TOPICS > Economy

The Pension Fallout

February 19, 2002 at 12:00 AM EDT


SPENCER MICHELS: Throughout the California energy crisis, politicians focused much of the blame for high electricity costs on so-called "out-of-state generators." Among them was Enron, which– like several other companies– was selling the state power at what Governor Gray Davis called exorbitant prices. (Applause) He put Enron on his gougers list, despite the fact that the firm had given him a total of $97,000 in campaign contributions.

GOV. GRAY DAVIS, California: Never again can we allow out- of-state profiteers to hold California hostage. Never again will we allow out- of-state generators to threaten to turn off our lights with the flip of their switch. (Applause)

SPENCER MICHELS: The crisis appears over, and electricity is available. But now, Enron’s collapse is causing California problems. Enron owes the state back taxes. And the drop in Enron’s stock price has caused many pension funds to lose millions of dollars. 136,000 retired professors and staff at the University of California are beneficiaries in the university’s $38 billion pension fund, which bought Enron stock. Because the stock dropped to almost nothing, the fund and the university’s $4.6 billion endowment pool lost $145 million — second highest amount in the nation. Nationally, the largest loss was to the Florida State Pension Fund: $325 million.

Other big losers: The Georgia State Pension Fund; Ohio Public Employees and Teachers; New York City; Washington State employees; and four other California funds, including Calpers, the giant public employees’ retirement system. At the University of California, the pension fund is managed by the treasurer’s office. It has been so successful that no one, not the university nor its employees, has had to contribute to it in a decade. Its value has tripled over 12 years. According to assistant treasurer Mel Stanton, Enron looked like a winner.

MEL STANTON, Assistant Treasurer, United Nations of California: Things looked very, very good. This was a dynamite company doing very well. Obviously, energy was a very key thing, especially in the state of California. So this company looked like it had, you know, had the wherewithal to move forward. So we were, like everybody else, sort of lulled into a situation that really was not justified.

SPENCER MICHELS: When Enron’s reported earnings declined unexpectedly last October, Stanton said, university analysts began hearing rumors of trouble. But he said they don’t sell stock based on rumors; their calls to Enron went unanswered.

MEL STANTON: Everybody was trying to seek information. They were being very closely guarded; not providing information. Obviously, all the way along, prior to this time period, months ago, they were giving false information as well. So we weren’t getting anything any different than anybody else.

SPENCER MICHELS: On the Berkeley campus of the university, Physics Professor Emeritus Charles Schwartz, a frequent critic of the pension fund’s administration, says the Enron loses might have been avoided.

CHARLES SCHWARTZ, Retired Physics Professor: If the people in the treasurer’s office, and their consultants, had been doing the kind of thorough investigating that they claimed to do before investing in anything, then they should have uncovered that there was something wrong in Enron’s books, which we now all know.

SPENCER MICHELS: And they claim they were the victims of fraud?

CHARLES SCHWARTZ: Well, but part of their job is to look for lousy bookkeeping, unclear terms on the balance sheet. That’s just what a good investment analyst does.

SPENCER MICHELS: The university said it had to rely on information from Enron. But Stanton admits there is a lesson.

MEL STANTON: It’s going to make us more cautious, everybody more cautious. The problem here is, really, accurate information.

SPENCER MICHELS: The university’s investment in Enron amounted only to 0.3% of its $54 billion portfolio, so small that no individual’s pension will be reduced by the stock collapse. Nevertheless, the university is joining a lawsuit against Enron.

MEL STANTON: There was some activities that took place that could… may turn out to be criminal in nature. I think this is a very unusual situation.

SPENCER MICHELS: Like the university, Calpers, the Sacramento-based California Public Employees’ Retirement System, also bought Enron stock. In addition, Calpers was involved in private business deals with the firm, including some money-making partnerships in the energy field. Calpers runs the largest pension fund in the country, with assets of $152 billion. It lost about $100 million on Enron stocks and bonds, less than 0.1% of the system’s assets. So its members, many of them retired state and local government workers, won’t have their pensions cut. Calpers invested in Enron stock– or equity, as it’s called– not because it researched the company, but because it was part of an index fund, a compilation of companies. Michael Flaherman, an economist with the Bay Area Rapid Transit District, is investment chairman of the Calpers board.

MICHAEL FLAHERMAN, Calpers Investment Chairman: Almost all of our equity investments are held passively in index funds, which means that we buy companies because they are publicly traded in the United States, and we hold them as long as they continue to be publicly traded.

SPENCER MICHELS: So you don’t look into the company. You didn’t look into Enron before you bought its stock.

MICHAEL FLAHERMAN: We did not. Some of the stock was held by outside managers who manage money on our behalf. Those outside managers do have a responsibility to assess the outlook for the companies whose stocks that they are buying, and… and, in general, did. But like everyone in the financial community, they missed… they missed the threat that… that these structures posed to the company.

SPENCER MICHELS: Flaherman, along with San Francisco Mayor Willie Brown and other public employees, are part of the Calpers board, which has had a reputation as a watchdog, pushing for good corporate governance and social responsibility by companies in which it invests. Flaherman cited an unsuccessful vote cast by Calpers against Enron former chairman Ken Lay.

MICHAEL FLAHERMAN: We voted against his reelection because we were aware of one conflict of interest that we thought was significant, and that was a relationship between Enron and a travel agency that was owned by his sister.

SPENCER MICHELS: But The New York Times alleged recently that, early on, some people at Calpers knew of other troubles at Enron, but didn’t blow the whistle. That allegedly happened in one of the Calpers-Enron partnerships, called LJM.

MICHAEL FLAHERMAN: I resist the characterization that we knew about it and didn’t tell anyone. I think that what happened, and I think this is pretty clear in the record, is that there were people who were looking at the LJM partnership who were concerned about the conflicts of interest potential that it represented, but that they didn’t recognize the significance of that conflict of interest to the larger corporate entity.

SPENCER MICHELS: For Flaherman, the main lesson from the Enron experience is that big investors have to look more closely at the management of the companies they invest in.

MICHAEL FLAHERMAN: Many institutions don’t take an active interest in the governance issue because it seems to have no payoff, but when it does have a payoff, it’s huge.

SPENCER MICHELS: He says the payoff could have been the survival of Enron. Instead, Calpers has joined the class action suit against Enron, hoping to recoup some of the money it lost.

RAY SUAREZ: A federal judge has now merged 60 separate lawsuits into one class action case against Enron and Arthur Andersen. The University of California was named as lead plaintiff in the case.