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California’s pension fund managers are at odds with activists and some union leaders over divestments

Mike Antonucci | February 27, 2018

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Mike Antonucci’s Union Report appears weekly at LA School Report. 

The California Public Employee Retirement System (CalPERS) and California State Teacher Retirement Systems (CalSTRS) handle a combined half-trillion dollars in assets. The decisions of their fund managers on where to invest have repercussions not only for retirees, but taxpayers and private businesses.

Despite these vast sums, both pension funds are on shaky ground. As of last year, CalPERS liabilities were only 68 percent funded, CalSTRS only 64 percent funded. The legislature took measures to increase funding to the systems, but their overall health is inevitably tied to the performance of their investment portfolios. These portfolios cover the entire spectrum of U.S. and international business and government enterprises.

Lawmakers and activists have sought to use these investments to achieve a political or social end. They have lobbied CalPERS and CalSTRS to sell off investments in industries they consider detrimental to the public good. Sometimes these divestment demands are very specific. In other cases they are very broad. Here are some of the actual or proposed divestments made in recent years:

• tobacco

• firearms

• fossil fuels

• privately run prisons

• securitized home rental properties

• Turkish government bonds

• companies doing business in Iran and Sudan

• companies helping build the Dakota Access Pipeline

• companies furthering the boycott of Israel

• companies potentially helping to build a border wall between the U.S. and Mexico

• Trump Organization properties.

In response to these efforts, both CalPERS and CalSTRS instituted divestment policies. To say that the pension fund trustees oppose divestment would be an understatement.

“Divesting appears to almost invariably harm investment performance,” reads the CalPERS divestment policy, “such as by causing transaction costs (e.g., the cost of selling assets and reinvesting the proceeds) and compromising investment strategies. In addition, there appears to be considerable evidence that divesting is an ineffective strategy for achieving social or political goals, since the usual consequence is often a mere transfer of ownership of divested assets from one investor to another.”

The CalSTRS Divestment policy is similar: “The Investment Committee opposes any divestment effort that would either implicitly or explicitly attempt to direct or influence the Investment Committee to engage in investment activities that violate and breach the Trustees’ fiduciary responsibility.”

“Taking us out of a particular company has zero impact to that company,” said CalSTRS chief investment officer Chris Ailman. “Somebody else buys the shares. It’s literally like a boycott of two out of thousands.”

Both pension funds prefer a policy of engagement – using the weight of their shares to effect change in the targeted industries.

The people most directly affected by divestment decisions are retired public employees and the unions representing them. But they come down on both sides of the issue.

Recently a group of California Teachers Association representatives petitioned CTA to direct CalPERS and CalSTRS to divest from Geo Group and Corecivic, two private firms that manage prisons. However, the union’s board of directors rejected the idea and endorsed the pension fund strategy of engagement instead. The union also invited Mr. Ailman from CalSTRS to address CTA’s Retirement Committee, where he revealed CalSTRS had lost $5.8 billion because of divestments.

CalPERS estimates it has lost more than $8 billion due to divestments. The fund’s trustees were upset enough by this that they announced they would reconsider their divestment from tobacco stocks.

Public employee unions try to avoid outright battles with each other over divestments but there are clearly two camps: politics and money.

“We all understand the need to make profitable investments but fossil fuels pose a threat to everyone,” said SEIU Local 1000 president Yvonne Walker. “We’ve learned this lesson before – placing dollars over principles is one of the key factors in today’s income inequality. We can’t change the past, but let’s make the right decisions for our future.”

Other unions disagree. “It’s time for CalPERS to re-evaluate their investment strategies and focus more on improving their investment returns and less on ‘socially responsible’ investments,” said Steve Crouch, the director of public employees for the International Union of Operating Engineers.

Two aspects don’t often arise in these debates. The first is that divestment only applies to direct investment in the targeted companies. It does not apply to market index funds that are tied to groups of stocks in the Dow Jones, S&P 500, NASDAQ and other indices. If, for example, a pension fund divests from ExxonMobil, it does not necessarily mean that it has zero money invested in ExxonMobil.

The second issue is that the lost billions in investments have to recouped elsewhere. The only other sources of revenue for CalPERS and CalSTRS are contributions from taxpayers and public employees themselves. That makes divestment decisions the concern of all Californians.

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