Blue-state pension plans 'jeopardized' by virtue-signalling investments in social causes

Blue-state pension fund managers "advancing social causes over financial results" are "jeopardizing" their pension funds, with taxpayers ultimately on the hook for those misguided investment decisions.

The Wall Street Journal's Andy Kessler says such activist investment policies as the "divest from fossil fuels" movement are harming pension plans:

California's $350[-]billion state pension system, [CalPERS], has its own set of confusing divestment initiatives.  Last month the American Council for Capital Formation [ACCF] warned that [CalPERS] "has demonstrated a troubling pattern of investments in social and political causes that are truly jeopardizing the retirement fund."  Of the system's nine worst[] performing funds, the report says that four focused on renewable energy.

Kessler's column links to an ACCF column and report, both authored by Tim Doyle, on California's troubled pension system, which highlight several disturbing trends:

  • "Rather than focusing on getting the fund back on firm financial footing, CalPERS's management is making questionable investments of pensioners' money into social and political causes that are not yielding acceptable returns[.]"
  • "Over the past decade, CalPERS returned 4.4 percent," compared with "the public pension average over that time of 5.7 percent."  On a fund of "roughly $300 billion" (p. 8 of the ACCF report), the cost of California's questionable investment decisions runs into the billions.
  • "Unrealistic actuarial assumptions ... have drastically underestimated the pension's unfunded liabilities, decreasing the urgency for the board to focus on returns while sheltering those individuals from the scrutiny of taxpayers that a much larger unfunded number would cause."

The ACCF report (pp. 9-14) details the "poor results" of CalPERS's investments over the past decade in five solar panel companies, including two Chinese companies on which the pension fund lost 50% or more on its investments.

The poor results on activist investments are not surprising, given that "[t]he overwhelming majority of those who sit on CalPERS's [b]oard of [d]irectors have little to no financial or portfolio management experience, but ironically many have political backgrounds" (emphasis added).

Perhaps most galling of all, the ACCF report reviews (p. 23) the personal investments of "the fund's [c]hief [i]nvestment [o]fficer and at least two other senior executives" and finds that "none had any personal capital allocated to any environment-focused funds or equities" (emphasis original).

CalPERS spent more than $1 billion on fees to investment advis[e]rs, hedge funds[,] and private equity in 2017.  These three people had access to $1 billion['s] worth of investment advice and chose to steer clear of the type of investments they direct pensioners' money into.

The CalPERS fund managers are activists with other people's money but not with their own.

In the second installment of its "Point of No Returns" series, ACCF has found a similar pattern in the "New York City Retirement System":

Fund managers responsible for the pension[] fund system of New York City routinely invest in things that have no reasonable expectation to yield acceptable returns for investors.

Doyle's column on the New York City pension system notes that "the use of certain accounting tactics" has "allowed fund managers and the comptroller to shield from public view the true consequences of their mismanagement." 

As in California, questionable social cause investments have financially harmed the New York City pension system.  The ACCF column lists one example: "12 percent of the funds' assets ($22 billion) are invested in a group called the 'Developed Environmental Activist' asset class, which has underperformed overall funds' returns by an average of" six percentage points.

New York City has also waded into the divest from fossil fuels movement, as Doyle's ACCF report details (page 5):

On January 10, 2018, city officials announced that the five pension funds will be taking steps to divest from fossil fuels – another alarming example of prioritizing politics over performance, as economic reports find [that] such a decision could cost billions. 

Undaunted, the city's comptroller, Scott Stringer, says the financial health of the city's pension funds "is linked to the sustainability of the planet":

New York City [m]ayor Bill de Blasio announced the same day that he was suing several energy companies – including some of the best performing stocks – for contributing to climate change.

The harm being done to California and New York City pension funds, among others, is summed up in the ACCF report on New York City:

Instead of focusing on sound fiscal practices that ensure [that] pensioners get the retirement benefits and security they were promised without harming taxpayers or bankrupting municipalities, those who manage many public pension plans have used beneficiaries' assets to advance social or political agendas.

Public employees, their municipal employers, and ultimately the taxpayers will be left on the hook for the inevitable results of blue-state politicians engaged in social cause investing.

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