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 thewebsite. “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.”
Ed’s Note: 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/