California’s public pension funds: Is internal reform enough?

Following the introduction of AB 2337, the Socially Responsible Investment Act, by Assemblymember Tom Ammiano, CalPERS and CalSTRS recently proposed changes in their real estate investment policies with the goal of avoiding future investments in deals that rely, or result in, the displacement of residents in affordable housing, a practice commonly referred to as “predatory equity”.

Predatory equity is an inherently risky form of real estate speculation in which investors pay more for rent-regulated housing than can be justified by the actual rental income at the time of purchase. The business model is predicated on the eviction and harassment of tenants so that rents can be significantly raised through vacancy decontrol or so that properties can be converted to other uses such as condominiums.

Unfortunately, this practice has become a problem of both statewide and national importance in recent years, and has in many instances used public pension fund money as the primary source of equity. Beyond the ethical concerns raised by such practices, the investments have also proven to be financially unsound, with CalPERS and CalSTRS recently losing more than $700 million in deals in New York City and East Palo Alto.

While CalPERS’ and CalSTRS’ proposed real estate investment policy changes are an important first step, they do not sufficiently guarantee that these types of predatory investments will come to a halt.

In addition to holes in the language of the proposed policies, including a failure to provide a right of return to displaced renters when rent-regulated housing is demolished, the fact remains that such policies can be modified at will by the board. Institutional memory is short, and nothing in the proposed policies prevents the boards from rescinding the changes when money once again begins to flow more freely in the real estate market. Legislation remains necessary to ensure that these policies stay in effect under the current and future boards.

In weighing the efficacy of self-oversight versus statutory reform, it is worth remembering that both CalPERS and CalSTRS were signatories to the UN Principles for Responsible Investment at the time many of these investments were made, and yet this particular internal policy commitment was insufficient to prevent these investments. CalPERS’ controversial investment in Page Mill Properties’ East Palo Alto portfolio, which has received significant coverage in local and national news outlets over the past year, resulted in the displacement of over 1,500 predominantly Latino and African American low-income residents in less than 18 months.

Most would agree that it is unacceptable for the retirement funds of California public employees to be used to displace working people from their homes. AB 2337 would provide stronger more permanent protections for renters, safeguard workers’ retirement funds, and introduce greater transparency and accountability into the investment decision making process, something all Californians would no doubt like to see.