CalPERS victimized as California Treasurer John Chiang seeks union support for his campaign for Governor

By Kevin Dayton
June 26, 2017

With California Governor Jerry Brown termed out in 2018, prominent Democratic Party politicians crave the highest executive position in the country’s most influential state. They’re figuring out which campaign strategies will allow them to become one of the two top finishers in the June 2018 primary elections and thus advance to the November 2018 general election.

Much of the early media attention is focused on well-known former big-city mayors Gavin Newsom and Antonio Villaraigosa. Lagging behind them in the polls is California State Treasurer John Chiang.

But Chiang has a plan. He seems to be adopting a campaign strategy adopted by former State Treasurer and 2006 gubernatorial candidate Phil Angelides: use the authority of the Treasurer’s office to curry favor with special interest groups.

Earlier this year Chiang exercised this strategy when he sold bonds to fund California High-Speed Rail. His decision was controversial. Critics contend that the state should not be borrowing money for this project. They say the California High-Speed Rail Authority lacks public accountability, its funding from the federal government is uncertain, it has no valid private investors (as required by law), and it is violating Proposition 1A, the ballot proposition that voters approved in 2008.

Chiang could have resisted selling the bonds and proclaimed his independence and commitment to serve as a check and balance against imprudent fiscal decisions of the legislature and Governor. He didn’t do it. He can’t jeopardize his strategy to get campaign support from unions and large multi-national construction and transportation conglomerates.

Another way Chiang is pursuing his strategy to appeal to special interest groups is his attempt on behalf of unions to manipulate contract conditions of the California Public Employees’ Retirement System (CalPERS), the largest defined-benefit public employee fund in the United States. At his instigation, the CalPERS Board of Administration voted on June 21, 2017 for a union-backed “labor neutrality” policy meant to prevent CalPERS contractors from engaging in speech that deters their employees from organizing into labor unions.

Chiang’s intrusive action is reminiscent of the “social responsibility” investment practices imposed on CalPERS by Phil Angelides when he was Treasurer from 1998 to 2006. Those practices ended up compromising the rate of return for CalPERS investments and contributed to its current $60 billion unfunded pension liability and $77 billion unfunded liability for retiree health care.

As noted in a June 20, 2017 Sacramento Bee editorial criticizing Chiang for the proposal, “a demand of labor fidelity by CalPERS also could drive up costs for a retirement system that already is requiring state and local governments to pay billions more to cover retiree benefits.” But Chiang is willing to take the risk of harming CalPERS beneficiaries as he hopes for his campaign to be the beneficiary of support from unions. Consider the political power behind the five speakers who supported his policy at the June 21 CalPERS Finance and Administration Committee meeting:

•  Pat Whalen, United Nurses Associations of California/Union of Health Care Professionals

•  Terry Brennan, Service Employees International Union (SEIU)

•  Sara Flocks, California Labor Federation, AFL-CIO

•  Tristan Brown, California Federation of Teachers

•  Brian Allison, American Federation of State County & Municipal Employees (AFSCME)

No one spoke during public comment against the policy, but it was not embraced wholeheartedly. Most of the substantive discussion among CalPERS board members and staff about Chiang’s proposed policy addressed two potential risks related to legality and fiduciary responsibility.

Is “Labor Neutrality” in Contracts Legal?

In developing the specific language for CalPERS contracts demanded by Chiang and union officials, CalPERS staff had to avoid running afoul of a U.S. Supreme Court decision (Chamber of Commerce v. Brown). In 2008, the U.S. Supreme Court struck down a California labor neutrality policy for state contractors (Assembly Bill 1889) signed into law in 2000 by Governor Gray Davis. According to the court’s decision, California and other states must defer to the federal National Labor Relations Act and can’t interfere with employers’ protected federal rights to speak to their own employees on the subject of unionization.

