As legislators scolded CalPERS officials yesterday for not complying with a state law ordering the sale of investments in firms doing business in Iran, there was no mention of one thing that led to the giant pension fund’s new streak of independence.
Consultants have estimated that boycotts of corporate stocks to end racial apartheid in South Africa and reform the tobacco industry cost CalPERS and CalSTRS billions of dollars, with no hard evidence of any results.
Now when pressured to sell or “divest” investments, a new policy adopted by the California Public Employees Retirement System last year gives priority to the “fiduciary duty” to manage money for the benefit of retirees.
Pressure to sell or “divest” investments for other reasons is met by “constructive engagement” with targeted corporations, if dumping the holdings and barring future purchases are not in the best financial interest of members of the retirement system.
The latest in a series of divestment legislation, AB 221 by Assemblyman Joel Anderson, R-La Mesa, in 2007, requires CalPERS and CalSTRS to sell the stock of foreign companies doing defense or energy business in Iran.
At a legislative hearing yesterday, Joe Dear, the CalPERS Chief investment officer, and Anne Simpson, the CalPERS global equity portfolio manager, were grilled for nearly two hours by unhappy legislators in both parties.
Iran’s abuse of its citizens, financing of terrorist groups, pursuit of nuclear weapons and threat to Israel were cited, often emotionally, by legislators, representatives of Jewish groups and an Iranian dissident.
CalPERS has not sold any of its investments in two dozen targeted companies. To the contrary, Anderson complained, CalPERS has increased its holdings in Gazprom, a large Russian energy firm that plans to expand operations in Iran.
“My god, man, when are we going to step up and actually earn our keep?” Anderson said to Dear. “So, I’m deeply concerned that you have completely thumbed your nose at the Legislature.”
Dear said the investment strategy of the $200 billion pension fund is to own stock in all of the publicly traded companies in the world, diversity aimed at reducing risk. He said Gazprom holdings are in a passively managed index fund that matches the market.
Simpson said consultants estimate that the transaction cost of selling investments in the Iran-connected firms would be $6 million to $23 million. She said the resulting error in tracking the market index, win or lose, could be $127 million over five years.
Legislators said public pension funds in Florida, Illinois and Georgia had figured out a way to divest their holdings in Iran-connected companies without violating their fiduciary duty.
Dear and Simpson both suggested that the problem with Anderson’s bill is that CalPERS was not protected against losses that might result from dumping holdings in the targeted companies.
“If you pay for it, we do it,” Dear said at one point.
Although not publicly mentioned at the hearing, CalPERS had major losses on previous divestments. A 1987 law requiring divestment of South African-connected firms cost CalPERS $529 million, the Pension Consulting Alliance estimated.
With the loss of what could have been earned by investing the $529 million, the total cost of the divestment grew to $1.86 billion by 2006, Wilshire estimated. CalSTRS is said to have had similar losses.
Tobacco-free portfolios are said to have resulted in major lost opportunities for investment by CalPERS and CalSTRS. Divestment legislation also has targeted discrimination in Northern Ireland and the use of slave labor during World War II.
A frustrated Assemblyman Warren Furutani, D-Los Angeles, said the Legislature needs to take the Iran divestment issue to a “political level” and talk to CalPERS board members. He said there has been talk of subpoenas.
“If we don’t get this done, it’s going to be a terrible mark on us,” Furutani said.
Assemblyman Mike Feuer, D-Los Angeles, said CalPERS seems to think it can “shine us on” and outwait legislators who will be forced from office by term limits. He said he asked the Legislative Counsel about options for action.
In a legal confrontation with the Legislature, CalPERS would seem to have a strong hand.
After about $2 billion in “surplus” CalPERS funds was used to help balance the state budget in the early 1990s, a labor-backed ballot measure, Proposition 162, gave CalPERS control of its money, management and actuaries.
The CalPERS board also has the power to set the annual payment that the state must make to CalPERS to provide pensions for its workers, tentatively about $3.5 billion in the new fiscal year beginning in July.
On the other hand, the annual payments received by the smaller California State Teachers Retirement System, with a pension fund currently valued at about $131 billion, must be set by legislation.
Chris Ailman, the CalSTRS chief investment officer, said the pension fund has sold $21 million worth of holdings in Iran-connected companies. He said 13 companies have taken action to meet divestment criteria and three are under review.
To comply with the Iran divestment law, Ailman told the legislators, CalSTRS has spent pension fund money to send staff to Europe and Asia for face-to-face meetings with corporate officials.
“We believe due to our engagement, and others, several companies ceased their operations in Iran,” he said. “Particularly, Royal Dutch Shell, Total, Siemens and E&I have all announced they will curtail their future operations in Iran.”
Ailman said representatives of CalSTRS and CalPERS both met in Paris with representatives of Total SA, a large French oil company. He said a recent appointment to meet with Gazprom officials in New York was canceled because of a snowstorm.
Legislative attempts to control investments by the two big public pension funds continue.
As the Legislature held the hearing on Iran divestment, Assemblyman Tom Ammiano, D-San Francisco, announced a bill, AB 2337, to prohibit CalPERS and CalSTRS from investing in “predatory” schemes that displace low-income renters.
A Wall Street Journal story yesterday (Feb. 24), “Backlash hits CalPERS property deals,” told of several CalPERS investments critics call “predatory equity,” including a $100 million loss on rent-controlled units in East Palo Alto.
“It is unconscionable that hundreds of millions of dollars in public funds have been used in efforts to evict tenants from New York to California,” Ammiano said in a news release.
“Actions speak louder than words,” he said, “and CalPERS needs to make its claim of socially responsible investing a reality.”
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/ Posted 25 Feb 10