SACRAMENTO, Calif. - The guard is changing at CalPERS in one of the biggest series of shifts at the board and staff in decades.
The announced departure of James Burton, chief executive officer of the $151 billion California Public Employees' Retirement System, Sacramento, renders a serious blow to the organization. "He wasn't afraid to confront the board," said one former CalPERS staffer. Mr. Burton intends to leave this fall for an undetermined private sector job.
One of the next staffers out the door will be General Counsel Kayla Gillan, sources predict; Ms. Gillan did not respond to requests for comment.
Last year, the fund lost Chief Investment Officer Daniel M. Szente, after only 16 months on the job. Also gone during the past 18 months have been the heads of real estate and alternatives investments.
Pressure too much
For some, the pressure of dealing with a contentious board has just been too much. But the lure of private sector compensation also has played a role.
The changes with the biggest potential implications for CalPERS' investment policy are occurring on the board itself: Board President William Crist and Investment Committee Chairman Michael Flaherman have announced they will not run for re-election. That means the 13-member board will lose two of its leaders and most moderate voices next January.
Also leaving will be Kathleen Connell, the divisive controller whose term is ending at year end. Her lawsuit challenging pay raises to top CalPERS investment staffers, which has rankled board members and staffers alike, is expected to be reviewed by a state appeals court in the next few months.
"It's about the biggest changeover that I've ever seen," said Robert Carlson, CalPERS' vice president and a 31-year board veteran.
While elections this fall will determine the face of the new board, board members already are jockeying for position, trying to build new coalitions. The fact that the changeover is nearly eight months away illustrates how politicized the board has become, some observers said.
State Treasurer Philip Angelides, with strong ties to organized labor, is likely to take an increasingly stronger role in developing the board's investment policies, some observers said. "It will be Phil's board," said one observer with close ties to CalPERS.
If so, Mr. Angelides likely would continue his focus on reshaping the pension fund's investment priorities.
During the past three years, he has spearheaded a policy to restrict CalPERS' investments in emerging markets. Those efforts culminated in CalPERS' excluding the Philippines, Indonesia, Malaysia and Thailand from its list of eligible emerging markets, although the board just restored the Philippines after belatedly discovering the Asian country's stock market meets T+3 settlement proficiency.
Mr. Angelides also has led efforts to direct CalPERS' assets into "California's emerging markets," targeting poorer urban and rural areas. For example, CalPERS has launched a $475 million venture fund to grow businesses in such areas, and has adopted a goal of investing 2% of its assets in such communities, at Mr. Angelides' behest. The treasurer also led an effort to ban investment in tobacco-related stocks.
If Mr. Angelides strengthens his grip on the board, he will have the strong support of Sean Harrigan, vice chairman of the investment committee and international vice president of the United Food and Commercial Workers International Union, Washington. Mr. Harrigan, who also was outspoken in his support of the emerging-markets policy, is considered the favorite to become chairman of the investment committee.
But unions don't speak with one voice at the CalPERS board, six of whose members are elected by constituent groups, many of which are organized labor units.
Counterbalancing the Angelides coalition is Mr. Carlson, who had served as a board president from 1976 to 1985 and who now represents CalPERS retirees. Often wary of the politicians on the board, Mr. Carlson will take another stab at running the board, he confirmed. He has the support of long-time ally and board member Charles Valdes, a former president of the California State Employees Association. In addition, the return to the board earlier this year of Kurato Shimada - who served as president of the California School Employees Association - added a third voice to this group.
If Steven K. Alari, vice president of the employees association, wins election to Mr. Crist's current seat, that may provide Mr. Carlson a four-person bloc.
However, Mr. Alari is said to be in a close race with George Diehr, a management science professor at California State University at San Marcos. Sources said both Messrs. Alari and Diehr will have well-financed campaigns - unusual for board elections - with support coming from their respective unions. Mr. Diehr, the president of the San Marcos chapter of the California Faculty Association, said he approves of CalPERS investment policies that yield collateral benefits for members, such a economically targeted investments and housing for members.
Both the employees association and the faculty association are affiliated with the Service Employees International Union, which has become an influential force at CalPERS. But the state employees association is trying to cut its ties to the international.
In addition, there is a four-way race for Mr. Flaherman's seat, with no clear front-runner.
Elections will be held in September.
Some observers speculate the expected wave of changes at the board was more than Mr. Burton wanted to deal with, or that he had grown weary of working with the often-fractious board. Mr. Burton did not respond to requests for comment, although Mr. Crist said: "I don't think the changing board contributed to Jim's departure. He's not being scared away. He wants to have a career in the private sector."
While far less visible to the general public than predecessor Dale Hanson, Mr. Burton is credited with building up CalPERS' infrastructure, conducting strategic planning and motivating CalPERS employees.
A board subcommittee consisting of Messrs. Crist, Carlson, Valdes, Harrigan and Feckner has been set up to decide how to replace Mr. Burton. Hiring an executive search firm is one possibility, but the group instead might favor using a targeted approach.