The nation’s largest public pension fund, CalPERS, is holding a meeting in San Diego this week to discuss investments in California infrastructure, this one focusing on energy.
Previous closed-door meetings with a wide range of interests (held in Sacramento, San Francisco and Los Angeles since March) have looked at transportation, water and infrastructure investing in general.
In a happy convergence, pension funds are moving into infrastructure to reduce inflation and market risk, while deficit-ridden governments are deep in bond debt and looking for new ways to rebuild and expand crumbling public works.
Creating jobs and putting money into local economies would be good public relations for public pensions, under fire for rising costs and worried about the undertow of the private-sector shift from pensions to 401(k)-style individual investment plans.
But public pensions still operate under some investment constraints, even though Proposition 21 in 1984 lifted the lid that kept must pension money in predictable bonds, enabling dubious promises that investment earnings would pay for big pension increases.
And it’s not clear to what degree pension fund investments in infrastructure would create jobs and much-needed public works improvements or simply replace money that would have been obtained from other sources.
“It has been a challenge in the past to find the right opportunities in California,” said Robert Udall Glazier, deputy CalPERS executive officer. “But I think we are at a unique crossroads where there is a desire from many different sectors to find ways to overcome whatever hurdles there might be.”
The California Public Employees Retirement System, with a target of 2 percent of total investments ($227.6 billion last week) in infrastructure, announced a goal last September of putting up to $800 million in California infrastructure over three years.
A spokesman said CalPERS currently has investments in four externally managed funds that have about $76 million in California infrastructure, mainly water storage and waste water recycling.
Legislation introduced this year requiring CalPERS to “prioritize” California infrastructure investment over comparable out-of-state infrastructure investments was opposed by CalPERS.
But CalPERS lifted its opposition after the bill (SB 955 by Sen. Fran Pavley, D-Agoura Hills) was softened to say CalPERS “may” prioritize California infrastructure, making it clear that the Legislature is not controlling pension fund investments.
“Due to the current economic recession in which the residents of the state and the nation as a whole find themselves,” says the bill, “infrastructure investment represents a significant opportunity to spur job growth while improving California’s infrastructure, which is important to maintain business competitiveness.”
The bill also applies to the California State Teachers Retirement System, the nation’s second largest public pension fund. But CalSTRS apparently is not focusing on California like CalPERS.
CalSTRS in February announced a $500 million investment with Australia-based Industry Funds Management for “a diversified portfolio of core infrastructure assets in North America and Europe across a range of sectors.”
The CalSTRS infrastructure portfolio manager, Diloshini Seneviratne, told Top1000funds.com in February that CalSTRS has a “very conservative” strategy and wants diversity in geography and other factors.
“Our policy does talk about Californian investment,” she told the website. “We will give Californian investment opportunities some additional review, but they will not get preferential treatment in terms or as far as any legal structures go.”
At CalPERS, Glazier mentioned that the Dallas Police and Fire Pension System is one of the first U.S. public pension funds to directly invest in a major infrastructure project.
The Dallas pension fund invested in the North Tarrant Expressway, a congestion-relief project in the Dallas-Fort Worth area, and has joined in financing a lanes-management project on the LBJ Freeway.
“Both projects represent a commitment by the Dallas Police and Fire Pension System to help build a state-of-the-art highway system in Dallas,“ the pension fund announced in June 2010. “The Pension System is a model for the nation in using public pension funds to help build needed highway infrastructure.”
New York Gov. Andrew Cuomo has mentioned public pension funds as a potential source for part of the funding needed to replace the Tappan Zee Bridge over the Hudson River, a quest begun by officials in the 1970s.
Two major California projects are being built through “public-private partnerships,” the $1 billion Presidio Parkway southern access to the Golden Gate Bridge and the $490 million Gov. George Deukmejian Courthouse in Long Beach.
In exchange for annual state payments, the private-sector partner agrees to finance the design and construction, then operate and maintain the facility for three decades before turning it over to the state in good condition.
The possibility that the state may not make “3P” payments could seem risky to pension funds. Opponents of “3P” projects also point to two troubled toll roads, one new 10-mile stretch near the Mexican border and a 10-mile freeway median route in Orange County.
With thin traffic, SR 125 went bankrupt and was purchased by the San Diego Association of Governments. When a “non-compete” clause barred freeway improvements, the SR 91 route was sold to the Orange County Transportation Authority.
An overview of California infrastructure investment prepared for the CalPERS board last September by Meketa listed several “challenges.” Tax-exempt bonds and federal grants used for projects restrict the use of third-party investments.
