Silicon Valley/San Jose Business Journal, January 14, 2005

In the next few weeks, the $180 billion California Public Employees' Retirement System will release the names of portfolio companies that it will target this year in its long-running campaign for better corporate governance.

When CalPERS, the nation's largest public pension fund in the country, speaks, shareholders and boards of directors listen.

But this year, when CalPERS speaks it will do so under a cloud. Gov. Arnold Schwarzenegger has endorsed a constitutional amendment that would end pensions for state workers hired after July 1, 2007, and instead offer them a defined-benefits plan. The aim is to reduce the state's pension costs, which have grown from $200 million annually in 2001 to $2.3 billion this year. Whether the plan would do that is a matter of debate, but if the state shifts its pensions to 401(k)-like plans, it would eventually put CalPERS out of business.

The proposal, which would require an amendment to the state constitution, would face serious opposition from the Legislature's Democratic majority. Realizing this, backers of the amendment are trying to qualify it directly for the ballot, bypassing the Legislature, where each house would have to approve it with a two-thirds vote. Once the measure is placed on the ballot, however, it needs only a majority vote.

But even if the proposal were to pass, the demise of the influential state pension fund would take years.

"In the short term it would have no impact," says State Controller Steve Westly, who serves as an ex-officio member of CalPERS. "But over time it might."

But with its future in question, others say CalPERS' clout would diminish.

"It would certainly take away the role that they have taken upon themselves the last few years," says Anthony Archie, a public policy fellow at the Pacific Research Institute, a libertarian-leaning think tank. "It would take power out of the hands of a board and put it in the hands of individual employees."

A CalPERS spokesman said it would take decades for the system to decline and go out of business, but as that happened the shift would reduce its impact on issues.

"As our assets would drop, we would lose our voice," says Darin Hall, CalPERS spokesman. "Who is going to speak for the little guy then?"

CalPERS has wielded its power successfully in recent years to help force the resignation of Richard Grasso, CEO of the New York Stock Exchange in 2003, after questions about his compensation arose. CalPERS also forced Disney Corp. (NYSE: DIS) to separate its chairman and CEO positions. It is also pushing the SEC to require corporate boards to allow shareholders to nominate candidates for boards of directors.

In the past CalPERS has targeted Silicon Valley companies including Apple Computers Inc. (NASDAQ: AAPL), Sybase Inc. (NYSE: SY) and JDS Uniphase Corp. (NASDAQ: JDSU).

CalPERS' main job is to invest the state's pension funds. Returns on its investments have varied lately with the economy. For the 12 months ending June 30, 2004, CalPERS funds returned 6.7 percent, up from 3.9 percent in 2003. The fund had two down years, losing 5.9 percent in 2002 and 7.2 percent in 2001. Those numbers peaked in 1997, when CalPERS investments achieved a 20.1 percent return.

Its involvement in social issues and corporate governance are seen by critics as a distraction from earning money, but CalPERS says its efforts pay off. It points to a Wilshire Associates study that studied 113 companies targeted by CalPERS between 1987 and 2003 and found that their performance improved. In the five years before CalPERS' involvement began, the average performance of these companies fell 97.7 percent below the Standard & Poor's 500 Index, the study says. In the five years that followed CalPERS' involvement, these same companies outperformed the index by 8.1 percent.

On Jan. 12, Moody's Investors Service assigned its highest long-term issuer rating of Aaa and highest short-term rating of P-1 to CalPERS in connection with the system's credit enhancement program.

Nevertheless, the long-term future of CalPERS is in doubt. In addition to a California constitutional amendment to end state pensions, the federal government is looking not only at privatizing a portion of Social Security but also at overhauling the way all pension funds are regulated. That review comes as several corporations have terminated their pension funds.

In December, Sean Harrigan, the president of CalPERS' board, was ousted in a move that he said was orchestrated by Mr. Schwarzenegger and by companies that had felt the sting of CalPERS' activism. The governor's office called Mr. Harrigan "paranoid." Disney, one of the companies Mr. Harrigan cited, did not respond to questions for this story.

The idea of switching state workers to a defined-contribution retirement plan last arose in 2003, when Assemblyman Keith Richman, R-Northridge, and Joe Canciamilla, D-Pittsburg, proposed it as part of a package of solutions to the state budget crisis. The idea, opposed by powerful state employee unions, got nowhere. Last year, they tried again with a more limited form of pension reform, an attempt to end double-dipping -- the practice of taking disability payments on top of retirement. The idea got one vote in committee and died.

Dr. Richman, a physician, was alone this year when he filed a bill calling for a constitutional amendment and again when he filed papers asking for the issue to be placed on the ballot.

A spokeswoman for Mr. Canciamilla says the legislator still supports "some kind of pension reform" but has not decided yet if he would support the major change called for in the ballot measure.

The measure does face an uphill battle.

"The governor has some tough sledding on this," says Mr. Westly, a Democrat who is expected to run for a second term as controller in 2006 or to run for governor. "I don't think most people will support the governor on this."

Opponents of the plan are sure to pit individual future retirees against the wealthy contributors to Mr. Schwarzenegger.

Timothy Roberts covers public policy, corporate governance and Internet security for the Business Journal. Reach him at (408) 299-1821.