Are CalPERS’ hands clean? : The pension fund sustained huge losses as the market sank. Was it all just bad investment choices?

It’s not yet clear whether the California Public Employees’ Retirement System, better known as CalPERS, has engaged in the same kind of pay-to-play activities that have rocked New York state’s pension systems, resulted in charges of corruption and cronyism, sparked a nationwide probe by the Securities and Exchange Commission and undermined confidence in the integrity of retirement funds and the people who manage them.

But there have been enough troubling signs in recent months to spur an internal CalPERS review and to prompt changes at some local pension agencies, including the two serving retirees in the city of Los Angeles. And last month, Gov. Arnold Schwarzenegger signed legislation requiring expanded disclosure and restricting the ability of public pension employees to lobby or participate in self-serving deals.

The review is welcome, as are the reforms, but they may be insufficient. Especially in this time of economic distress, CalPERS owes it to the 1.6 million workers and retirees who depend on it to show not only that the fund remains viable, but that its investment decisions result from careful study rather than kickbacks or political pressure. The same is true of local pension systems.

CalPERS also owes it to taxpayers, who pick up the bill when investment returns fall short and public pension funds are unable to meet their obligations on their own. The pension fund already has notified the state that it will need an increased contribution next year because of its steep losses, which are even greater, by percentage, than those of other large funds across the country.

This raises an uncomfortable question: Did abuses by players in the pension industry -- the private money managers who seek pension investments, the “placement agents” who connect those managers with public funds, or even officials of the funds themselves -- lead to unsound investments and greater losses than CalPERS would otherwise have sustained?

The New York probe suggests that it’s not out of the question. State Atty. Gen. Andrew Cuomo, who began the investigation after the resignation nearly three years ago of Comptroller Alan Hevesi, says he has uncovered a “matrix of corruption.” Earlier this year, Cuomo and the SEC charged two former Hevesi aides, Henry Morris and David Loglisci, with taking kickbacks from companies that wanted a crack at New York’s public pension fund.

The probe has now come to California, as was made evident in May with the resignations of two members of the board of the Los Angeles Fire and Police Pensions. Board President Sean Harrigan and member Elliott Broidy stepped down after receiving letters from the SEC asking them to turn over correspondence they had with investment firms being probed in New York.

Harrigan, a former executive with the United Food and Commercial Workers International Union, is also a former CalPERS board member. An investigation by the news organization ProPublica found that financial firms made nearly $1 million in political donations to Harrigan’s union when he was on the board, while other major unions, without a presence on the CalPERS board, received little from such firms.

The Times, meanwhile, has reported on the enormous fees paid to placement agents such as Alfred J.R. Villalobos, who received more than $70 million from private companies for helping persuade CalPERS to invest in them.

As each new story comes out, it is easy to become overwhelmed by the possible connections among the players and the questions about what to do to ensure that the system is free of corruption. But when the strands are separated, the course becomes clearer.

There is little confusion, for example, about kickbacks, in which a public official takes money or favors in exchange for access or assistance. That is illegal, and prosecutors have plenty of tools at their disposal for dealing with it. There are not, today, any allegations that anyone associated with CalPERS took kickbacks.

The next level of corruption is more common, harder to prove, and often legal. This is when the investment of pension funds in a private firm is tied to a political donation to the pension board member who made it happen. Sometimes such donations are demanded, other times requested -- and sometimes merely noted.

The CalPERS board includes people seeking reelection or higher office, such as the state treasurer and controller, plus appointees of both the governor and members of the Legislature, along with union-appointed members. A majority of members of the two Los Angeles pension boards are appointed by the mayor. And, as shown by the ProPublica story, non-politicians also can become magnets for donations, skewing the decision-making process and making access and political connections more important than the wisdom of the investment.

In settling some New York cases, Cuomo demanded a two-year blackout on business between private investment firms and public pension funds after the firm makes a campaign contribution to a pension trustee or any elected official who can influence a pension fund investment decision. L.A.’s Fire and Police Pensions adopted a similar rule for its fund.

The California pension reforms, embodied in the bill Schwarzenegger signed last month, stop short of such bans and simply require disclosure of donations made by placement agents. Now CalPERS board President Rob Feckner has proposed additional rules under which placement agents would be treated as lobbyists and more closely regulated. It’s a good step, but CalPERS and local pension agencies should consider following the lead of L.A.’s fire and police fund to eliminate the possible influence of political contributions on investment decisions.

The season of scrutiny over pension funds is just beginning. Although Feckner’s straightforward approach to reform is welcome, he and his colleagues must know that voters may have difficulty supporting continued payment of state and local obligations to public retirees if they believe that recent pension losses have been the result of politically-directed investments, and not just the bursting of the economic bubble.