Meddling by Public Pension Funds Is Picking California's Pocket
Gov. Arnold Schwarzenegger last week proposed shifting California's pensions for state workers from a massive plan guaranteed by taxpayers to individual 401(k)s controlled by the workers themselves. It's a great idea, not just because it would save taxpayers billions but because it would keep the politicians and union activists who currently run the state's pension funds from improperly meddling in corporate boardrooms.
That's what they do -- and they're increasingly effective at it. Over the last 20 years, public pension funds have grown nearly sevenfold -- to more than $2 trillion nationwide, outpacing private-sector fund growth by more than one-third and making them tremendously powerful in boardrooms across the country.
Why do they want to meddle? Because they can. Although private-sector fund managers focus on picking lucrative investments -- because that's how they get paid -- public fund trustees have different incentives. Sure, they want funds to perform well. But if they don't, they know that taxpayers will make up the shortfall. So they're free to pursue political objectives.
Public funds first discovered their political strength in the mid-1980s, when they successfully pressured companies with business in South Africa to lobby against apartheid or to withdraw from that nation. For years, activist pension funds focused on broad-brush issues like apartheid. They didn't meddle with corporate management.
But the public funds have taken the corporate scandals of the Enron era as a license to step up their interference with corporate boards. "The age of investor complacency must be replaced by a new era of investor democracy," said Phil Angelides, California treasurer and a member of the board of CalPERS, the state's main pension fund.
Of course, when you look more closely, the trustees are more interested in advancing their own self-interested political agenda than in advancing democracy. Democracy, after all, would mean letting workers control their own retirement accounts, as Schwarzenegger wants to do.
Take CalPERS. Its board was headed until two weeks ago by Sean Harrigan, who moonlights as the regional director of one of California's most powerful private-sector unions, the United Food and Commercial Workers. This resulted in a hopeless conflict last year, when the fund mounted a fight against Safeway just after the supermarket chain had resolved a four-month strike by Harrigan's union.
