The Texas Association of Public Employee Retirement Systems

Federal Report: March 2002

Summary

CalPERS Adopts ‘Permissible Country’ Model for Investing in Emerging Markets

Democratic Leaders Pledge Full Floor Debates on Social Security

Milwaukee County Executive Resigns over Pension Plan Politics

Witnesses Say Enron Collapse May Show Need to Amend 1995 Law

CalPERS Launches Financial Market Reform Initiative

Portman, Cardin Legislation Aims to Protect 401(k) Plan Assets

U.S. Labor Department to Offer Early Retirements

CalPERS Adopts 'Permissible Country' Model for Investing in Emerging Markets

The California Public Employees' Retirement System (CalPERS) has completed its comprehensive review of emerging market countries with which it will invest public equity in the future. The pension fund's board adopted a new "permissible country" review proc-ess that takes into account broad financial factors as well as transparency, political stabil-ity and labor practices/standards.

The board's decision was based on a report by the system's pension consultant Wilshire Associates. CalPERS review of the emerging markets is believed to be the first of its kind ever done by a public pension fund that looks beyond traditional economic factors and considers basic democratic principles.

"We now have in place a blueprint to examine which emerging markets can support institutional investment," said Michael Flaherman, chair of CalPERS Investment Commit-tee. "It is a screen and an important entry point for investments into our portfolio that will help to protect our pensioners assets in the emerging markets."

Based on its new review process, CalPERS will begin taking a public equity posi-tion in Poland and Hungary. CalPERS decided to withdraw investment in public compa-nies in four Asian countries - Indonesia, Malaysia, the Philippines and Thailand. The move by CalPERS to pull out of four emerging markets on ethical grounds met with a mixed response from European pensions funds.

"We welcome the fact that of one of the world's largest pension funds has entered the debate about how to encourage companies to behave responsibly," said Raj Tha-motheram, Senior Adviser of Socially Responsible and Sustainable Investment (SRSI) at the UK-based Universities Superannuation Scheme. "We also think the criteria they are using are right because they all have fiduciary relevance - indeed there are other criteria, like bribery and corruption and gross human rights abuse which should also be considered for the same reasons."

However, others worried that a blanket ban on investment would do little to encour-age errant countries to change their ways. Peter Norman, president of the Swedish AP7 pension fund, which introduced its own SRSI policy, said, "These countries are in desper-ate need of capital so excluding them from capital is not going to be very helpful."

CalPERS will allow its managers to invest in emerging markets in Argentina, Brazil, Chile, the Czech Republic, Hungary, Israel, Mexico, Peru, Poland, South Africa, South Ko-rea, Taiwan, and Turkey.

"This is a living document subject to on-going change, not a static policy," said Wil-liam Crist, president, CalPERS Board of Administration. "Reforms have been made in re-cent years in the emerging markets that have increased their appeal to foreign investors. We will reevaluate our model as the emerging markets change and develop over time."

Democratic Leaders Pledge Full Floor Debates on Social Security

House and Senate Democratic leaders in February vowed full floor debates on So-cial Security's future and stressed the risks of investing a portion of Social Security payroll taxes in individual savings accounts. House Majority Leader Dick Armey (R-Texas) an-nounced he will schedule consideration of a bill (HR 3135) that would guarantee full bene-fits for current Social Security enrollees, a precursor to a later move to set up individual accounts for younger workers.

Senate Majority Leader Tom Daschle (D-S.D.) and House Minority Leader Richard A. Gephardt (D-Mo.) told their Republican counterparts in a letter that they want to focus on the costs and risks for future beneficiaries as well.

"We believe the American people want and deserve a national dialogue about any plans to privatize Social Security," they wrote. The letter also refers to the benefit-guarantee bill, saying that "cursory consideration" of the bill on the House suspension cal-endar "is clearly insufficient for a matter of such fundamental importance."

Milwaukee County Executive Resigns over Pension Plan Politics

Milwaukee County's top executive resigned Feb. 21, citing the fallout from the Wis-consin county's approval of a pension plan that could give million-dollar payouts to some politicians. "I have sadly come to the conclusion that I cannot effectively lead this govern-ment at this time," County Executive F. Thomas Ament told the Associated Press.

Ament, 64, said he will retire two years before the end of his current four-year term. He was elected county executive in 1992. He and several County Board members were targeted for recall after it was learned that the enhanced pension plan they approved in 2000 would give Ament and other top politicians big lump-sum payments - $1 million or more, in some cases - in addition to monthly checks when they retire.

Ament has said he did not know the payouts would be so high, and he agreed re-cently not to collect the higher benefits himself. During the furor, his chief of staff resigned, and Ament also asked for the resignations of three top aides he said had failed to provide adequate information on the pension changes. "I take responsibility for this, and I'm truly sorry that it happened," Ament said.

Gov. Scott McCallum, who had urged Ament to step down, said he made the right decision. Under the enhanced plan, Ament would have gotten a lump sum of $559,000 and an annual pension of $102,000 if he had retired in 2004. County officials said it was not immediately clear how much he would get in retirement benefits upon leaving office next week.

Ament said the recall effort did not figure in his decision. "I'm going to take a rest. I plan on doing something, but I have no plans now," he said.

Board Chairman Karen Ordinans said she would assume Ament's responsibilities until she appoints an interim county executive. She must do that within 30 days. The board passed an ordinance that would scale back sick pay benefits that allowed retiring workers to collect payments for all of their unused sick pay. Ament said he would sign the measure.

The pension plan changes let the county offer only a small pay raise to its 5,800 full-time employees and avoid a major tax increase. More than 300 county employees have retired or are considering it because of the enhanced pension benefits, said Jac Amerell, head of the county pension office.

