Would helping labor hurt CalPERS’ profits?

CalPERS is under pressure to change its real estate policy, making it easier for labor unions to organize workers. But opponents say that could conflict with the CalPERS duty to maximize profits.

The giant pension fund, hiring three outside law firms for advice, launched a complex process of workshops and negotiations last year that has failed to produce an agreement between labor unions and CalPERS investment partners.

A policy change proposed by staff, despite opposition from labor unions, was criticized by state Treasurer Bill Lockyer and other California Public Employees Retirement System board members at an investment subcommittee meeting last week.

The chairman, Henry Jones, told staff to prepare a revised policy for consideration in August after meeting with labor and circulating drafts to all the parties. He asked staff to determine if some issues should be assigned to a new Risk Management Committee.

“As we all know, CalPERS has been and continues to be a leader on labor policy issues for institutional real estate and now infrastructure investments,” Jones told the committee.

“Through the implementation of a policy, CalPERS will continue to demonstrate its support for fair wages and benefits and proper working conditions for employees at CalPERS owned investments,” he said.

In 1994 a Responsible Contractor Program was adopted for real estate investments more than 50 percent owned by CalPERS. The policy, amended from time to time, addressed the concerns of both labor and the investment partners.

The move to revise the policy began last year after labor complained that provisions calling for “neutrality” during organization drives and enforcement were too weak.

Improved enforcement might mean random audits and imposing penalties, which could increase costs and require more CalPERS staff. But several labor officials told the subcommittee that “neutrality” is the main issue.

“We reject the notion that neutrality by itself is a fiduciary risk,” Marguerite Young of the Service Employees International Union said of the legal obligation of CalPERS board members to properly invest pension funds.

“It just doesn’t add up,” said Young. “Neutrality doesn’t assure a union, and a union doesn’t assure a loss in value.”

The investment partners contend that what labor wants would reduce the “competitiveness” of CalPERS, limiting investment opportunities and potentially resulting in lower profits.

A Lockyer representative and other board members were skeptical, saying CalPERS would remain a very desirable investment partner, particularly in the current economy.

Representatives of investment partners listened to the subcomittee hearing by telephone. They are expected to make their pitch, already expressed in detail in the CalPERS staff report, at the August meeting.

Peter Mixon, CalPERS general counsel, told the subcommittee that any decision to change the Responsible Contractor policy would be subject to fiduciary standards, not just labor law that has been the focus of workshops and the subcommittee meeting.

“The overarching fiduciary duty of maximizing competitive risk-adjusted rates of return, I think we have heard, will be clearly impacted by the types of changes that labor advocates are suggesting, both here today and throughout the process,” Mixon said.

The subcommittee was given a specific example of what labor wants by a representative of Unite Here, a union representing hotel, restaurant, textile and other workers that has recently been at odds with SEIU.

CalPERS invested $100 million in April 2006 in what would have been Sacramento’s most spectacular building — twin 53-story condominium towers sitting atop a 230-room hotel several blocks from the CalPERS headquarters building.

But the Towers on Capitol Mall never got beyond the pile-driving stage. In June 2007, as the real estate bust gathered steam, CalPERS announced that it had acquired the interest of developer John Saca for an undisclosed amount.

CalPERS said one of its long-standing partners, CIM Group of Los Angeles, would “resolve issues with outstanding creditors and complete the first phase of site preparation and then, over the next 18 months, focus on creating a viable development program for this important site.”

Now, two years later, the site is a weed-grown block in downtown Sacramento, surrounded by a fence. Development plans have apparently been put on hold during the economic downturn.

Ivana Krajcinovic of United Here told the subcommittee that the current CalPERS neutrality policy would have covered Saca, but not the operator he had selected to run the hotel, Intercontinental.

“So with this language a hotel could open up that you own, three blocks from your headquarters,” she said, “and an operator could come in and start an all-out anti-union war, if workers decided to try to stand up and try to organize a union.”

Krajcinovic said the CIM plans for the site are unclear. But, she said, CIM has made it clear that it does not want to impose neutrality on its delegates or contractors.

“Right now we have gone back and forth with CIM, and we are clearly at some sort of Mexican stand-off,” she said. “Without clear direction from the client, that’s going to continue.”

In written comments in the CalPERS staff report, CIM said it continues to agree “with the stated goal of neutrality,” but warned against imposing “strict requirements” on CalPERS projects.

“Such requirements could unfairly subject the advisor to potential liability, and could also be at odds with the Fiduciary Duty Requirement (in particular at smaller hotels, where the benefits of union contracts may not outweigh the increased costs/inefficiencies, which can be more pronounced in a smaller-hotel environment),” CIM wrote.

Real estate is a growing part of the $181 billion CalPERS investment portfolio, increasing from 5 to 12 percent during the past decade. But it’s also been troublesome, producing high-profile losses and some community-activist protests.

CalPERS said this month that it could lose nearly $1 billion in an ill-timed Southern California land deal. The CalPERS board heard more complaints last week from low-income tenants in East Palo Alto, who say they are being pushed out by a developer who received $100 million from CalPERS. (See Calpensions 2 Feb 09: “CalPERS: Pushing out the poor”)

To improve control, the CalPERS board last week adopted a single steamlined real estate policy, replacing about two dozen separate policies, and placed limits on the delegation of authority.

Ed Mendel  covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. This story and others can be viewed at http://calpensions.com.