One of the more astute observers of public sector union impact on government policy and government budgets is Steven Malanga, a senior fellow with the Manhattan Institute. In an article just published in City Journal entitled “The Pension Fund That Ate California,” Malanga recounts the history of CalPERS from its modest inception in 1932 to the monster it has become today. It ought to be required reading for every taxpayer in California. And it provides ample evidence of how the political agendas of public sector unions and the financial sector are closely aligned and coordinated, despite the barrage of propaganda from public sector unions that would have voters believe the opposite is the case.
As Malanga recounts, when CalPERS started back in the 1930’s, during the onset of the great depression, the financial risks of investing too aggressively or over-promising benefits were well understood. Pension fund investments were restricted to federal Treasury bonds and state municipal bonds. Retirement ages were set at age 65, and the pension formula was set at 1.43 percent of a retirees average salary during their last five years working. And not much changed until rise of public sector union power in the late sixties.
The following excerpt from Malanga’s article explains how today, the interests of CalPERS are completely intertwined with those of the public sector unions, by describing how the public sector unions now virtually control the CalPERS board of directors:
“Six of the board’s 13 members are chosen by government workers, and as union power grew in California, those six increasingly tended to be labor honchos. Two more members are statewide elected officials (California’s treasurer and controller), and another two are appointed by the governor.”
Since California’s treasurer, controller, and governor are all elected thanks to massive political contributions from public sector unions, this means that a supermajority of the CalPERS board, 10 of the 13 members, are likely if not certain to be pursuing the agenda of the unions. And as Malanga notes, the unions even thwarted current Gov. Brown’s recent attempt to include in his pension reform a plan to add two members with financial expertise to the CalPERS board.
Malanga’s report includes abundant examples of conflicts of interest that are inevitable when a politically managed fund controls hundreds of billions in investments. Two of the of the most chilling examples are how investment firms made political contributions to union backed candidates, while, coincidentally, CalPERS then directed investments from their pension fund into these firms.
“These blockbuster allegations of influence-peddling came after nearly a decade of warnings of apparent conflicts of interest within CalPERS, prompting Businessweek to observe “an unpleasant whiff of pork-barrel politics rising from the board.” One example involved Ron Burkle, a major political donor in California. Burkle was a significant giver to Angelides’ campaign for treasurer, and he employed another board member, former San Francisco mayor Willie Brown, to do legal work for him. But Burkle’s closest ties were with Governor Gray Davis: he gave $600,000 to Davis’s gubernatorial campaign and appointed Davis’s wife to the board of directors of one of his companies. CalPERS invested some $760 million in Burkle’s private equity funds from 2000 through 2002.
Another disturbing case involved board member Sean Harrigan, also an officer of the United Food and Commercial Workers International Union. Between 2000 and 2004, the Sacramento Bee reported, Harrigan openly solicited donations for a union campaign fund from various investment companies that won multimillion-dollar deals from CalPERS. The companies ponied up $300,000. A CalPERS spokesperson said that the fund was unaware that Harrigan was soliciting donations from firms that did business with it, adding that there was no prohibition within CalPERS against the practice.”
Control of CalPERS by public sector union advocates has resulted in pension formulas increasing from 1.43% at 65 to between 2.0% and 3.0% at 50 to 60 today. It has resulted in an aggressive, risky investment strategy that, using the latest estimates, leaves CalPERS now underfunded by at least $80 billion. But control of CalPERS by public sector unions also has turned it into a lobbyist and a powerful public spokesperson. As Malanga writes, the information CalPERS puts out to voters is often deliberately misleading:
“Meanwhile, CalPERS’s rejoinders to its growing chorus of critics continue to mislead. Responding to a September 2012 opinion piece by Gary Jason, a California State University professor, about the impact of pension costs on municipal bankruptcies, CalPERS claimed that pensions were only a small part of the problem, accounting for just 10 percent of Stockton’s budget, for instance. But in 2011, when Stockton declared a fiscal emergency, it listed $29 million in payments to CalPERS and $7 million to repay previous pension borrowings, which together equaled 21 percent of its total general-fund spending of $168 million. In a March 2011 analysis of its fiscal plight, city officials blamed ‘uncontrolled pension, health, and other benefit cost increases.’
CalPERS also understates the growing financial stress caused by pension obligations. This past August, for instance, board member Rob Feckner published a disingenuous op-ed in the Sacramento Bee responding to critics of Cal- PERS’s most recent poor investment performance. Feckner said that the media misunderstand the fund’s investment strategy, which focuses not on a single year but on long-term results. He noted that over the last 20 years, the fund had hit its investment targets more frequently than it had missed them. Yet he ignored the sharp increases in taxpayer contributions that CalPERS demanded when it missed its targets, as well as the fiscal smoothing gimmicks that it wielded to keep contributions from rising even more.”
When someone considers public sector union power, which in California runs on well over $1.0 billion each year in dues revenue and a standing army of full-time professionals, volunteers, and retirees, even that isn’t necessarily enough to explain their nearly absolute control over every city, county, and agency in the state, up to and including the state legislature. It is the alliance between the largest financial interests in California combined with the political clout of the unions, that makes them pretty much omnipotent.
In California, financial interests issue bonds to cover what is now nearly a trillion dollars in outstanding government debt, and they invest nearly half-a-trillion in public employee pension fund assets. Despite a well cultivated perception that the public sector unions fight these financial interests, in reality they want the same things: Deficits which accompany more spending on union payrolls require new bonds to be issued at great profit to the issuers, and more pension benefits provide additional compensation to union members, requiring more money for the bankers to manage – at great profit. Only the taxpayers lose.