For much of the last decade the California Public Employees' Retirement System cultivated the image of a cutting-edge pension fund -- pouring billions of dollars into potentially lucrative but high-risk investments, hounding companies to rein in executive pay and championing financial security for government workers.
Now, CalPERS finds itself caught in a maelstrom of troubles that threatens its reputation as the gold standard for public pension funds.
Slammed by huge investment losses in last year's meltdown of financial markets, the nation's largest public retirement plan faces questions about its long-term ability to make good on the benefits it owes more than 1.6 million workers, retirees and their families.
All Californians have a stake in the fund's performance: If CalPERS' $200-billion portfolio comes up short, and state and local governments refuse to cut workers' benefits, the bill falls to taxpayers -- many of whom have no guaranteed pension benefits of their own.
Already, CalPERS has notified state and local government authorities that their contributions to the fund will have to rise beginning in 2011 or 2012, reflecting the steep drop in the system's assets during the markets' crash.
CalPERS also has been tainted by its involvement with so-called placement agents, middlemen who lobby pension funds on behalf of big money managers.
One well-known middleman, former Los Angeles Deputy Mayor Alfred J.R. Villalobos, has raked in at least $70 million in fees over the last decade from investment firms eager to pitch their services to the fund.
To a large degree, CalPERS' woes are issues for all major public pension systems in the wake of the dive in financial and real estate markets since late 2007. Fear of future shortfalls in funding is dogging funds large and small nationwide.
But CalPERS' troubles have stood out because of the fund's size and its longtime status as a pacesetter for the pension field:
* Despite the fund's vaunted moves to diversify into real estate, corporate buyouts, commodities and other investments apart from plain-vanilla stocks and bonds -- a strategy aimed at boosting overall investment returns -- CalPERS' portfolio now lags its peers over the last decade.
The fund performed worse than the average big public pension fund over the last year, five and 10 years ended June 30, according to CalPERS' financial consultant, Wilshire Associates. CalPERS' portfolio sank 23.5% in the last fiscal year, while the average large pension fund dropped 18.8%.
* Some high-profile bombs in CalPERS' real estate portfolio have raised questions about the fund's ability to choose intelligently among the countless deals it is offered by Wall Street money managers.
CalPERS lost nearly $1 billion after betting in 2007 on the mammoth Newhall Ranch housing development north of Los Angeles. Now in jeopardy is the fund's $500-million investment in 2006 to buy a piece of a massive apartment complex on the east side of Manhattan.
Here too, CalPERS has fared worse than its peers: Its real estate portfolio overall lost an average of 8.6% a year in the last three years, compared with an annualized decline of 4% for the average public pension fund's real estate investments.
Rob Feckner, the president of CalPERS' board, concedes that the fund made mistakes with some of its property investments. "We've learned some things in the last few years, and we've tightened our policies as a result of that," he said.
* The placement-agent investigations have caused critics to focus on the broader issue of political influence over CalPERS' massive pool of money -- the question of who gets the ears of the fund's board and staff, and whether investments are made on their merits or because of heavy lobbying.
It's no secret in Sacramento that CalPERS board members routinely are taken to lunch or dinner by money managers or their agents.
George Diehr, who has been on the 13-member board since 2002 and now chairs the investment committee, estimated that he had been out to eat with money managers 10 times this year.
"A lot of it is understanding the opportunities that are out there and how these investments work," Diehr said. But when it comes to deciding whether to choose a particular manager or idea, "those decisions . . . are really driven by the staff," he said.
Critics aren't mollified -- and the Villalobos affair has sharpened their attacks.
"The fact of the matter is that investment products salesmen should not be meeting the board members," said Dave Elder, who chaired the California Assembly's public employees committee for a decade until retiring in 1992. Salespeople, he said, "need to be meeting the investment staff. If the investment staff screws up, they can be fired."