To avoid violating the free speech rights of contractors, CalPERS staff consulted with legal counsel and then developed an “aspirational” policy rather than an “operational” policy. The idea is that setting a labor neutrality goal in contracts is legal, while imposing a labor neutrality mandate in contracts is not.

Union representatives weren’t satisfied with the cautious approach of CalPERS staff and its legal counsel. They declared the policy to be “incredibly important” and called for stronger ways to enforce it on all contracts or on a subset of contracts. They asked to participate in a stakeholders group to determine how to make the policy operational and enforce it. And they asked the CalPERS board to waive executive privilege so they could get confidential legal analyses of Chiang’s proposed policy.

It’s likely Chiang will use his seat on the CalPERS Board of Administrators to push CalPERS staff to give union representatives significant influence in the development and implementation of the operational elements of this policy. Based on discussion among CalPERS board members, unions are apparently planning to target hospitals and other healthcare providers that have contracts with CalPERS. (This is not surprising: unions primarily targeted healthcare facilities operators under Assembly Bill 1889 before that state labor neutrality law was invalidated by the US Supreme Court.) It’s likely that one of those healthcare providers will counter with a lawsuit against CalPERS.

Will “Labor Neutrality” in Contracts End Up Raising Costs and Harming Beneficiaries and Taxpayers?

When it engages in investment management and benefit administration, CalPERS must work in the best interests of more than 1.8 million retired government employees in its pension system and 1.4 million members and their families in its health program. But did Chiang consider the best interests of CalPERS beneficiaries before calling on CalPERS to pressure its contractors not to speak to employees about unionization?

Potential costs to CalPERS of the labor neutrality policy were discussed during the Finance and Administration Committee meeting. CalPERS staff and some board members warned that administering the policy would cost staff time and money. In addition, some board members recognized that the policy could discourage some companies from bidding on CalPERS contracts, thus decreasing bid competition and increasing low bid amounts.

Cost is a sensitive issue. CalPERS is under duress because its annual rates of return fall short of rates needed to avoid additional unfunded liabilities.

Chiang obviously anticipated suggestions that the neutrality policy was not in the best interests of members and beneficiaries. To introduce the policy, the Treasurer’s representative on the CalPERS board read a prepared statement claiming the policy was needed “now” because “the Treasurer sees a workforce that’s empowered to make decisions in their best interest as a more productive workforce.”

This argument is apparently meant to establish a statement in the committee record that the policy would end up saving money for CalPERS and thus serve the best interests of beneficiaries. But the logic needed to make this claim is based on unsubstantiated assumptions about unionization and influences on worker productivity.

The Policy Is Approved With an Uncertain Outcome for CalPERS and Chiang

Ultimately the CalPERS Finance and Administration Committee voted 4-2 to approve the policy proposed by Chiang. (The committee chairman did not vote, as is customary unless a tie needs to be broken, but he expressed concerns about the policy.)

Chiang’s victory was bolstered when the full CalPERS Board of Administration approved the policy later that day by voice vote. (Some board members voted NO but a roll call vote was not taken.)

Chiang can now cite this victory as an argument for unions to support him rather than Gavin Newsom or Antonio Villaraigosa. Maybe that will help him to become one of the two top finishers in the primary and then win the general election in the fall.

Meanwhile, CalPERS may soon need to deal with lawsuits and higher costs resulting from the labor neutrality policy. It’s the price of politics.

OPINIONS

It’s One Thing to Back Labor. But Treasurer Chiang’s CalPERS Proposal Goes Too FarSacramento Bee editorial – June 20, 2017

CalPERS Can Send a Strong Message to Trump – commentary by California Treasurer John Chiang in response to Sacramento Bee editorial – June 20, 2017


Kevin Dayton, a frequent contributor to CPC’s Prosperity Digest, is the President & CEO of Labor Issues Solutions, LLC, and is the author of frequent postings about generally unreported California state and local policy issues at www.laborissuessolutions.com. Follow him on Twitter at @DaytonPubPolicy.

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