Like most public employees, I pursued a career in state service because I want to serve the people of this state and do my part to promote a safe, healthy, well educated, and just California. I was also attracted to the financial security and benefits available to public employees. Unfortunately, politicization of at the California Public Employees’ Retirement System (CalPERS) and California State Teachers’ Retirement System (CalSTRS) threatens these goals and makes me question whether my pension will be there for me when I retire in a few decades.
CalPERS recently reported an annual return (ending June 30) of 4.7 percent, well short of the fund’s 7.5 percent goal. CalSTRS growth was even more anemic at 3.9 percent compared to a 7 percent goal. Despite the massive staff and expenses of both funds, results would have been significantly better had they invested in the minimally managed index funds available to state employees for their personal investments. For instance, the Savings Plus Large Cap Index Fund earned 7.42 percent and the Savings Plus Bond Index Fund earned 8.64 percent over the same period with minimal investor expense.
If the funds don’t deliver, agencies must provide increased contributions to make up the difference.
CalPERS and CalSTRS both employ environmental, social, and governance (ESG) investing strategies and are under constant activist pressure to devote even greater assets to that purpose. In short, this means that investment decisions are based in part on the social values of the potential investee, rather than a traditional evaluation of potential return.
Supporters argue that ESG informed investments provide a more holistic view of risk and lead to a greater long-term return. Evidence shows this is rarely true. A Pacific Research Foundation review of 18 ESG funds with a ten-year track record found only two were able to beat the S&P 500 benchmark. An investor’s return from ESG funds would have been 43.9 percent smaller over the ten years compared to a S&P 500 index find.
Imagine walking into your financial adviser’s office for an annual review of your retirement accounts. Upon entering you are told that your heavily managed (and high expense) investments fell significantly short of simple index funds. Not only that, but the adviser has taken the liberty of redistributing your assets into products that match their own political and moral beliefs, which may or may not provide the best financial returns or be in alignment with your values. That would be a legal and ethical violation in the private sector, and public employees shouldn’t have to take it either.
Poor fund returns threaten our retirement security. As returns stagnate and employer contributions increase, we can expect to see political pressure for entities to leave the fund, leaving slashed benefits for retirees. This has already happened to employees and retirees in the Sierra County town of Loyalton, where the town’s retirees saw their benefits cut 60 percent after city leaders stopped making CalPERS payments in 2016. Even if our employers decide to stay in the funds, they will no doubt ask for increased retirement contributions from employees.
Public agencies across California also rely on CalPERS and CalSTRS to deliver maximum return on investment. If the funds don’t deliver, agencies must provide increased contributions to make up the difference. That means cutting or deferring services which would otherwise be available to the public. Simply put, decreased pension fund performance means larger class sizes, decreased investments in social justice, less safe neighborhoods, worse roads, fewer resources available for environmental cleanup and protection, and much more. It will also force public employers to stretch employees beyond their limits and make their jobs less attractive to quality candidates.
Ironically, ESG investing strategies will hurt California’s ability to pursue its values. If CalPERS and CalSTRS wish to promote social and environmental responsibility, they must eschew politically based investment decisions and instead focus solely on delivering maximum returns so that agencies and employees have the resources to build a stronger and more just California.
Editor’s Note: Andy Nevis works as a program analyst for the state and is a member of CalPERS.