State considers opening up CalPERS to private workers

California governor Arnold Schwarzenegger has thrown his political weight behind proposed legislation that would require the LP giant to manage private retirement accounts.

A bill that would allow private workers to invest alongside the California Public Employees’ Retirement System has advanced in the state legislature after gaining public support from Governor Arnold Schwarzenegger.

Sponsored by Assemblyman Kevin de Leon, a Democrat from Los Angeles, Assembly Bill 2940 would require CalPERS to offer individual retirement accounts (IRAs) or annuities to Californians whose employers don’t offer retirement savings plans.

In a statement, Schwarzenegger called the legislation “a win-win for everyone and it will make our small businesses and our employees financially stronger.”

CalPERS, which manages more than $235 billion (€149 billion) in assets, declined to comment on the legislation, saying only that they are in the process of evaluating the bill and assessing its feasibility.

After advancing through a subcommittee hearing, the bill awaits consideration from the Assembly Committee on Public Employees, Retirement, and Social Security.

As several of the bill’s administrative details have yet to be ironed out, and even more are left to CalPERS to implement, the effect that the legislation would have on the pension’s 9.3 percent alternative asset allocation is unknown, said sources close to the legislation.

If private accounts were pooled and allowed to invest alongside of CalPERS investments, it could mean a big influx of capital devoted to private equity.

Two years ago, Harvard University initiated a somewhat similar program, offering university donors a chance to invest alongside its endowment managers. Donor money was thus funneled to private equity funds, as well as to real estate and hedge funds.

However, the minimum investment to invest alongside Harvard is $100,000, and 95 percent of its principal and proceeds are earmarked for donation to the university.

AB 2940 still faces several obstacles before passage. First, the bill must clear both the California Assembly and Senate, and then federal regulatory agencies like the IRS must give their approval.

More immediately, if CalPERS deems the administrative costs of the program too high or finds some other fault with the bill, a vote against the legislation by the pension’s board of directors could throw a major wrench in its passage.

The bill does enjoy support from one key constituent, however—Schwarzenegger. The governor’s political influence over CalPERS-related legislation was felt earlier this week when an editorial column he wrote successfully buried a bill that would have curbed CalPERS’ ability to invest alongside sovereign wealth funds.