Actions taken in recent days by the University of California Board of Regents, Gov. Gavin Newsom and state Treasurer Fiona Ma have ushered in a new era of pension divestment to take a stand against fossil fuels.

Jagdeep Singh Bachher, UC’s chief investment officer and treasurer, and Richard Sherman, chair of the UC Board of Regents’ Investments Committee, announced last week that the university’s $13.4 billion endowment will be free of any investments in fossil fuels by month’s end and that UC’s $70 billion pension fund will also end its last such investment in coming months. 

Several UC regents, the UC Academic Senate and other faculty groups have long since called for such divestment as an obvious step in an era in which fossil fuels are a major source of the green-house gases believed to contribute to global warming. But Bachher and Sherman also said that fossil-fuel investments – long a staple of hedge funds and pension funds alike – were no longer safe, given the rapid emergence of alternative energy sources and growing opposition to reliance on oil, natural gas and coal.

Oil company investments seen as risky

Newsom also cited both environmental concerns and financial risk on Friday in signing an executive order directing the California Public Employees’ Retirement System, which has $380 billion in investment assets, and the California State Teachers’ Retirement System, which has holdings of $237 billion, to transition to a new investment model that drops investments in fossil fuels.

Newsom’s office said he would work with CalPERS and CalSTRS on a mission statement that establishes “a timeline and criteria to shift investments to companies and industry sectors that have greater growth potential based on their focus of adapting to and mitigating the impacts of climate change.” 

The governor said California as a state had to be all-in in the fight to stop the planet’s warming.

“How we meet this moment will define our state – and country – for decades to come, just as the emergence of the internet defined our economy over the past few decades,” Newsom said in a news release. “We have to get ahead of this and align our state investments, our purchasing power and our transportation and housing policies to be ready to meet this moment head-on.”

State Treasurer Fiona Ma, who is a member of both the CalPERS and CalSTRS boards, foreshadowed Newsom’s decision two weeks ago when she urged CalSTRS to sell its $6 billion holdings in oil and gas companies.

The Pensions & Investments website reported that Ma made the call after hearing more than 40 students tell the CalSTRS board on Sept. 5 of the importance of divestment.

CalPERS trustee: Prioritize high returns

While the surge in support for divestment will likely prove popular with California Democrats, it’s not clear how CalPERS members will react. Corona police Sgt. Jason Perez stunned CalPERS Board President Priva Mathur in an October election after running on a platform that said CalPERS investment decisions should be solely based on their likely returns. Perez says many CalPERS members fear that they’ll never get close to their full pensions when they retire.

According to the most recent updates, CalPERS only has 70 percent of the funds it needs to meet its obligations to present and future retirees. CalSTRS is 63 percent funded, a huge disappointment to state officials who thought a 2014 bailout orchestrated by then-Gov. Jerry Brown and the Legislature would get it back to health. 

The University of California pension system is in much better shape than either CalSTRS or CalPERS, with 85 percent of needed funding.

The California Public Employees Retirement System and the California State Teachers Retirement System recently announced that they had exceeded their investment goals by at least 1 percentage point in fiscal 2017-18, with CalPERS citing annual gains of 8.6 percent and CalSTRS reporting 9 percent returns.

This came after strong returns in 2016-17 as well for both of the pension giants. But even with CalPERS now reporting $355 billion in assets and CalSTRS $225 billion, both systems have 70 percent or less of funds needed to cover their long-term commitments.

This troubling long-term picture is why the League of California Cities, in a January report, said it expects CalPERS to keep raising rates on local governments for years to come until they become “unsustainable.” CalSTRS, meanwhile, relies on the Legislature to set the rates it charges workers, districts and the state for pension costs – and the bailout the Legislature approved in 2014 that sharply increased what districts in particular must pay has not shored up the system nearly as much as was hoped.

Against this backdrop, CalPERS and CalSTRS are offering hints that they aren’t happy with the Legislature and think it is making their jobs more difficult.

CalSTRS’ chief investment officer, Christopher Ailman, issued a statement about the good returns that downplayed their significance: “We will rank high compared to similar funds, but it is only one year. We need to repeat that performance year in and year out, on average, over the next 30 years.”

But in an interview with the Private Equity International website that was posted July 2, Ailman elaborated on his view of investment gains. He did so in a way that challenged claims made by many Democratic lawmakers and pro-pension groups such as the Californians for Retirement Security that state pensions’ biggest problem was the Wall Street crash of a decade ago.

CalSTRS exec: Don’t blame investment results

“Ailman points out it’s often not the investment results that have led to the underfunding, it’s either poor management of liabilities or a lack of contributions,” the article said.

“Asked whether this keeps him up at night, he says he sleeps like a baby – wakes up and screams every three hours. ‘We pay out half a billion dollars a month in benefit payments, more than we bring in.’”

In the interview, Ailman also complained about Assembly Bill 2833, a state law that took effect last year that requires pension systems to disclose more information about expenses and fees related to their investments. He said the law ignored existing disclosure requirements and that it had caused CalSTRS to miss out on lucrative opportunities.

He said the “extra rules and extra issues” were having unintended but negative effects.

“We now have a situation in the state of California where CalPERS and CalSTRS have less invested in Silicon Valley than the Dutch, Asian and Middle Eastern sovereign wealth funds. Fundamentally, as a native Californian I think that’s just so wrong, but I can’t change people’s minds. It is what it is now,” Ailman told Private Equity International.

CalPERS knocks bill to monitor divestment laws

CalPERS’ concerns about legislative actions are also plain, if more muted. The Pensions & Investments website reported July 18 that the pension fund opposes Senate Bill 783, which already passed the Senate and now is before the Assembly. It would set up a review body to analyze how CalPERS and CalSTRS had complied with state laws directing the pension funds to divest from certain industries. CalPERS says this review panel would duplicate the work of pension staffers.

Given that CalPERS and CalSTRS at times have resisted the Legislature’s attempts to micromanage their portfolios, SB783 could be seen as giving teeth to lawmakers’ attempts to have a bigger say in investments.

The debate over SB783 comes as CalSTRS faces demands from activists to divest in a new corner of the private sector: companies which run private prisons. Other recent calls for divestment have targeted assault-rifle makers; finance companies that helped with construction of the Dakota Access Pipeline; and fossil-fuel companies.