CalPERS’ social investing comes at steep cost paid for by California taxpayers
The California Public Employees’ Retirement System, the nation’s largest state pension fund, claims that making investments based on myriad social priorities is good for business, even though a newly released report found that such investments are some of its poorest stock performers and are increasing the public’s risk in the vastly underfunded system.
CalPERS invests its own money in social-oriented ventures and pressures other investors to do so, as well. In fact, a CalPERS spokesman called it “laughable” that anyone suggest that fund stop having a “say in how the companies we invest in are run.” It’s more laughable that CalPERS thinks that Californians ought not to have a say in how it manages the $345 billion in assets that originated from taxpayers, who pay the compensation packages for the government employees whose pensions CalPERS provides.
Taxpayers also are, ultimately, financially responsible for any funding shortfalls from CalPERS’ investment strategy. The system is awash in “unfunded liabilities.” That term refers to the accumulating debt that’s being amassed to pay for the pension promises. As a senior obligation, pension debts must be paid out of the public till first – before public funds are used to pay for bond debt, or any other important financial obligations.
In other words, if CalPERS invests poorly, then California taxpayers must foot the bill. Their taxes will go up; their level of services will collapse. Such consequences already are taking place, especially at the local level as cities struggle to pay higher fees to make up for previous poor decisions by the pension fund. Perhaps it’s time for taxpayers to have more of a say in how CalPERS and the California State Teachers’ Retirement System are run.
The new report, by the American Council for Capital Formation, found that the fund’s “environmental-related investments comprised four of its nine worst performing private equity funds last year, accounting for more than $600 million in committed capital.” It noted that “none of the system’s leaders put their own money into environmental investments.”
Last year, CalPERS announced its “Environmental, Social, and Governance (ESG) Five Year Strategic Plan,” which is a blueprint for the agency’s so-called socially responsible investment strategy. As CalPERS explains on its website, “The plan identifies six strategic initiatives that will direct staff’s work. The initiatives are data and corporate reporting standards; UN PRI Montreal Pledge company engagement; diversity and inclusion; manager expectations; sustainable investment research; and private equity fee and profit sharing transparency.”
CalPERS has stepped up such social investments even though its returns over the past decade – even after stellar performance last year – averaged only 4.4 percent. The fund has assumed a rate of return of 7.5 percent, which it recently lowered to 7 percent. The higher the assumed rate, the lower the taxpayer-backed unfunded liabilities. The unfunded liabilities also are caused by benefit increases, including a 1999 CalPERS-backed proposal that sparked a wave of retroactive pension hikes.
ACCF argues that CalPERS has not only received lower returns than it should have received because of these politically correct priorities, but its board “appears to use its size and beneficiaries’ money to wage action on companies not aligned with its political views, and spends time and resources influencing other large institutions … to fall in line alongside it.”
It’s the latest evidence of CalPERS’ recklessness, which is the result of having taxpayers to rely upon. The fund has a fiduciary responsibility to maximize investment returns on behalf of the retirees whose money it controls – and on behalf of state taxpayers. Yet this isn’t the first time its politically oriented investment strategy has raised questions about returns.
As Reuters reported last December, “CalPERS staff had recommended that the board remove its 16-year ban on tobacco investments in light of an increasing demand to improve investment returns and pay benefits. But the board voted to remain divested and to expand the ban to externally managed portfolios and affiliated funds.” An independent report estimated that exclusion of tobacco cost the fund $3 billion over 13 years.
There were similar reports regarding CalPERS’ divestment from coal-related stocks. “Coal stocks are on the rebound, but California’s main public pension fund won’t see investment gains from that industry,” the Sacramento Bee reported last August. In that case, the state Legislature was the prime culprit, as it passed a law calling for the divestment.
But the law mandated that CalPERS do so “consistent with its fiduciary responsibilities,” which means the pension fund had plenty of wiggle room had it been more interested in higher returns than social issues. Even some union officials complained at a public meeting about this policy, which suggests that things really may have gone too far.
Don’t expect the push for social investing to relent. The Bee noted that the ACCF report “comes at the end of a year in which CalPERS repeatedly faced calls from environmental advocates and left-leaning politicians to more aggressively confront climate change, make a stand on gun violence or take activist stands against Trump administration policies.” Some included divesting from the Dakota Access Pipeline or companies that work on the proposed border wall.
Yet, as ACCF noted, these are tough arguments to make when one considers that CalPERS’ had a $2.9 billion surplus in 2007 and now has an estimated deficit of more than $138 billion. CalPERS is funded at only 68 percent and California cities are becoming increasingly vocal about their fees – and what that means for the provision of public services.
Few policies are more emblematic than the fund’s ongoing program to promote “diversity” on corporate boards. Last summer, CalPERS sent letters to 504 companies represented on the Russell 3000 Index calling for them to develop and disclose a board diversity policy. “Simply put, board diversity is good for business,” said a CalPERS official on the fund’s website. “It is essential in today’s global economy that boards avoid ‘group think’ and ensure there is the breadth of experience, skills and knowledge necessary to meet complex business needs.”
Yet few organizations are mired in groupthink more than CalPERS. Its board currently is comprised of two government employees, one retired government employee, one former government employee, two former union presidents, one union vice president, one board member from a government-run utility and two union-backed Democratic elected officials. One member was a member of the Principles for Responsible Investment, “a United Nations-supported organization that promotes active ownership and responsible investment throughout the investment ecosystem.”
The board make up is by statutory design, but this is still one of the least diverse boards imaginable despite the election this week of a board member who is a CalPERS critic. If a diverse board is good for private business, it would be good for a public pension fund, as well.
As long as the pension fund is run by public employees and retirees for the benefit of public employees and retirees and backed by the state’s taxpayer, nothing much will change. Wouldn’t we all enjoy making investments based on our political and social interests rather than on the hard reality of return rates? But few of us have other people’s money to depend on if they don’t pan out as well as we’d like.
Steven Greenhut is a contributing editor to the California Policy Center. He is the Western region director for the R Street Institute. Write to him at email@example.com.