Witnesses Say Enron Collapse May Show Need to Amend 1995 Law

Congress needs to consider amending a 1995 law that limits lawsuits by share-holders to recoup losses, members of the Senate Judiciary Committee were told Feb. 6. Washington state Attorney General Christine O. Gregoire and Bruce Raynor, president of the Needletrades, Industrial and Textile Employees union, told the committee that the Pri-vate Securities Litigation Reform Act (PL 104-67) may need to be changed.

Critics say the law unfairly shields accounting firms from liability in civil lawsuits. Committee Chairman Patrick J. Leahy (D-Vt.) is drafting legislation that would likely roll back portions of the law. But Stephen Schatz, a Palo Alto, Calif., attorney, said Congress should maintain provisions that limit the discovery phase of private securities class-action suits actions until a judge determines there is enough evidence to proceed to trial.

"Responses to the Enron disaster must be carefully tailored to avoid creating new vehicles for frivolous litigation," Schatz said. He spoke against broad efforts to roll back the act, including legislation (HR 3617) introduced by Rep. Edward J. Markey, D-Mass.

CalPERS Launches Financial Market Reform Initiative

The California Public Employees' Retirement System (CalPERS) has announced a new action plan to promote market changes to "prevent future Enrons." The CalPERS Board of Administration is urging Congress, the Securities and Exchange Commission and others to adopt a package of financial market reform principles.

"Our pensioners and pensioners everywhere depend heavily on ethical, transpar-ent, and accountable financial markets for their retirement future," said William Crist, president of CalPERS Board of Administration. "For more than 10 years, CalPERS has made constructive attempts to improve corporate governance in the United States and abroad. Enron teaches us that in spite of these efforts, shareholder value can be de-stroyed by faulty corporate governance. It clearly is time for us to tighten the screws."

CalPERS is asking the federal government and stock exchanges to take actions to elevate the quality of company audit committee members; create clear and effective laws and regulations that will ensure that company audits are truly independent; and create ac-counting standards that will put an end to "unintelligible or manipulative" financial state-ments that confuse or even deceive investors.

CalPERS also announced its intention to organize an effort with other investors to identify and expose the many potential conflicts of interest that can contribute to a com-pany's downfall. These conflicts can emanate from investment bankers, equity analysts, rating agencies, lending institutions, outside attorneys and other consultants. A special commission will focus on how to ensure that all the "spokes" of the wheel involved in the company's governance are working to ensure transparency and accountability.

"Federal agencies, the investor community and corporations themselves can ex-pect to hear from CalPERS over the coming months as we press for change," said Mi-chael Flaherman, Chair of CalPERS Investment Committee. "We want reforms to be put into place soon so that all investors may be ensured of the integrity of our financial mar-kets. We will continue to be aggressive on behalf of our 1.2 million members."

CalPERS total Enron stock and bond losses now stand at $105.2 million (one-tenth of 1 percent of all assets in the system's investment portfolio). The losses include the fol-lowing: $62.2 million loss in Enron common stock ($27.4 million in lost book value from the internally managed equity index portfolio and $34.8 million realized losses by CalPERS active managers) representing seven-tenths of 1 percent of CalPERS public equity hold-ings; and potential losses of $43 million in bond holdings, representing one-tenth of 1 per-cent of all bond holdings.

In addition, a private equity investment in The New Power Company valued at $36.8 million, which was later converted to stock is also expected to be a loss. These losses are offset by a $133 million gain from JEDI I, an Enron-CalPERS partnership, and the possibility of a future gain from the liquidation of JEDI II.

Portman, Cardin Legislation Aims to Protect 401(k) Plan Assets

Reps. Rob Portman (R-Ohio) and Benjamin Cardin (D-Md.) have introduced the Employee Retirement Savings Bill of Rights (H.R. 3669), designed to empower employees to control their retirement savings accounts through new diversification rights, new disclo-sure requirements, and new tax incentives for retirement education. The bill would imple-ment the proposals that President Bush recently offered for protecting Sec. 401(k) plan assets.

By modifying the rules that apply to the 401(k) plans and Employee Stock Owner-ship Plans (ESOPs) of publicly traded companies, the legislation provides workers with control over their retirement plan investments while preserving the opportunity for emp-

loyee ownership. Through new diversification rights, new disclosure requirements and new tax incentives for retirement education, this legislation would help employees achieve retirement security through their 401(k) plans and ESOPs.

"In the Enron debacle, thousands of workers lost their entire retirement savings be-cause they didn't have the information they needed and the control to manage their in-vestments," said Rep. Cardin. "This bill will give workers the tools they need to prevent fu-ture Enrons."

U.S. Labor Department to Offer Early Retirements

Labor Department employees got the opportunity to take early retirements begin-ning March 1, according to a memo issued by Labor Secretary Elaine Chao, who touted the measure as a means to fully implement President Bush's five-point management agenda.

"Early outs" are a means of reducing the size of the government during agency re-organizations or budget reductions while avoiding involuntary layoffs. In 1999, Congress granted OPM permanent authority to allow agencies to offer early retirement.

The Labor Department will offer early retirements from March 1 to Sept. 30. About 4,000 employees are eligible.

"We're providing options to employees as well as trying to make sure that the ad-ministration's efforts on workforce restructuring are able to proceed," said Patrick Pizzella, assistant secretary for administration and management at the Labor Department.

Employees are eligible for early retirement if they are at least 50 years old with 20 years of service, or if they are any age with 25 years of service. Employees under the Civilian Service Retirement System (CSRS) must have served in a CSRS-covered position for at least one of the last two years before retirement.

Annuities for CSRS employees who take early outs will be reduced by 2 percent per year until age 55. Annuities for employees covered by the Federal Employees Retirement System will not be reduced.

Chao said Labor would not offer cash incentives to employees who opt for early retirement.