The $500 billion California agency accountable only to itself
One of the most powerful entities in California is in the midst of a board election that will wrap up at the end of the month. It’s a government agency with $500 billion in assets, the power to bankrupt the state if mismanaged, and enough influence to sway national and global corporate decision-making — yet California taxpayers have little say in who governs it.
That agency is CalPERS, the California Public Employees’ Retirement System. The largest public pension fund in the nation, CalPERS manages pension and healthcare benefits for more than two million beneficiaries consisting of current and retired government employees (as well as eligible family members). CalPERS pays out tens of billions of dollars in benefits every year, and sets employer contribution rates for most government employers in California.
CalPERS is governed by 13 board members: six are elected by system members (two of which are up for election now), and three are appointed by state officials. Member voting for the two open seats concludes on September 29th. The remaining board members are the State Controller, the State Treasurer, the Director of the California Department of Human Resources, and a Representative of the State Personnel Board.
Per California’s Constitution and Public Employees’ Retirement Law (PERL), CalPERS’ fiduciary responsibility is to its members. But a closer look reveals that CalPERS:
- Hides behind this fiduciary responsibility at great risk to taxpayers, while making little effort to minimize taxpayer risk and exposure;
- Systematically undervalues the cost of pension benefits, driving uninformed decision-making by government employers; and
- Abuses its investment authority, using it to drive social policy at their members’ expense.
A Liability for Taxpayers
California public pensions use a defined benefit structure, which promises a certain pension/benefit amount to retirees regardless of how the system’s investments perform. Inaccurate or unrealistic investment return assumptions can spell disaster, leading to hefty government obligations at the state and local levels that taxpayers must shoulder.
If CalPERS had a legal obligation to minimize taxpayers’ costs and exposure to risk, phasing in a defined contribution plan — a more conservative approach such as a 401(K) — would be a possibility. However, the system’s constitutional independence from taxpayer accountability has created an environment where shifting away from high-risk defined benefit plans is practically impossible.
Being locked into an expensive and risky defined benefit structure makes CalPERS dependent on broadening its contributor (member) base. CalPERS’ pension plans are approximately 80 percent funded. To make up the deficit, new members are needed to replace those who retire or leave the system. Thus, government employers are under pressure to hire, regardless of their personnel needs or financial resources.
This is a win for government unions, which constantly push to expand government to gain more dues-payers who fund the unions’ political war chests. But it’s a loss for taxpayers, whose state and local governments accumulate more debt, largely in the form of unfunded pension liabilities. With an estimated $1.4 trillion in unfunded pension liabilities according to a 2023 report by the American Legislative Exchange Council, sinking deeper into the pension hole is the last thing California needs.
Disservice to Government Employers
CalPERS has a long history of systematically undervaluing the cost of pensions, and overestimating expected returns. This leads employers down a path of false security, where they believe they can afford more benefits than their financial position allows.
This too benefits government unions, whose bargaining units regularly negotiate and strike for higher wages regardless of what the employer’s finances allow (see SEIU 721 and Los Angeles teachers for just two examples). All too often, government agencies such as cities, counties, and school districts cave to unsustainable union demands, turning a blind eye to the severity of their pension crises.
If an employer wants to exit CalPERS in favor of alternative pension plans, the costs are immense. In the case of Herald Fire Protection District, it took over two years to exit CalPERS and a 15-year bank loan to cover the high cost. In 2014, the small city of Villa Park considered leaving CalPERS, but the whopping $3.6 million price tag was too prohibitive. Today, Villa Park, with its seven full-time employees, still participates in the system.
Public employers participating in CalPERS are backed into a corner: Stay in the system and keep the expensive defined benefit structure, or be saddled with the enormous costs of leaving. Public employers, especially small local agencies, deserve better than to be trapped in this bureaucratic dilemma.
Misguided Investment Priorities
Although CalPERS members vote for six of the thirteen board members, that doesn’t automatically result in accountability to those members. For years, CalPERS has engaged in increasingly political investment decisions that are not backed by financial necessity or prudence.
In 2012, CalPERS formally adopted “Environmental, Social, and Governance” (ESG), a progressive investing principle driven by social and cultural politics. CalPERS further politicized their investments with a net-zero portfolio commitment, committing “$100 billion toward climate solutions by 2030.” For an agency whose sole responsibility is (or should be) managing retirement benefits, such pledges are a departure from its core mandates, prioritizing political and environmental goals over fiduciary duty.
A September 2024 report by Pacific Research Institute found that, when compared to dozens of other major pension funds in the U.S., CalPERS returns for 2023 are “below average at best,” and rank in the bottom half of performers for five-year and ten-year timeframes. Author Wayne Winegarden writes, “Not only has CalPERS been unable to match the returns of the better performing public pension funds, but it has also generally underperformed key market benchmarks such as the S&P 500” for five-year and ten-year timeframes.
Winegarden adds, “CalPERS beneficiaries would have been better off had CalPERS simply invested their pension money in a passive index fund that tracked the performance of the S&P 500… In light of CalPERS’ relatively uncompetitive returns, its position on Environmental, Social, and Governance (ESG) advocacy is disconcerting.”
CalPERS maintains that ESG integration is a risk management tool, citing the risks of climate change and agenda-driven social issues. However, the record on investment returns suggests that ESG practices haven’t translated into superior financial performance. CalPERS is supposed to invest for solid returns that keep the fund solvent — not gamble on political fads that risk leaving taxpayers to cover the costs.
CalPERS’ outsized social-political influence extends well beyond California. With more than $500 billion in assets under management, CalPERS wields investment power on a scale comparable to entire nations. CalPERS has been forthcoming about their corporate activism: “We engage our portfolio companies to encourage them to consider how environmental, social, and governance (ESG) risks and opportunities affect their ability to create value over the long-term.” They also “monitor these companies to ensure they implement any commitments made.”
Globally, CalPERS casts tens of thousands of proxy votes every year in other companies’ board rooms, allowing them to exert their political agenda throughout the world. Few, if any, other institutions wield this level of power — especially while remaining virtually unaccountable for their decisions.
When CalPERS’ leaders are unaccountable to California taxpayers and even to their plan participants and beneficiaries, this leaves them accountable to only themselves.
For CalPERS to truly serve the public interest, it must embrace its fiduciary duty not just to beneficiaries, but to the taxpayers who ultimately fund the system. Until that responsibility is recognized, meaningful reforms — such as transitioning toward sustainable defined contribution plans — will remain out of reach. CalPERS will not make this shift voluntarily; only legislative action can ensure that accountability to taxpayers is written into the law. The first step toward this goal is to rein in the government unions that resist reform and have a stranglehold over California’s legislature.