Chairman Clifford T. Phillips III: Ok I'd like to call this hearing to order. The witnesses have been sworn and I'd like to get started right away since we have limited time. Our pension system in this state is in crisis.
As members of this committee may know we have made great strides in providing our state workers with some of the most competitive and progressive defined benefit programs in the country. We have been able to attract and support the best talent in the state and through aggressive hiring, grow total man hours worked by state employees, despite the fact that we have had to struggle with the highest absenteeism rate in the nation. I am proud to say that despite this, real wages for our employees have outpaced the rest of the country by 15% per year for the last 10 years. No, no, please, ladies and gentlemen, hold your applause. Let me continue.
We have reduced the vesting of 120% last year's salary and health benefits in our state pensions to age 48 and, for the first time, added a cost of living multiple that raises cash portions of the pension benefits by 1.2x the CPI so that our retired state workers never have to worry about the Bush Administration's ridiculously low inflation estimates again. This finally puts us in front of San Diego.
We have done our part to support the workers of this great state, now it is time for our financial advisors to meet their commitments to our loyal and sacrificing workers. And this is why we are here. We have expected of the gentlemen before us, our pension fund's financial advisors, and we have made it very clear that we require of them nothing less than 16-18% annual returns. This is not optional, gentlemen. This is what we have mandated. This is what we require. This is what we expect. At this point our state pension fund is beset by a 46% funding ratio. So let me begin by asking you, where are our returns?
William Ackerchapman: First of all, Mr. Chairman, I want to thank the committee for giving me the opportunity to speak this morning. The crisis we face is not a crisis of returns but a crisis of costs. The unfunded obligations of the state pension fund are out of control and need to be-
WA: -arrested immediately, and-
WA: -some measure of
CTPIII: Sir... sir....
WA: Yes, Mr. Chairman?
CTPIII: Our time here is limited. There isn't any time to make speeches. I'm looking at the returns on the unified pension fund here for the last five years. These returns, well, it would be fair to say that these are the result of your direction, would it not, sir?
WA: That is correct. I am the senior portfolio manager.
CTPIII: And I see here that you manage $125 billion for us?
WA: That is also correct.
CTPIII: So where are the returns? I mean, this Henry Paulson guy just pocketed $3 billion for himself-
WA: Mr. Chairman?
WA: I think you mean John Paulson.
CTPIII: Right, whoever. Why aren't we getting returns like this?
WA: Well, as long-term institutional investors, we focus on overall balanced performance of our investment portfolio. Our focus is to keep the overall portfolio moving forward toward growth targets. We try to avoid the kind of concentrations that-
CTPIII: So really you just don't use those kinds of successful strategies. Look, I'm looking at some trades now, going back to 2006, and I see loss after loss after loss. In one 5 week span there is losing trade after losing trade. You sold on the order of $4 billion dollars, all of it at a loss. Who exactly decided to lose all this money.
WA: Mr. Chairman, that would have been right after this body passed the No Investment in Tobacco, Weapons or Instruments of Terror Act. We were forced to liquidate a series of positions to comply with those edicts.
CTPIII: Are you telling me that this state's pension fund was making money investing in terrorists on such a scale that unwinding those was this significant?
WA: Mr. Chairman, we divested each of those positions as required by the statute.
CTPIII: Sir, these trades I am talking about include Siemens, Norinco, The Weir Group, ABB, Royal Dutch Shell. My staff looked these companies up. Had these positions been held back in 2006 they would have been quite profitable. None of these are run by terrorists.
WA: I think, sir, that those firms were on the NITWIT Act's "Darfur list."
WA: The Darfur list. The NITWIT Act requires divestment from any firm on the Darfur list.
CTPIII: How can that be? Our Darfur list is the same as the Darfur list used by our great neighboring state to the North.
WA: I believe, sir, that they got it from the University of Wisconsin.
CTPIII: Well, where did the University of Wisconsin get it from?
WA: Yes, and Amherst, I believe, lifted it from Smith.
CTPIII: Ok, let's move on. Now I see here you also divested another large group of loss making trades. These include some of the most profitable companies in the world over the last two years. Exxon, British Petroleum, Total, Chevron. In an era when big oil was making billions and billions of dollars you sold your positions?
WA: Mr. Chairman, those issues were on the Burma list.
CTPIII: The Burma list?
CTPIII: What do you mean?
WA: Well, that's not correct actually. Total was on the Freedom Fries list that was published in the Divest Undemocratic Democracies Act.
CTPIII: But that was years ago.
WA: So far as I am aware it hasn't been repealed, or the list modified.
CTPIII: Well, then how, sir, do you explain this $54 million expense for litigation fees in 2007?
WA: Chevron sued us after we divested.
WA: Their complaint points out that there are no standards for determining what firms have sufficient contacts with the Sudan or Burma to be put on the list, there is no evidentiary standard, that the prohibition is effectively a taking within the meaning of the takings clause, that there is no mechanism for them to get off of the list and that the list is a state action that violates federal preemption rights in dictating international relations and this has the effect of denying them due process of law.
CTPIII: Ok, we are going to investigate that for sure. We'll get to the bottom of that. This is another Bush administration gambit to keep big oil floating in terror money. My other subcommittee is having hearings on this exact subject next week. Moving on. I see that you have almost no investments in "private equity." I mean, aren't all these guys throwing the huge birthday parties for themselves in Manhattan with 20,000 guests and that kind of thing? How did you miss that boat?
WA: The Maoist Investment Act.
CTPIII: The MIA? What do you mean?
WA: It prevents us from investing in structures that have sovereign wealth funds as limited partners. That ruled out all the private equity firms that were large enough to absorb our minimum investment without our violating our own concentration limits.
CTPIII: What about this total purging of debt instruments here in 2007?
WA: Well, the Attest to Safe Signing Act forbade us from investing in any debt instrument underwritten by any bank that did not require all of its debtors to certify that they were not a "forbidden entity."
CTPIII: So you were required to do business with a different bank? To buy debt from another bank? One that complied?
WA: None of the banks large enough to offer us the kind of debt we would be interested in buying require their customers to certify such things.
CTPIII: Well what's the hangup? Why not just require it? I mean, aren't these banks American businesses?
WA: I don't think their legal departments will allow them to accept any certifications.
CTPIII: Why is that, exactly?
WA: Well, the list of forbidden entities is classified.
CTPIII: Ok, what exactly CAN you invest in?
WA: We are not sure just yet, but our lawyers are looking at two possibilities.
CTPIII: Ok, what asset classes are those?
WA: Well, the Public Broadcasting system and U.S. Treasuries. We think PBS the more likely.
CTPIII: How the hell are you going to invest in PBS? It is a not-for-profit.
WA: We're working on that now.
CTPIII: How could that possibly be more likely than investing in U.S. Treasuries?
WA: Well, the State Department hired several Sudanese contractors to work on the Embassy there.
WA: Accordingly, Smith put the United States Government on the Darfur list.
Pension Funds Gain Leeway On Terror Laws [WSJ]