mike Mansfield, then U.S. ambassador to Japan. “I asked, ‘What does the federal government think of public pensions investing in Japan?’” If American consumers are going to continue buying Japanese products, then its best for U.S. investors to also invest in these companies, Mr. Carlson recalls him saying. “That gave us carte blanche,” he added.
The fund now targets a 20% allocation to international equities and 26% to global fixed income. It also has targets of 6% to private equity, 40% to domestic equity and 8% to real estate.
Russell Read, CalPERS chief investment officer, set up a pilot program to invest an initial $500 million in commodities with the possibility of expanding the program. Separately, in March, board members approved conversion of the $6.7 billion international fixed-income portfolio into a long/short strategy, likely making it the first fund to use this strategy for its entire international bond allocation.
As the fund has grown, it has also become the target of various political attacks. A fund the size of CalPERS draws more attention than a $2 billion fund. “They’ve got green eyes,” Mr. Carlson said of politicians who in the past have tried to raid the system to help fund the state budget.
In 1991, Gov. Pete Wilson wanted to tap the fund to help alleviate some of the state’s $14 billion budget deficit, said Mr. Castaneda. CalPERS responded by reaching out to voters and lobbying for Proposition 162. Once this passed, it gave CalPERS the right to take its budget and investments into its own hands, essentially rebuffing the governor and protecting CalPERS from state interference. The governor, though, does have a representative on the board.
“There are several elected people (on the board). So it’s not as if somehow this 13-member board could go ahead and take everything … It’s just not there. That’s not possible. So we’re very proud of (Proposition 162) and what we were able to accomplish there,” Charles Valdes, chairman of the investment committee told Mr. Castaneda, in a taped interview as part of an oral history project for the fund.
More recently, the fund warded off a 2005 attempt by Gov. Arnold Schwarzenegger to partially privatize the state system. Mr. Schwarzenegger’s plans would have forced all public employees to join a defined contribution plan. He abandoned the call in the face of strong opposition by union workers.
Contributions to economy
CalPERS’ contributions to the state economy partially buoyed its case against privatization. CalPERS and the $162 billion California State Teachers’ Retirement System, Sacramento, generate a combined annual $21 billion in economic activity for California, according to an April study by the Applied Research Center at the California State University, Sacramento.
But the fund is best known in the industry for its corporate governance initiative. CalPERS is an active shareowner, said Mr. Carlson, and does not “walk the Wall Street walk.”
The fund began wielding its power to improve the way companies operate in the mid-1980s. Observers credit that move to Jesse Unruh, California treasurer from 1975 to 1987 and a driving force, along with Mr. Carlson, behind the creation of the Council of Institutional Investors, Washington, a non-profit share-owner rights organization.
“He could see where power lay, and he gravitated to it immediately,” Mr. Valdes said of Mr. Unruh in his recorded interview with Mr. Castaneda. “He knew the concept was a good one. If you could get all of the public pension funds to band together, their combined ownership of corporate America gave them clout that was unbelievable,” he said of the council.
In 1992, the fund began issuing its “Focus List” of companies in which CalPERS invests that have underperformed their peers. Experts talk of the “CalPERS effect” where companies listed on the fund’s roster, begin to change their operations and improve share price.
“Scholars think of corporate governance as (CalPERS’) most important function, on a macro level,” said Mr. Castaneda.
The fund is working on a history project of its own — a book detailing its 75-year history is due out this summer.