Deals and People December 14, 2004

Harrigan Loses Effort to Regain CalPERS Posts

December 14, 2004 (PLANSPONSOR.com) - The recently deposed head of the California Public Employees' Retirement System (CalPERS) lost his bid to get back on the giant pension fund's board when a state political leader reappointed a veteran labor leader to the CalPERS post.
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Despite pleas from national labor leaders to Democratic state lawmakers to put Sean Harrigan back in his old job as president and a member of the CalPERS board, Assembly Speaker Fabian Nuñez reappointed Mike Quevedo Jr., a vice president of the Laborers International Union, the Los Angeles Times reported. Quevedo will now serve another three-year term on the 13-member panel.

Harrigan was ousted December 1 when the State Personnel Board voted to replace him as its CalPERS representative (See Harrigan Moved Aside at CalPERS ). He blamed his downfall on a conspiracy among business leaders, the California Republican Party and the administration of Governor Arnold Schwarzenegger.

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On Monday, Harrigan said he didn’t expect his rebuff to slow CalPERS’ penchant for using its portfolio power to effect corporate change. “CalPERS will continue to be the most powerful voice in this country and maybe around the world on corporate governance,” he told the Times. For his part, Quevedo said the board would “continue to do as we have always done” on the corporate governance issue.

Nuñez’s decision to reappoint Quevedo was endorsed by Senate President Pro Tem Don Perata and sets the stage for a potential power struggle between two main contenders vying for the presidency of the $177-billion CalPERS.

The two are CalPERS Vice President Rob Feckner, a close Harrigan ally, and Willie Brown, the retired mayor of San Francisco and long-time Democratic speaker of the state Assembly. Brown lost a bid for the board’s presidency in 2003 when national and state union officials weighed in on Harrigan’s behalf.

Compliance December 13, 2004

Tax Court Rules Good Return No Defense for Prohibited Transaction

December 13, 2004 (PLANSPONSOR.com) - A US Tax Court has ruled that even though a pension plan fiduciary owned less than 50% of companies to which the plan was loaning money, he should be considered a "disqualified person", thus making that loan a prohibited transactions.
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>Judge Herbert Chabot, writing for the Court, in the case of a CPA – Joseph Rollins – who loaned plan funds to companies that he had a minority interest in, ruled that a fine of $164,000 will have to be paid as a penalty on prohibited transactions.

>Rollins was the sole trustee of his accounting firm’s pension plan, and was a minority owner in numerous companies that he decided to make loans to at an interest rate of 12%. Because he did not own more than 50% of any of the companies, he did not believe he would run afoul of the prohibited transaction provisions in section 4975 of the tax code, which states that any disqualified person – including someone who owns over 50% of a company and is a plan fiduciary lending to that company – is not allowed to accept loans from a plan.

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>However, Chabot agreed with the Internal Revenue Service, ruling that CPA benefited from the loans and allowed the borrowers to “to operate without having to borrow funds at arm’s length from other sources.” He ruled that because the CPA would benefit from the transaction (a violation of Section 4975(c)(1)(D)), and the loans were dealings with the plan’s assets under the CPA’s own interest (a violation of Section 4975(c)(1)(e). He also ruled that the CPA was a disqualified person with respect to the plan because he was a fiduciary of the plan and a 100% owner of the employer sponsored plan.

>In the ruling, Chabot agreed that the loans were prohibited transactions, but held that it was necessary to decide whether the CPA has violated Section 4975 (c)(1)(e).

>The ruling in the case is available  here .

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