California Pension Restructuring Proposal

According to the CalPERS website, in their California Investments section, “as of January 31, 2011, approximately 10.3 percent of CalPERS total assets are invested in California.” This means that out of the $233.5 billion in assets under management by CalPERS (ref. Current Investment Fund Values), $24 billion is invested in California.

Apparently CalPERS would have us believe that investing 10.3% of their assets in California is a praiseworthy accomplishment, since their disclosure goes on to state “CalPERS is one of the largest investors in California – providing jobs, services, and a financial boost to the State’s economy.” But why shouldn’t CalPERS invest 100% of their funds in California?

Back in 2004 I attended a business forum focusing on the Sacramento region, and listened to a panel of experts discussing California’s economic prospects. One of these experts was an investment manager from CalPERS, who stated with pride that “fully 20% of CalPERS investments are made in California.” (Note: it’s only half that much today) At the time, I asked him why we should be impressed by the fact that 100% of CalPERS funds come from California taxpayers, yet only 20% of those funds go back into California-based investments. His answer was instructive: “We have to invest where we can realize the largest returns.”

The debate over whether or not public employee pension funds are sustainable hinges on one key question: What are the largest sustainable, long-term returns possible? And from that standpoint it is completely rational for CalPERS, and CalSTRS, and the dozens of smaller California-based public employee pension funds to invest their money elsewhere: China, India, Brazil, Texas, Wyoming, wherever. But since public employee pension funds are operated for the benefit of public employees, who, through their unions, virtually control California and are largely responsible for the regulatory environment that has made places like Brazil and Wyoming far more lucrative places to invest, it would be fitting to require 100% of pension fund investments for California’s employees to be invested in California.

This one reform – requiring CalPERS to invest 100% of their funds in California – would have several salutary benefits. First of all, it would force an honest discussion as to what rates of return are truly achievable and sustainable. And, obviously, it would be a tremendous boon to California’s economy. After all, if investing 10.3% of CalPERS funds has provided “jobs, services, and a financial boost to the State’s economy,” imagine what benefit might accrue if ten times as much money was invested in California?

Libertarians and free-market advocates may correctly criticize this proposal as being counter to their principles of open markets and free trade, but these principles might be better applied to private money – CalPERS and the other public sector pension funds are using taxpayer’s money. And by forcing these funds to invest exclusively within the markets where these taxpayer’s live, these taxpayers will at least enjoy the economic stimulus created by these investments, even if they can’t enjoy these generous pensions themselves.

Even more important, by forcing California’s public sector pension funds to invest exclusively in California, an honest conversation will be started at last regarding how California’s business climate has been ruthlessly suppressed. It is more than ironic that the public sector unions – who are largely responsible for California’s hostile regulatory environment – allow their pension funds to turn to Wall Street’s globalized investment apparatus to realize rates of return that they themselves have made impossible to achieve in California.

If public employees and their unions knew that the rates of return their pension funds will earn are going to be based on how healthy the business climate is right here in California, they would be far more likely to advocate a rational recalibration of California’s taxes and regulations. They would also be more likely to accept that an inflation adjusted rate of return of 4.75% (CalPERS official rate) is probably too high, and accept reasonable cuts to their current and future pension benefits accordingly.