As the nation’s largest state retirement fund, the California Public Employees’ Retirement System doesn’t just influence Wall Street. In many ways, it is Wall Street. CalPERS has $366 billion in assets and such investment power has given it a bout of megalomania. For instance, it has long used its fiscal muscle to pursue an ideologically driven investment agenda.
Since the 1980s, CalPERS has been on the cutting edge of “social investing.” Back then, the agency withdrew its investments from companies tied to the apartheid South African regime. It incrementally expanded its values-oriented divestments. By 2016, its board adopted an “environmental, social and governance” strategic plan designed to battle climate change, diversify board governance and exit tobacco, fossil-fuel and other politically incorrect businesses.
But a funny thing happened on the way to a socially responsible Nirvana. The agency’s unfunded pension liabilities have soared, threatening its long-term fiscal health. In the past, CalPERS had 100 percent of the funds needed to fulfill the state’s pension promises. Now, after years of impressive stock-market returns, the fund only is 70-percent funded.
Depending on whose estimates one believes, CalPERS has between $160 billion and $360 billion in unfunded liabilities. They are based on predictions about future investment performance, so there’s no way to get a definitive figure. But almost everyone acknowledges the depth of a problem that is leading cities to raise taxes and cut services. To make matters worse, CalPERS previously had four employees for every retiree. Now it’s one-to-one.
Social investing isn’t the reason CalPERS is in trouble. That has more to do with the fund’s support for retroactively increasing pension benefits while assuming that the stock market would continue to rise indefinitely. But social investing has limited CalPERS’ ability to maximize its investment returns, which is the fund’s primary responsibility.
For instance, a 2016 report by the American Council for Capital Formation found that “environmental-related investments comprised four of its nine worst performing private equity funds last year, accounting for more than $600 million in committed capital.” Focusing on ethereal matters makes it harder for CalPERS to dig out of its hole, something that’s essential even though taxpayers are the ultimate backers of all California public pensions.
CalPERS officials recently have seen the light. “The board now plans a comprehensive review, scheduled for 2021, of all of CalPERS’ existing divestment policies, which include bans on investments in companies that mine thermal coal, manufacturers that make guns illegal in California and businesses operating in Sudan and Iran,” according to the Wall Street Journal. It quotes a new board member and the CEO, who see social investing as reducing the fund’s investment options.
CalPERS also is resisting a push by some lawmakers to force the fund to comply with the latest political sensibilities, such as divesting from businesses tied to Turkey given that country’s continued unwillingness to acknowledge the 1915-1917 genocide. That remains frustrating, but investment decisions need to be based on potential market returns rather than domestic or international political considerations.
We’re happy CalPERS is serious enough about returns to consider sidelining its social-investing policy. Now it needs to become even more serious and resist any future temptations to jack up the outrageously generous pension benefits that are at the heart of its problems.