Robert Girling, who is a Professor Emeritus in the School of Business and Economics at Sonoma State University recently accepted the position of Legislative Director for CSU-ERFSA replacing Alan Wade who held the position well into his 90s.
Professor Girling has prepared several reports about his recent work covering the actions of both CalPERS and the California State Legislature that CSU-ERFSA members should be aware of. We will be posting these reports over the next few weeks. The first report, which follows, provides some important background information about the current operations of CalPERS:
On November 16, 2019, I attended the meeting of the Investment Committee of the CalPERS Board, representing CSU ERFSA. The meeting was held at the CalPERS office in Sacramento and all board members were present. My objective in attending was to listen and learn while identifying issues that might be of concern to ERFSA members and CSU faculty and represent any concerns in the time reserved for public comment.
Some background: CSU faculty and staff are members of CalPERS, which, in addition to administering our health insurance, manages and administers our retirement funds. Its origin was in 1932 when the nation was in the grips of the Great Depression; Franklin Roosevelt was elected to the first of his four terms as President of the United States. The State of California established a retirement system for state employees in California. The retirement system grew into what is now the California Public Employees' Retirement System, or CalPERS. The central office is located in downtown Sacramento at Lincoln Plaza.
As the nation’s largest public pension fund, CalPERS serves more than 1.9 million members in the retirement system. With a staff of just under 3,000 employees PERS manages investments of $378 billion. CalPERS is also the second largest employer purchaser of health benefits in the nation after the federal government; covering the health insurance needs of 1.5 million employees and their dependents.
The investments by CalPERS have been adequate to meet the annual payout of retirement benefits averaging 8.3% for the last 10 years. However, returns for the last year have been significantly lower at 5.2%. The funds are currently invested approximately as follows: 50% in public equities [stock market], 7% private equity, 30% fixed income bonds and government securities and 11% in real estate assets. CalPERS is approximately 70% funded meaning that the value of the fund comprises 70% of what is needed to meet all current and future obligations. Consequently it is considered underfunded because its assets are less than what the pension plan owes to its members.[1]
CalPERS relies on the advice of investment consultants. Several of these investment advisers to CalPERS appeared before the members of the Investment Committee. The Committee asked questions regarding real estate investments and private equity investments. State Controller Betty Yee asked the hired advisers to explain why fees increased while the assets under management declined. A question was also raised regarding CalPERS influence on responsible business practices or ESG [environmental, social and governance] of companies in which the Fund has a stake. Concerns were raised regarding the rather low return on private equity investments and how the advisers might characterize ‘good vs. bad’ private equity investments. Another concern expressed was the inadequate oversight of investment managers. In each case, it is your Legislative Director's view that the responses provided were vague and insufficient.
CalPERS investments within California totaled $33.5 billion or 9.5% of the total investments. These investments are estimated to have generated 246,000 jobs within the state. Private equity investments in California total $1 billion or just 3.7% of all private equity investments while 25.8% of investments in real assets or $9.3 billion are in California. One might wonder why less than one-tenth of the fund is invested in our own state. CalPERS notes “As with all our investments, the decision by us and our third-party investment managers to support a California-based company, property, or project is made solely based on the financial merits of the particular investment opportunity.”
A detailed presentation of CalPERS strategy with respect to fund sustainability was presented by Ms. Anne Simpson, CalPERS Director for Board Governance. She explained the background and current focus on six priorities: climate change; diversity and inclusion, data and corporate reporting; alignment of interest in private equity; manager expectations and research. She referred to CalPERS’s prior leadership in the field of sustainability through engaging companies to set emission-reduction targets and appoint women to the boards of directors. During public comment some 10 speakers rose to critique CalPERS investment strategy with respect to its investments in fossil fuels.
Legislative Director's Comments:
Over the past few years several studies have questioned the fiduciary responsibility of CalPERS continued investments in fossil fuels. And, there have been repeated calls for CalPERS to divest from such investments. A state law passed in 2015 directed state pension plans to divest from coal. CalPERS divested shares from 14 coal companies that were worth $14.7 million when the pension fund sold them. However, CalPERS continues to hold sizable investments in oil and gas.
A just released study Analyzing the Financial Risk of Holding Fossil Fuel Assets in CALPERS’ Portfolio [http://bit.ly/CalPERSRisk] prepared by Professor Clair Brown’s lab at the Institute for Research in Labor and Economics at the University of California reports that CALPERS investments in fossil fuels (coal, oil, and gas) puts members retirement dollars at serious risk.
The study documents that market returns on the traditional energy sector between October 2007 and December 2018 was negative (-4.8 %). Energy is now the lowest performing sector in the S&P 500. This contrasts with returns to other sectors ranging from 3.3% (financials) to 623% for consumer discretionaries and the S & P 500 benchmark return of 355%.
Gov. Gavin Newsom recently signed an executive order asking State pension funds to consider steering investments away from greenhouse gas emissions. In 2018 the California legislature passed, and Governor Jerry Brown signed, Senate Bill 964, the first bill in the nation to define “climate-related financial risk” in law and require institutional investors to assess that risk in their portfolios. SB 964’s requirements are specific to the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS). If the board members of pension funds fail to adequately consider the financial risks posed by climate change and not report these to the public, that could be considered a breach of their legal duties.
[1] A defined benefit plan such as PERS is considered adequately funded if its assets equal or exceed the discounted value of its future liabilities—the benefits it must pay. Most assets can be valued accurately, but the valuation of liabilities is far more complex. “Liabilities” are based on estimated benefits that members have earned to the date of the actuarial computations. These include obligations currently being paid—e.g., pensions to retirees— as well as estimated benefits that members who are still working have earned to date. The benefits for retirees are relatively simple and involve primarily life expectancy. Estimating benefits for people yet to retire is pretty complex. It involves their age, estimated years to retirement, estimated final salary, In California state law is clearly favorable for PERS retirees requiring the state to use its taxing power to make good any contractual pension benefits.