CalPERS Approves Policies to Aid System's Attempts to Invest in P3s

SAN FRANCISCO - The California Public Employees' Retirement System took a step this week toward entering the infrastructure investment field when its investment committee Monday approved policies to guide the massive pension system's move toward funding public-private partnerships.

Don't look for any sudden moves from the nation's largest pension fund, which manages $234 billion in assets, said CalPERS spokesman Clark McKinley.

"It'll probably be a few months, maybe late this year early next year, before we have any new money in the market," he said. "We never rush into these things."

Investment Committee chair George Diehr pointed in the direction infrastructure investments might go in a statement issued after the vote.

"Several components of our new asset class might come into play in the eventual construction of bridges, airports, utilities, water systems, and other infrastructure," he said. "We're looking for long-term economic value by providing safe, reliable, efficient, and high-quality services that are vital for society."

The infrastructure program is the final component of an inflation linked asset class CalPERS initiated in December. The commodities, inflation-linked bond, and forestland components of the class are already underway, managing $4.7 billion as of June 30.

"It took us a little more time to get this policy approved because it's a bit more complicated than the other components," McKinley said.

One of the complications is that some California public employees who rely on CalPERS for their retirement income react with horror at the idea of public-private partnerships, particularly Professional Engineers in California Government, the union that represents about 13,000 state-employed engineers, architects, land surveyors, and similar professionals.

PECG is politically influential, with its political action committee reporting almost $1 million in contributions in the first half of 2008, largely to Democratic politicians and causes.

The union reportedly threatened to sue CalPERS last week, backing off after the infrastructure investment policy was changed to reduce threats to members' jobs.

"Provided that CalPERS' fiduciary responsibilities are met, it is not the intent of this policy for these investments to result in job losses to CalPERS members," the policy states.

The infrastructure asset class is envisioned as having global scope, with a target between 30% and 60% of the infrastructure class in foreign holdings.

CalPERS' ability to invest in domestic projects outside California may be limited by other aspects of the investment policy.

"In particular, the investment vehicle shall make every good faith effort to ensure that such transactions have no more than a de minimis adverse impact on existing jobs," the policy says. "These efforts shall include working directly with public employees, government officials, or collective bargaining groups, as appropriate, in order to take such reasonable actions as may be within the investment vehicle's control to mitigate such potentially adverse effects. Compliance with this requirement shall be a key consideration by CalPERS when reviewing any future investment opportunities with an investment manager."

According to McKinley, in presenting the policy to the committee, Farouki Majeed, senior investment officer for asset allocation and inflation-linked assets, said in reference to the public sector jobs issue, the experience CalPERS has had so far in the U.S. is that due care has always been taken in the concession and operating agreements to avoid negative impact on public employees and associated labor conflicts.

The pension fund will probably dip its toes into the infrastructure water before jumping in, McKinley said.

"We might start with a fund of funds, watch it, monitor, then do co-investments," he said. "Eventually it could be on a project-by-project basis. Eventually it will be deal driven."

Infrastructure could account for up to 3% of total CalPERS market assets by 2010, under the new policy. The would be more than $7 billion at CalPERS' current size, up from about $400 million the system currently reports holding in infrastructure-related investments credited to its private equity and real estate asset classes.

Its infrastructure goal is to achieve an annual investment return of 5% over the rate of inflation, net of fees, over five years.

The inflation-linked asset class was conceived as a hedge against the stock market volatility and inflation, McKinley said.

CalPERS has experienced that equity market volatility recently, as the fund reported an overall loss of 2.4% for the year ending June 30, driven by losses of 10.7% in equities.

CalPERS has issued a request for proposals for firms to provide investment consultant services for its infrastructure, forestland, and commodities asset classes. It expects to hire a senior portfolio manager for infrastructure this month or next, according to the staff report for Monday's meeting.

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