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December 13, 2004 12:00 AM

Harrigan’s ouster won’t alter CalPERS’ efforts

California pension giant should remain in vanguard among shareholder advocates

Joel Chernoff
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    SACRAMENTO, Calif. — Sean Harrigan's pending departure as president of the CalPERS board might affect the style, but not the substance, of the giant pension fund's corporate governance program.

    While corporate America rejoiced in the labor leader's comeuppance, replacement of Mr. Harrigan at the helm of the $177.8 billion California Public Employees' Retirement System, Sacramento, likely will have little effect on the fund's practices.

    "I don't think that the CalPERS board is going to retreat from the corporate governance advocacy at all," said Richard Ferlauto, director of pension and investment policy for the American Federation of State, County and Municipal Employees, Washington. "In fact, this coming shareholder season, they're going to be more aggressive about issues like executive pay, and will be aggressive on other issues, such as auditor issues," he said.

    Moving ahead

    CalPERS officials already have been hard at work pursuing corporate governance issues since the California State Personnel Board voted 3-2 on Dec. 1 to replace Mr. Harrigan as its representative on the CalPERS board with Republican businessman Ronald Alvarado. Mr. Alvarado's one-year term on the board will start Jan. 1.

    CalPERS is pressing drug companies to explain how they plan to restore shareholder value following Merck & Co. Inc.'s withdrawal of arthritis and pain-reliever drug Vioxx from the market. And the board plans to challenge auto manufacturers' strategy to strike down California greenhouse gas emission controls.

    In addition, the board also will consider giving staff greater authority to sponsor shareholder proposals dealing with executive compensation issues — up to 20 per year. The staff also wants the authority to comment to the Public Company Accounting Oversight Board, Washington, on matters related to independence of auditors.

    Board changes afoot

    Meanwhile, don't count Mr. Harrigan out yet. He wants to replace fellow labor leader Mike Quevedo, whose term on the CalPERS board officially expired last January. Mr. Quevedo's seat is appointed by the state Legislature. However, some sources think it's unlikely that Mr. Harrigan will be able to cut a deal, and one source believes the seat already has been promised.

    So that leaves Rob Feckner, a glazier from Napa, Calif., who represents non-teacher public school workers, as the front-runner for the presidency of CalPERS. Rumors are that former San Francisco mayor and current CalPERS board member Willie Brown also might want to make a second run for the board presidency, but some observers discount that speculation because they question whether Mr. Brown can win enough votes.

    Still, Mr. Brown is a force to be reckoned with. "You never count out the mayor. He's a very prolific politician," Mr. Feckner said.

    If Mr. Feckner wins the presidency at the board's Feb. 16 meeting, he would have to surrender his role as chairman of the powerful investment committee. The most likely candidate to succeed him there would be Priya Mathur, vice chairman, who has been groomed for the job since she joined the CalPERS board in January 2003.

    Neither Mr. Feckner nor Ms. Mathur is likely to lead a significant change in CalPERS' policy, although their tone might be more moderate, observers said. Mr. Feckner is a close ally of Mr. Harrigan's, while Ms. Mathur, a principal financial analyst with the Bay Area Rapid Transit District, also has ties to organized labor.

    Meanwhile, a larger threat to CalPERS and other California public pension funds looms on the horizon.

    Starting July 1, 2007, all California state and local pension funds would be closed to new participants under a constitutional amendment introduced Dec. 6 by California Assemblyman Keith Richman, a pediatrician. Instead, new workers would join new defined contribution plans.

    "We're making commitments to people that we just can't afford to pay," said Daniel Pellissier, Dr. Richman's chief of staff.

    Dr. Richman's proposed constitutional amendment closing California public funds to new members is not expected to pass the Legislature, but could turn up later on a ballot initiative that would be decided by tax-wary California voters.

    "There's no chance that it will pass the Legislature, because the Legislature is controlled by the Democrats," said long-term CalPERS watcher James McRitchie, editor of corpgov.net, a Web site that tracks corporate governance activities.

    Dr. Richman, who has announced his plans to run for state treasurer, argues the state and localities no longer can afford defined benefit pension costs.

    "The city of San Diego, Orange and Contra Costa counties all have pension deficits of more than $1 billion. CalPERS owes ($1.9 billion-plus more) than it has on hand and just last week state teacher pension fund officials said they may cut benefits for future retirees by $500 a month to eliminate their $23 billion deficit," he said in a news release.

    The state's pension contribution has grown to $2.6 billion this year from $200 million in 2000, and the legislative analyst's office predicts it will reach $3.5 billion by 2009. That contribution is crowding out other needs for the state and localities, Mr. Pellissier said. "At some point, you just have to draw the line," he added.

    In addition, California cities, counties and special districts have issued $11.7 billion in pension obligation bonds since 1994, which they will have to pay off down the road.

    Dollar-for-dollar match

    The amendment would require new employees to join a defined contribution plan, but does not provide details of plan provisions. Mr. Pellissier said Dr. Richman's staff is developing a separate bill that would create plans that would have a dollar-for-dollar match, up to 10% of employee pay. If employees did not make their own investment choices, the contributions would default into lifestyle funds.

    Mr. Pellissier said each locality would be free to establish its own plan, but they could join together to cut costs. He added a defined contribution plan would be better suited to workers who don't spend their entire careers in public service.

    He termed the current brouhaha over the CalPERS presidency "an unfortunate distraction" from the cost issue.

    Robert Walton, assistant vice president for governmental affairs for CalPERS, said the cost of pension benefits has been overstated. "The cost as a percentage of payroll, even today, is lower than it was '80 through '86, even after you consider all the benefit increases," he said.

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