How CA’s largest pension funds became a political battleground – CalMatters

from Adam AshtonCalMatters

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The two largest in California public pension funds they have more money than ever before—and they’re hearing from more people than ever before how those assets should be used to change the world.

The boards at California Public Employees Retirement System and on California State Teachers Retirement System have faced campaigns from groups asking them to pull money from companies linked to the Trump administration, cut investments in fossil fuels and cut private equity firms because of their labor records.

The list includes electric car maker Tesla, surveillance company Palantir, private companies that run immigration detention centers, ExxonMobil, Chevron and private equity firm Apollo Global Management.

to some extent sales campaigns are routine business at CalPERS and CalSTRS, which hold a combined $1 trillion in assets and are headquartered in the capital of a dark blue state.

But a combination of Trump-era politics and a concerted push by workers in the Legislature to force pension funds to open the books on private equity holdings attracts the focus of a more diverse mix of advocates.

“It’s politics,” said Richard Costigan, a Republican who served on the CalPERS board from 2011 to 2019 as an appointee of Democratic Gov. Jerry Brown. “When you look at Palantir and Tesla, it’s driven by politics. Seriously, why aren’t you investing in Palantir?”

The rebuttal: Despite their earnings and stock value today, companies tied to the Trump administration’s immigration enforcement agenda are taking a serious reputational risk that could backfire on the funds. Separately, they say putting money into fossil fuel companies poses a danger to both the environment and pension systems that rely on long-term investments.

Pension funds “need to align their investments with the values ​​of their country, the values ​​of their members and the long-term interests of their members,” said Richard Brooks, climate finance program director at the advocacy organization Stand.Earth.

He recently published a study collating CalPERS and CalSTRS investments in companies involved in the Trump administration’s immigration enforcement, such as Palantir and private prison companies CoreCivic and GeoGroup.

“I’m seeing a disconnect right now,” he said.

CalPERS and CalSTRS employees oppose the sale and have consistently fought legislation that would tie their hands. Both systems are underfunded and owe tens of billions more than their assets, a crisis that in 2012 brought the Legislature and then-Gov. Jerry Brown to pass a law imposing less generous retirement benefits for employees hired after that year.

But CalPERS and CalSTRS have pulled money from industries in the past. CalPERS has been sold of firearms in 2013 and from tobacco in 2016. They are too prohibited by state law from investing in coal as well as in Iran-related businesses.

They are governed by boards of directors that consist of state employee union leaders appointed by state Democratic leaders and the state comptroller and state treasurer, both of whom are Democrats.

In short, they are people who are politically aligned with the mostly liberal groups that pressure them to change policy.

This does not mean that it is easy for them to withdraw investment from any industry.

“It’s so hard. How do you let go of all this anti-union stuff? The quick answer is you can’t,” said Kenny Wagoner of Ducenta Squared Asset Management, which advises union plans.

He gave the example of a real estate investment trust with stakes in large warehouses — the kind run by Amazon. Members may question an investment in a company with a reputation for union-fighting, but rent from the warehouse may be the best return available to support their pensions.

Here’s a look at the main friction points ahead of CalPERS and CalSTRS.

Tesla Volatility

A years-long campaign to convince CalPERS to broke with electric car maker Tesla peaked in September when the pension board ordered a risk assessment of whether it should hold shares in the electric car maker.

Tesla delivers returns for CalPERS over time. It is considered one of the “magnificent seven” technology stocks driving the markets today.

The company’s critics have characterized it as a volatile risk under Trump ally Elon Musk, pointing to Tesla’s sales slump last year along with the regulatory challenges it faces with its self-driving cars. CalPERS as a Tesla shareholder has consistently voted against Musk’s pay packages.

“Tesla’s past earnings don’t erase the current picture,” said CalPERS board member Mulisa Willett at the meeting, which requested a risk analysis.

In March, the board held a closed-door discussion about “Tesla ownership.” A board member then said in open session that CalPERS would not sell its stake in the company.

“While we are unable to provide specifics regarding the discussion, we can note that the company is one of the top 10 drivers of performance in our global equity portfolio and is a key holding for our climate transition portfolio,” said CalPERS board member Kevin Palkey. “Following our closed session discussion, we have collectively agreed to make no changes at this time.”

Immigration and surveillance

Palantir, a California company that supported the US military during the wars in Iraq and Afghanistan, became the focus of public campaigns to release pensions during Israel’s assault on Gaza because of its work with the Israeli Defense Ministry. The Berkeley Unified School District, for example, passed a resolution in September calling on CalSTRS to divest from the company.

Palantir now faces increased scrutiny because of its work with the Department of Homeland Security, which is conducting the Trump administration’s immigration crackdown.

Climate advocacy organization Stand.Earth highlighted CalPERS and CalSTRS’ holdings in Palantir and six other homeland security companies in a study released last month highlighting public pension investments in companies that Stand.Earth describes as enabling “repression and violence.”

Fossil fuels

California lawmakers came close to forcing CalPERS and CalSTRS to divest from fossil fuels three years ago when a bill to do so passed the state Senate. But it did not become law.

Both major pension funds opposed the bill, although one of their board members, State Treasurer Fiona Ma, supported it.

Advocates and government officials who are unwilling their pensions in support of industries that drive climate change, forced funds to divest from oil and gas for a decade.

California’s third largest public pension fund, the University of California Retirement Plan, divest from fossil fuels in 2020. At the time, its leaders cited financial reasons, finding that fossil fuels had a poor long-term outlook.

The UC Retirement Plan is in better shape than CalPERS and CalSTRS. The UC plan’s assets are worth 92% of what it owes over time to its beneficiaries, while the CalPERS and CalSTRS portfolios are worth about 80% of what they owe.

Labour’s focus on private equity

Two bills in the Legislature this spring pit unions against unions over how CalPERS and CalSTRS should do business.

One would force the funds to be released more information about their shareholdingsa change that CalPERS staff said could happen thus severely undermining his ability to invest with these firms that it would have to increase its fees to employers by more than $6.1 billion a year.

The measure by Democratic Sen. Dave Cortese of San Jose has the support of unions that represent grocery store workers and hotel employees, none of whom have CalPERS or CalSTRS pensions. The public sectors have not yet taken a position on the proposal

The second, carried by Democratic Assemblyman Robert Garcia, would direct the funds to commissioned a study of their labor standards for building and construction projects. The State Building and Construction Trades Council urged CalPERS and CalSTRS to raise their existing labor standards and supports the bill.

The California Association of School Employees, whose members have pensions from CalPERS, opposes the deals bill.

“CSEA’s position is that decisions to invest and sell CalPERS funds should be made by the CalPERS board and its investment professionals, not by the legislature,” Aaron Latham, a spokesman for the union, said in a written statement.

CalMatters reporter Michael Zinstein contributed to this story.

This article was originally published on CalMatters and is republished under Creative Commons Attribution-NonCommercial-No Derivatives license.