Playing politics with the pensions of nearly 3 million state employees, retirees and beneficiaries is nothing new to California’s pension funds and lawmakers, but after a raft of proposals in recent years to direct investments based on factors other than fiduciary concerns, even the politicized pension funds may be realizing that enough is enough.
The numerous politically-motivated investment diktats over the years include an encouragement to invest in “green” technologies and bans on tobacco companies, gun manufacturers, coal companies, firms that might displace government employees by winning contracts to perform state or local services at less cost and/or better quality, companies doing business with apartheid South Africa and private prison operators (though government-run prisons that do the same thing at higher cost are apparently fine).
The trend continues this year, with proposals to divest from Turkish government bonds (due to the country’s failure to recognize the Ottoman Empire’s genocide of between 1 million and 1.5 million Armenians 100 years ago) and companies involved in the Dakota Access Pipeline and the building of a Mexican border wall.
The pension funds themselves may be tiring a bit of all the restrictions on their investments, however. After an eight-month study of the tobacco divestment, California Public Employees’ Retirement System staff recommended eliminating the ban last year. “As a mature, cash-flow negative system, CalPERS is obligated to seek out and implement the portfolio construction methods that best serve our mission — the sustainable delivery of promised benefits,” a staff report concluded. (That did not prevent the board from voting 9-3 to maintain the policy, however.)
After all, the divestment caused CalPERS to leave some serious money on the table. According to a report from Wilshire Associates, one of CalPERS’ chief investment consultants, “Those investors who continued to invest in tobacco have, in fact, seen over 900 percent in cumulative returns over the past 15 years, making the tobacco industry the second-highest performing industry over that time period and significantly outperforming the broad market.”
This is hardly the only instance of progressive values harming the state’s pension funds. A separate Wilshire analysis in January estimated that CalPERS’ divestments going back to the South Africa ban had cost the fund a total of $7.9 billion, including about $3.7 billion from its tobacco divestment in 2000 and $4.4 billion from the South Africa divestment in 1986, with some minor offsetting gains from its Iran and Sudan bans from 2007. It also lost $7 million from its firearms divestment, which goes back just a few years and made up just a small amount of the fund’s portfolio to begin with.
“I’ve been involved in five divestments for our fund,” CalSTRS Chief Investment Officer Chris Ailman told the CalSTRS board in 2015 when the board was contemplating a proposal to divest its coal holdings. “[On] all five of them we’ve lost money, and all five of them have not brought about social change.”
After a CalPERS investment initiative to focus on “clean” energy and technology resulted in a loss of 9.7 percent between 2007 and 2013, former chief investment officer Joseph Dear described the effort as “a noble way to lose money.”
But, hey, it wasn’t his money anyway, and at least it made some politicians feel good and gave them some street cred with their activist social justice warrior constituents.
CalPERS Chief Operating Investment Officer Wylie Tollette had a more level-headed response. “To use the CalPERS portfolio as the political football can be damaging to the interests of the state and the taxpayers, because ultimately the taxpayer ends up footing the bill for the benefits,” he recently told the Sacramento Bee.
California’s pension systems are already struggling with low funding ratios and a long-term investment outlook that has already forced them to lower their annual investment return assumptions multiple times in recent years. It is time for a separation of investment and state. Giving employees total control of their retirement investments by switching them to 401(k)-style defined-contribution retirement plans would allow them the freedom to engage in “socially responsible” investing — or not — without putting taxpayers on the hook for others’ financial social engineering.