Revenue streams to pay off investments can be limited and risky. The toll roads had “user fees.” The Presidio Parkway and Long Beach courthouse annual payments are for making an asset “available” to the public.
Countries with successful “3P” programs have guidelines and advisory support, a framework that can used to offer concessions and contracts to private firms for operating and managing infrastructure.
As public pension boards consider infrastructure investments, some advice echoes the “sustainability” rationale used by pension funds for urging corporations to adopt sound “environmental, social and governance” policies to prosper in the long run.
Part of the “fiduciary” duty of pension boards to protect pension recipients may extend to preserving the financial health of governments, the pension plan sponsors, through infrastructure investments needed to maintain and improve the economy.
“Pension funds are, first and foremost, bound by their duties as fiduciaries and as such must seek the best possible investments, balancing expected returns with potential risks,” Timothy Barron, president of Rogerscasey consulting, told aiCIO magazine.
“Yet, for public plans particularly, there is a symbiotic relationship with their sponsoring entity, where a healthy sponsor is crucial to the long-term viability of the plan itself.
“Infrastructure investing may be an example where the plan fiduciary can provide capital to support the sponsor while benefiting the plan as well—this must be determined through careful due diligence of each individual opportunity, however, and is fraught with the potential for misaligned interests.”
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 21 May 12
Calpensions 
May 21, 2012 at 9:38 am
Great article and interesting. Have you seen the discussion on the Chicago Infrastructure Trust? There is an infographic attached to this article here:
http://www.huffingtonpost.com/michael-likosky/rahm-emanuels-chicago-inf_b_1455756.html
May 21, 2012 at 5:04 pm
This is nuts! CalPERS is supposed to earn 7.5% on their investments. If infrastructure returned that much we’d have the best infrastructure in the world. The reason govt bonds don’t pay much is because however necessary infrastructure is, by itself it doesn’t return much. Taken as a whole it is worthwhile, but no way can you get 7.5% out of building toll expressways and bridges.
It only makes sense as a way of deflecting criticism for not making 7.5% (which they are not doing by a country mile). After the next few years of 1.1% returns CalPERS can say “Oh, but look at all the good we do for the state. Forgot our lousy investments that taxpayers have to make up for.”
By appearing to merge their interests with the public interest the public can be deluded into supporting CalPERS as an indirect way of repairing our crumbling infrastructure. Instead of just repairing our crumbling infrastructure which would be a *lot* cheaper than making up for the inadequate returns of CalPERS.
Look at the Excel data file of P/E ratios going back to 1881 at Yale Professor Shiller’s web site
http://www.econ.yale.edu/~shiller/data.htm.
If you look at the 12/1999 data it shows a P/E ratio of 44 which is a 4.2 sigma deviation from the mean of 16.4. Anyone who knows anything about statistics knows that was such an unusual event it will not happen again for decades, if ever. With the Euro collapse imminent, CalPERS is looking at an unforgiving market that will take at least a dozen more years to return to normal.
If you can’t make the returns, try to dazzle them with bull.
May 21, 2012 at 5:12 pm
I disagree Michael– it is merely a wise diversification and a kind of two-for given the state’s needs— bravo on the article and bravo to Calpers!!
May 21, 2012 at 7:24 pm
2/3 of CalPERS’ “members” are the business community’s “regulators”–those very regulators that cause the nation’s CEOs to rank California the worst state in the union to do business for the last nine years. So, if CalPERS wants a good return on its investments–in California infrastructure, stocks, bonds, mutual funds, real estate–it would be well-served by teaching its “members” that they are impacting their own wealth creation by over-regulating. Back off and everyone wins.
May 21, 2012 at 7:47 pm
The Bay Area Council Economic Institute in January 2012 released a study (http://www.bayareaeconomy.org/media/files/pdf/P3-CaliforniaInfrastructureUpdateWhitePaper2012Jan.pdf) that showed the dramatic and untapped potential for creating jobs in California through greater use of public private partnerships. The study also provided recommendations for establishing the policies and processes to ensure it’s done right.
May 21, 2012 at 8:31 pm
Here’s a way for Calpers to promote renewable energy development and make money too. The Exceutive Summary is below and the whole 30 page Brief is free at http://www.jimbell.com, click on “Green Papers”.
