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Surrounded by birch trees and honeysuckle vines, CalPERS's sprawling headquarters on Sacramento's P Street gives the appearance of having been deliberately camouflaged. Nothing on the outside of the building even has the pension fund's name on it. Inside, however, it's another world. An expansive lobby with a tropical courtyard and six-story-high sunroof suggests the casual elegance of a resort hotel. Yet the pension fund is fast outgrowing its spacious digs. Even now, heavy machinery is clearing ground across the street for a new $250 million expansion of the campus.
With carpeted corridors and acoustical walls and ceilings, the CalPERS headquarters is a quiet place to work -- except during the one week a month when its board members claim a 200-seat auditorium at one end of the building as their seat of power.
Board meetings can spark drama. Last year, for example, when the board was set to vote on whether to keep its $65 million investment in the Philippines, Filipino activists arrived in buses from San Francisco to pack the auditorium. The country's ambassador to the United States took the podium to urge board members to keep the investment, despite CalPERS's concerns about Philippine tax laws covering banking and child labor. After the board voted not to divest, President Gloria Macapagal Arroyo broke the news to her country in a radio interview, and the Philippine stock market hit a 12-week high.
But such instances are the exception.
For the most part, board meetings of the nation's largest and arguably most influential public pension system are sparsely attended and about as dramatic as watching paint dry. That's because many decisions related to CalPERS's enormous portfolio occur in obscure committees -- composed of subsets of the board -- whose recommendations the entire body often rubber-stamps with little or no public discourse. During a recent meeting, the board took recorded votes just twice. "It's entirely possible for an outsider to sit through a CalPERS meeting and not realize what he has just witnessed, and that's apparently how [board members] prefer it," says retiree Charlie Oates, who once published a newsletter for CalPERS members.
But the lack of public drama belies the private power that CalPERS and its $183 billion in assets can wield.
For decades now, the overwhelming majority of CalPERS's 13 board members have been Democrats with strong ties to organized labor. Six members are elected directly by members of public labor unions. The Legislature, controlled by Democrats, gets to pick another member. Two of the four ex officio members -- State Treasurer Phil Angelides and Controller Steve Westly -- are Democrats.
Under Democratic control, CalPERS has been a leading voice in corporate governance issues, repeatedly roiling America's business leadership with a high-profile divestiture of tobacco stocks, controversial aid to those seeking to depose Michael Eisner as CEO of the Disney Corp., and a long-running push for increased numbers of independent directors of public companies. At the same time, CalPERS has also been something of a Democratic piggy bank, with hundreds of millions of dollars in "alternative" investments funding the business efforts of a variety of campaign donors and party insiders, from Los Angeles grocery billionaire Ron Burkle to San Francisco investment banker Richard Blum -- who happens to be husband to U.S. Sen. Dianne Feinstein -- and on to former Vice President Al Gore and his plan to create a youth-oriented cable TV channel.
Over the last few months, Gov. Arnold Schwarzenegger has pushed a series of "reforms" of state government, one of which would change the way in which state worker pensions are funded and, inevitably, force change at CalPERS. The Republican governor is presenting his move as a matter of fiscal accountability, a way to help balance California's budget while eliminating "platinum-plated" pensions for public workers. Democrats and their allies in organized labor are fighting back by calling the move an assault on low-paid public workers.
So far, neither has explained that the fight over CalPERS isn't, at its core, a fight over pensions. It is a fight for control of an investment portfolio, the shape of which exerts more global financial influence than the entire economies of many -- and probably most -- sovereign nations. It is a battle royal for a measure of political power that is all but incalculable.
In his budget proposal last year Schwarzenegger had nothing but praise for California's public-employee pension system. The object of his acclaim is referred to as a "defined benefit" system because it guarantees a specific amount of money throughout a retiree's golden years. "State employees will continue to be secure in the knowledge that a volatile investment market will not affect retirement benefits because they will continue to be covered by a defined benefit retirement plan; this is a stark contrast to the concerns of many private-sector employees," the governor declared in January 2004.
But that was then.
Even as he pushes a constitutional reform agenda that includes measures to rein in public spending, redraw the state's political boundaries, and make tenure more difficult to attain for California's 715,000 public school teachers, Schwarzenegger now wants to overhaul the retirement system that he once hailed. Declaring that costly pensions for teachers and 1.4 million other public-sector employees have got to go, the governor wants to scrap defined benefit pensions for state workers hired after July 1, 2007, and replace them with so-called "defined contribution" plans, the 401(k) model familiar to workers in the private sector.