By Ed Mendel
As if their rising cost to state and local governments weren’t trouble enough, public pensions also face legislation cracking down on pension boosting, improperly influenced investments and real estate schemes that displace the poor.
A whiff of anti-corruption cleanser, or the verbal equivalent, wafted through the Capitol this month. Bills moved to curb the “spiking” of final pay to boost pensions and regulate “placement agents” paid big fees for helping money managers get pension funds.
Moral outrage colored testimony as a committee approved a bill to prohibit pension fund investments in “predatory equity,” ill-fated attempts to move rent-controlled units to market prices that cost CalPERS and CalSTRS $700 million in investment losses.
Action is needed to maintain public confidence in the pension funds, said Democratic advocates of the legislation, which faces opposition or pleas for changes from powerful interest groups.
But the scandal-driven bills have a better chance of passage, even if watered down, than another sweeping reform introduced by Republican leaders last week that would cut pension and retiree health benefits for new state workers.
Senate Republican Leader Dennis Hollingsworth of Murrieta and Gov. Arnold Schwarzenegger said the bill, SB 919, is needed to prevent pension costs from “crowding out” funding for higher education, health care and other programs.
“In California we had the internet bubble, we had the housing bubble, and I see in the very near future a public pension bubble,” Schwarzenegger said at a news conference.
Schwarzenegger proposed last year that pensions for new state hires (the pensions of current workers are protected by court decisions) be rolled back to the level in effect before a major benefit increase a decade ago.
A pension reform group wanted to put an initiative on the November ballot to cut benefits for new state and local government hires. But the drive stalled after Republican gubernatorial candidate Meg Whitman and others did not provide hoped-for funding.
Labor officials, who have the ear of Democratic legislators, say any pension benefit changes must be negotiated. A Highway Patrol official has said lower benefits for new hires might be considered as an alternative to a more punitive initiative in the future.
The spiking of pensions drew national attention last year after the Contra Costa Times reported that two fire chiefs retired, at ages 50 and 51, with pensions far larger than their final salary.
The author of a bill, SB 1425, imposing new spiking controls on the California Public Employees Retirement System and the California State Teachers Retirement System said he is asked why he is carrying the bill.
“The answer is it was an issue I heard about repeatedly during year 2009, more than at any time during my 25 years of public service,” said state Sen. Joe Simitian, D-Palo Alto, a former mayor, school board member, county supervisor and assemblyman.
Public pensions are based on years served multiplied by a percentage of the final pay, usually 2 to 3 percent in California. A common way to spike a pension is to boost the final pay by cashing out unused vacation and leave time and a number of other things.
CalPERS sponsored legislation, SB 53 in 1993, that created screens and audits to control spiking. Similar legislation for the 20 county retirement systems operating under a 1937 act, SB 2003, failed in 1994.
Now Assemblywoman Fiona Ma, D-San Francisco, is carrying a bill, AB 1987, that would impose spiking controls on the 1937 act counties, including the Contra Costa system that administers the pensions for the two fire chiefs.
“I decided to take on this bill because I agree that reform is necessary to protect not only the health of our system but the public’s trust of our system,” Ma told an Assembly committee last week.
A complication for the 1937 act systems is a state Supreme Court ruling in a Ventura County suit in 1997 that a number of things had been improperly excluded from final pay, resulting in retroactive increase for retirees and a wide range of settlements.
If anti-spiking legislation passes, the 1937 act systems are said to be worried about lawsuits claiming Ventura decision violations. Other problems: a lack of resources to enforce the new controls and potential conflicts with counties.
The two anti-spiking bills have a provision aimed at curbing “double-dipping,” which is retiring and then returning to the same or similar job. The retiree would have to wait six months before taking a job covered by the same pension system.
To save money, the city of Rocklin, near Sacramento, boosted the pensions of nine retiring managers earlier this by giving them credit for an additional two years of service, then rehired them in their old jobs as part-time employees.
Representatives of counties and a school business group asked for more “flexibility” in the six-month ban, arguing that recent retirees are sometimes needed for things like filling jobs temporarily during recruitment and training.
A pension scandal in New York early last year led to the disclosure by CalPERS that the firm of one of its former board members, Al Villalobos, collected about $60 million in “placement agent” fees for helping private equity firms get CalPERS funds.
A bill sponsored by state Treasurer Bill Lockyer, AB 1743, requires placement agents to register as lobbyists and bans contingency fees based on the amount of funding received. He said the Legislature abolished contingency fees for lobbyists 60 years ago.
The bill moved out of a committee earlier this month, despite financial industry opposition to the fee ban and no support from Republicans. Democrats worried that small minority-owned investment firms might be harmed by the fee ban.
Because the bill modifies the political reform act, a two-thirds vote is needed on the floor, requiring some Republican votes. A compromise on the fee issue or a rewritten bill that does not change the political reform act may be necessary.
“My guess is if we can’t reform the system, pension funds in California are going to do what New York did, which is just ban placement agents,” Lockyer told the committee. “And I think frankly that hurts the small ones (investment firms).”
It was bad enough when CalPERS reportedly lost $500 million and CalSTRS $100 million on what some have called the biggest real estate deal in U.S. history, $5.4 billion for New York’s Stuyvesant Town and Peter Cooper Village rental complex.
But critics call it a “predatory equity” plan in which the huge purchase is intended to be paid off by raising rent-controlled units to market prices, forcing low-income tenants out of affordable housing.
CalPERS also lost $100 million in a similar ill-fated attempt by Page Mill Properties to upgrade 1,700 rent-controlled units in East Palo Alto, triggering a long legal battle with the city and tenant groups.
Chris Lund of the East Palo Alto Fair Rent Coalition told a legislative committee last week that the development “resulted in the displacement of over 1,500 predominantly Latino and African-American low-income residents in less than 18 months.”
A number of the displaced tenants are said to be CalPERS members. “It’s unconscionable to use your own money to displace yourself,” Terry Brennand of Service Employees International told the committee.
A bill, AB 2337 by Assemblyman Tom Ammiano, D-San Francisco, would prohibit CalPERS and CalSTRS from making “predatory” investments. The CalPERS board last week adopted a policy with the same aim.
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