Electricity Supply and Price Security in
San Diego County
Comparison of Strategies for the Production/Procurement of Electricity and Elimination of Greenhouse Gas Emissions
Research Brief Submitted To:
The San Diego Regional Apollo Alliance
By
Jim Bell and Dr. Heather Honea
8/28/2007
Copyright © 2007 Jim Bell & Heather Honea, PhD
EXECUTIVE SUMMARY
This research brief compares two energy production and procurement options in terms of their ability to make San Diego County electricity price and supply secure. Both options require that San Diego County fully meet its electricity requirements.
• Net-Meter Option – San Diego County passes Community Choice Aggregation Ordinances and invests ratepayer dollars into becoming renewable electricity net-metered-out* by increasing its electricity use efficiency by 40% and by installing photovoltaic (PV) systems on 20.5% of its roofs and parking lots. *Net-metered-out means that San Diego County will be putting as many kWh into the Western States Grid each year as it uses from the grid each year.
• Power Link Option – SDG&E invests ratepayer dollars in building the Sunrise Power Link and Diego County continues to purchase imported electricity from SDG&E. In this Brief the Power Link is analyzed as being a continuation of the County’s current dependence on imported electricity or imported natural gas or nuclear fuels to produce it in the County.
To determine which option best meets San Diego County’s electricity supply and price security needs, each alternative was evaluated in terms of its contribution or threat to economic security and opportunity, energy security, public and environmental health, and social good. Our analyses indicate that the Net Meter Option provides the greatest benefit across all of these factors.
Analysis
Return On Investment – (ROI). Of the two Options, only the Net-Meter Option generates a return on investment to ratepayers and actually becomes self-funding after initial start-up capital sets it in motion.
Energy and Economic Security. The Net-Meter Option provides San Diego County the most economic security and opportunity by changing its current negative-electricity-purchase-cash-flow into a positive-electricity-purchase-cash-flow. The Net-Meter Option keeps the majority of the money the County currently exports to pay for imported electricity or imported natural gas to produce it locally — in its local economy. This dollar export exceeded $1 billion in 2005.
The Net-Meter Option is fueled by inexhaustible solar energy which is delivered free. Therefore, it will protect San Diego County from economic shocks related to rapid rises in the cost of natural gas or other nonrenewable fuels whether such price hikes are real or contrived.
In contrast the Power Link Option will deliver imported electricity. Regardless of whether this electricity is produced renewably or with nonrenewable fuels, it will continue the current negative-electricity-purchase-cash-flow out of the County’s economy.
If the average retail cost for electricity in the County is $.10 per kWh the County’s 2010 negative-electricity-purchase-cash-flow will exceed $1.6 billion and grow to over $2 billion in 2050 assuming the County’s population grows to 3.92 million by 2050. If the cost of natural gas doubles or triples as it did during the 2001-2002 energy crisis the negative cash flow related to purchasing natural gas to produce electricity locally or purchasing imported electricity produced by burning it would grow proportionally. This level of negative-electricity-purchase-cash-flow would adversely affect the economy.
The Net-Meter Option is the only strategy that can provide San Diego County with true electricity supply and price security. This is because solar energy in its various forms is our County’s primary indigenous energy resource. All we have to do to harness this resource is to install sufficient efficiency improvements and devices to convert free solar energy into electricity. If the County were to net-metered-out, for all practical purposes it would become renewable electricity self-sufficient. Similar to power plants that depend on the grid for power when they are down for repairs and overhauls, solar generation would depend on the grid when there was insufficient local renewably generated electricity to meet the County’s electricity needs. Once the County is renewable electricity net-metered-out, its PV system output would substantially exceed the County’s need for electricity during the majority of its peak demand hours, when the sun is shining. This would reduce transmission congestion.
The Power Link Option is highly dependent on increasingly costly, politically vulnerable, finite supplies of natural gas and other non-renewable energy resources. It is difficult to predict the cost of natural gas and other nonrenewable energy resources — especially, if liquefied natural gas is imported from terrorist and earthquake racked Indonesia to the Power Links terminus in Mexicali, Mexico. This is SDG&E’s current plan. Therefore, the Power Link Option does not provide real energy price and supply security.
Social and Environmental Good. The Net-Meter Option will be virtually health and environment benign because solar generated electricity produces no pollution or greenhouse gases. It will also stimulate local business and employment
The Power Link will deliver electricity produced in distant power plants primarily by burning natural gas or some other nonrenewable and polluting energy sources. While this will minimizes local pollution, it will increase it globally because of transmission losses.
