Calpers Managers Leave as Board Seeks Job Protection

April 28, 2008

By Dan Levy, Bloomberg

April 28 (Bloomberg) -- The California Public Employees' Retirement System is losing two top executives as board members of the largest U.S. public pension fund seek assurances that investment decisions won't cut civil service jobs in the state.

Chief Executive Officer Fred Buenrostro may leave by year- end, two people familiar with the matter who declined to be identified said last week. Chief Investment Officer Russell Read announced his resignation from Sacramento-based Calpers, as the fund is known, on April 23 after running the $244 billion fund for two years.

The 13-member board, which includes six representatives elected by current and retired state workers, is debating over plans to invest about $5 billion in toll roads, power plants and other infrastructure projects. Board members and government workers want assurances the investments won't lead to job losses in California, said George Diehr, the board's vice chairman. The staff is seeking to avoid restrictions that could reduce the fund's returns, said the people.

"It would not seem appropriate to engage in projects that had an impact on their jobs,'' Diehr said in an April 26 interview. "I don't see it as that restrictive in light of the huge need for infrastructure development, both in the United States and internationally.''

A Calpers committee overseeing investment policy met April 21 to review proposed guidelines for infrastructure investments, Diehr said. The fund already has guidelines to ensure it doesn't make decisions that would eliminate jobs of pension members.

Balancing Act

"There are a fur ball of issues,'' said Casey Jennings, a principal at Lincoln Road Partners LLC in Lincoln, Massachusetts, which arranges debt financing for municipalities. "How does a pension fund invest in infrastructure amid privatization, when its fiduciary responsibility is to get the best, safest return?''

Board President Rob Feckner and Buenrostro declined to comment. Read said last week that he was leaving to pursue investments in environmentally friendly technology.

A spokesman for Calpers, Brad Pacheco, said he hadn't heard the debate had anything to do with Read's departure, and wasn't familiar with Buenrostro's plans. Diehr and Louis Moret, another board member, said they doubted the guidelines on new infrastructure investments would have prompted Buenrostro, 58, or Read, 44, to leave.

Read led the retirement system to increase investments in private equity, real estate and emerging markets. The fund put $450 million into commodities last year for the first time.

Investment Shift

The board approved Read's proposal in December to invest as much as 5 percent of its money into a new class of investments, including public construction projects.

Calpers earned a 19.1 percent in the year ended June 30, according to its most recent annual report, compared with a gain of 18.4 percent on the Standard & Poor's 500 Index of stocks.

"This is a government agency that is pretty well run that has made double-digit returns over a number of years,'' Moret said. "We will miss Russell, but there's a lot of good people out there.''

A spokesman for California Governor Arnold Schwarzenegger said his office had no comment on the personnel changes.

The governor, a Republican, "believes all investment ideas should be looked at in order to earn the highest yield for taxpayers and the pensions of California's hardworking employees,'' said Rachel Cameron, his spokeswoman.

'Natural Struggle'

The Calpers board meets every month and oversees the investment policies and administration of the 76-year-old pension fund, which also manages health-care benefits for 1.5 million current and retired state workers and their families.

"There's always a natural struggle between the board and the CEO,'' said Richard Koppes, a lawyer at Jones Day and former general counsel of Calpers who worked at the fund from 1986 to 1996. "It's a very diverse, ego-driven group like any board of a major organization.''

The board includes the state controller, treasurer, director of personnel administration and a member of the State Personnel Board. Three members are appointed, two by the governor and one by lawmakers. The rest are elected by constituents of the fund, such as retirees, school workers, and the entire membership.

"It's not like a corporation where basically you get a number of people with common interests and fairly common backgrounds,'' said Stephen Nesbitt, chief executive officer of Cliffwater LLC, a Los Angeles-based company that advises pension funds on investments.

'Board Driven'

Moreover, Calpers is a "board-driven'' organization whose directors propose investments to the fund's professional staff, said James McRitchie, publisher of CorpGov.net, a corporate governance publication, and self-appointed Calpers watchdog.

"One of the challenges with infrastructure is the impact on the existing public-sector workforce,'' Sean Harrigan, a former Calpers board president and labor leader. "We're in the early innings of that debate.''

Read will be replaced by Anne Stausboll, 51, the fund's chief operating investment officer, who will serve as interim CIO until a permanent successor is found.