No to politicized pension investments
As Gov. Gavin Newsom pushes an “inflation relief” plan that would actually worsen the inflation problem, Sacramento is waging another war on fossil fuels that the state can ill afford.
In late May, the California State Senate voted to divest the California Public Employees' Retirement System (CalPERS) and the California State Teachers' Retirement System (CalSTRS) from fossil fuels by 2030. CalPERS is the largest pension system in the country by both total assets ($394.5 billion) and members (2 million). CalSTRS is the second largest by total assets ($247 billion) and has the sixth largest membership (more than 800,000) in the country.
If the Fossil Fuel Divestment Act (Senate Bill 1173) becomes law, CalPERS and CalSTRS will join the University of California and Cal State University pension systems in fully divesting from fossil fuels. They will also be prohibited from making new investments in fossil fuel companies.
Unfortunately, this is likely to cost CalPERS and CalSTRs hundreds of millions of dollars, exacerbating the state's problem of unfunded pension liabilities, which now total more than $1.5 trillion according to a new report from the American Legislative Exchange Council (ALEC).
In the annual Unaccountable and Unaffordable report, ALEC uses more prudent and conservative assumptions to calculate total unfunded liabilities. At $1.5 trillion, California is higher than any other state and up $145 billion since last year's report. The nationwide total for all 50 states is more than $8.2 trillion.
California's problems are not isolated to one year. With over a decade of data gathered, the report finds that California's unfunded liabilities are growing at an alarming rate. The Golden State has pledged generous pensions to its state government employees without properly funding these promises.
Much of the funding problem stems from making political crusades, such as Environmental, Social, and Governance (ESG) practices, the primary goal of investing. Although Senate Bill 1173 is the most recent divestment bill, CalPERS and CalSTRS have been allowing politics to dictate investments for the past 20 years. In that time, these funds have divested from tobacco and firearms, for example, and restricted plan managers' ability to invest in fossil fuels.
If California was concerned with maximizing returns, it would avoid such practices. Recent research from the Center for Retirement Research at Boston College found that ESG constraints yield lower returns and do not achieve their intended social goals because there are always other investors willing to purchase stock and make money. Politicians in Sacramento may brag about their stand against fossil fuel companies, but the world will be no closer to ending fossil fuel use.
When lawmakers are allowed to use retirement funds for their own political activism, investment returns suffer, and unfunded liabilities grow at a faster pace. This higher volatility means taxpayers must pay more in pension contributions when investment returns fall short of assumed returns. Additionally, every state employee should have confidence that their retirement funds are being invested for maximum growth and not to promote a political agenda.
The way forward for California is to protect pensioners from politically driven investment strategies by strengthening fiduciary rules. California can also learn from other states like Utah, Alaska, Michigan,
and Oklahoma that have successfully reformed their pension systems. In these states, switching to hybrid 401(k)-style or full defined contribution plans has resulted in lower unfunded liabilities.
As unfunded liabilities grow, the resulting higher taxes will push more people to move out of California, which they are already doing in record numbers. Lawmakers in Sacramento should avoid politically motivated investment decisions and learn from other states that have kept pension funds solvent and tax burdens low — before it's too late.