Proof of Concept
As the first step toward making the Net-Meter Option a reality, this brief proposes that San Diego County begin with a modest Proof of Concept Project. This project would consist of the County Board of Supervisors issuing a Request for Proposals (RFP) to qualified bidders to make the County 2% renewable electricity net-metered-out by mid 2010. Specifically, we propose that the San Diego County in partnership with the San Diego Apollo Alliance develop a Proof of Concept Project that would mirror the County’s current electricity use profile of 4% large commercial, 28% medium commercial, 7% small commercial, 7% agriculture and 54% residential. By maintaining this ratio, the success of the Proof of Concept Project would validate the security, economic, health, and public good benefits outlined in this brief and provide an economic model that the County could apply to becoming completely renewable electricity net-metered-out.
San Diego County would issue an RFP for the Proof of Concept Project to qualified bidders. Qualified bidders would include Energy Service Companies (ESCOs) and SDG&E. ESCOs are companies who help clients reduce energy costs by improving their energy use efficiency and developing their renewable energy resources. ESCOs typically supply the working capital to perform the work they do. They pay back their capital investment and make their profits by sharing in the savings on energy costs that the work they perform makes available. Once finance costs are paid and profit margins are met, the ESCO’s role ends. After that, all the savings generated by the improvements go to the client, which in this case would be San Diego County, its residents and resident businesses.
May 21, 2012 at 8:33 pm
Not to be toooooo cynical, but with the California legislature mandating CalPERS investment in Infrastructure and Infrastructure being almost entirely mandated to be “prevailing wage” = Union Jobs, this seems pretty obviously another jobs program to pump up union dues –> campaign contributions –> more union jobs mandated –> then the circle continues. Taxpayers making up the difference between low return “infrastructure” projects and the 7.75% forecast return on investments. No wonder the “rich” are leaving California!
May 21, 2012 at 8:48 pm
Rufus, I looked at the California Infrastructure Paper. They are recommending $250 Billion to $750B over 10 years. These are unrealistic sums and 1,000 times the amount CalPERS is investing.
Let’s stick with reality.
May 22, 2012 at 2:55 am
Rufus Jeffris Says: “The Bay Area Council Economic Institute in January 2012 released a study (http://www.bayareaeconomy.org/media/files/pdf/P3-CaliforniaInfrastructureUpdateWhitePaper2012Jan.pdf) that showed the dramatic and untapped potential for creating jobs in California through greater use of public private partnerships. The study also provided recommendations for establishing the policies and processes to ensure it’s done right.”
RUFUS,
CalPERS can’t even get their own business right: they are advocating corporate governence while being investigated by many agencies for a lack of good governance, corruption, and incomptenance.
The untapped potential, as you call it, is most likely just another booby trapp set for unsuspecting tax payers that still believe the BS coming from CalPERS.
“The study also provided recommendations for establishing the policies and processes to ensure it’s done right.”
– Too Funny! We already have those policies and procedures that have been completely ignored. Save the BS for someone else.
CalPERS is at least 50% of the problem!
May 22, 2012 at 3:38 am
Jim Bell Says: “Here’s a way for Calpers to promote renewable energy development and make money too.”
How did Solyndra work for the Obama administration?
Again, Jim, CalPERS isn’t even capable of doing what they’re supposed to be doing. Until they can get their own house in order, and they are light years away from doing that, they should just focus on investment returns and save the “save the world” mentality and the “good Samaritan” PR campaign for another day.
When, and if, CalPERS is ever even 80 funded it will only be because they are charging everyone 200 -300% of the advertised cost for pensions, and cities & counties have increased their contributions above the deferred CalPERS rate, and also sold pension obligation bonds to help pay down the pension debt that only keeps rising. In other words, when CalPers claims a certain funding level they aren’t really being honest about where those funds actually come from.
Just wait until CalSTRS blows a huge hole in the bow of the education budget with their demands for tripling the cost of the teachers pension funding, which will mostly come from the local school districts. This, of course, is happening at the same time the CalPERS 3@50 pension cost has increased from 15.7% of payroll to 30-40-and even 50% of payroll for people that can retire at age 50. Of course these costs are understated because CalPERS has the pension industries longest smoothing policy.
We are in big trouble regarding pensions and medical benefits and CalSTRS, CalPERS, and their B.O.D.’s are a huge part of the problem. Instead of these clowns acknowledging a problem even exists, they would prefer to step into a arena they aren’t familiar with in order to deflect from their charter mission which they are failing at miserably.
May 22, 2012 at 6:50 pm
not really cap—the idea is a good further diversification on the fund and fulfills an important econ and societal role. I see it as a 2 fer.