CalSTRS votes to limit political gifts

The state teachers' pension board passed ground-breaking limits Thursday on campaign contributions that the governor and other public officials with influence over the fund can receive from Wall Street money managers.

Trustees of the $169 billion California State Teachers' Retirement System hope to crack down on individuals and firms trying to buy entree into investment deals. The limits, if they survive a widely anticipated legal challenge, could set a new industry standard and press other states and pension systems to follow suit.

"It's very bold. This limit on campaign contributions is much more than what I have seen," said James McRitchie, an Elk Grove corporate governance expert and former state ethics officer. "It's going to put a lot of pressure on ... public pension funds to put in similar restrictions."

Nearly a year in the works, the proposed regulations now go to the state Office of Administrative Law for review and could become effective in two months. The limits would apply to trustees, the governor, treasurer, controller, the superintendent of public instruction and any candidates for the constitutional offices.

The regulations, which carry a potentially enormous fundraising impact, could be held up in court, trustees acknowledged Thursday. Nine years ago, a similar contribution ban by the California Public Employees' Retirement System was tossed out by the courts.

The CalSTRS rules are aimed at investment managers and their firms -- Goldman Sachs, Lehman Bros. and other monied financiers -- that do at least $100,000 a year in business with CalSTRS, and those vying for a contract. Among the provisions:

• An aggregate annual contribution limit of $5,000 from a firm and $1,000 maximum from an individual.

• Barring violators from doing new business with the fund for two years.

• Allowing firms 90 days to disclose an inadvertent violation.

• Requiring board members to recuse themselves from investment decisions involving contributors.

The plan passed 8-3 with dissenting votes by Trustee Carolyn Widener and representatives for state Treasurer Bill Lockyer and Superintendent of Public Instruction Jack O'Connell.

Lockyer called the proposal unnecessary and illegal, saying state campaign finance laws offer adequate safeguards.

Current CalSTRS policies, which apply only to trustees, pension plan staff and companies that do business with CalSTRS, merely require disclosure of any contributions or gifts worth at least $250.

Despite the threat of litigation, trustees said the plan -- pushed heavily by Gov. Arnold Schwarzenegger's administration -- will put CalSTRS in the forefront of tackling "pay-to-play" practices.

"The money in this state is huge. It really is a ... message that you don't pay to play," said Trustee Beth Rogers.

CalSTRS, the nation's second-largest public pension fund, joins a handful of states that have imposed strict campaign financing rules to prevent trustees from coming under undue influence on investment decisions and the hiring of investment managers.

CalSTRS, which oversees investments for 800,000 retired and active schoolteachers and their families, pays out millions in fees to money managers every year, making the fund an attractive client for investment firms.

For some pension fund trustees, political contributions from investment managers can be sizable. For example, state campaign records indicate former Treasurer Phil Angelides picked up more than $4 million in donations from companies doing business with CalSTRS and CalPERS.

In 2000 and 2001, Angelides received nearly $43,000 from supermarket magnate Ron Burkle, his wife and Burkle's Yucaipa Cos. Angelides later went on to back CalPERS investments in Yucaipa.

Former Controller Steve Westly also received contributions from three venture capital firms that he helped land investments with CalPERS. Westly denied any improprieties.

In the past, the Securities and Exchange Commission has proposed restrictions on donations, but they were never adopted because of heavy opposition from elected officials and business groups.

While former SEC Chairman Arthur Levitt, a longtime pay-to-play critic, has endorsed the CalSTRS plan, a coalition of 14 business associations led by the California Chamber of Commerce has opposed it.

Critics argue that the fund has no authority to impose the restrictions and that the rules could bar firms from vying for business.

"We have strong concerns that adoption of unconstitutional and unwarranted campaign contribution limits for one industry is a dangerous precedent and serious threat for all industries," the coalition wrote in a letter to CalSTRS.

CalPERS, the nation's No. 1 public fund, is closely watching CalSTRS' process and considering crafting similar rules.

Over the years, trustees of the two California funds have been embroiled in campaign contribution controversies, including former state Treasurer Matt Fong and former Controller Kathleen Connell. The two had collected about $400,000 in political donations from firms doing business with both funds. The treasurer and controller are ex-officio members of CalSTRS and CalPERS.

In 1998, CalPERS moved to restrict contributions, but Connell successfully sued to overturn the ban, contending it impaired the First Amendment rights of her supporters to donate to her election campaign. The judge indicated the rules should have been adopted as government regulations, which can be enforced as law.

CalSTRS' legal advisers say the fund can withstand any challenges because it is targeting a specific group of individuals.

"We are not trying to suggest people cannot give to politicians," said Trustee Peter Reinke. "We want to address pay to play."

About the writer:

• The Bee's Gilbert Chan can be reached at (916) 321-1045 or gchan@sacbee.com.