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.

Nearly 10,000 inmates could leave California prisons within four years, another consequence of the state’s long struggle with the judicial system over the way it incarcerates convicts. 

“As the state prison population comes close to exceeding a court-mandated limit, the California Department of Corrections and Rehabilitation is pursuing new regulations that aim to get more inmates paroled more quickly over time,” the Sacramento Bee reported. “The proposed rules, originating from voter approval of Proposition 57 in November and unveiled [March 24], would allow ‘nonviolent’ felons to first seek parole at the conclusion of the base term for their primary offense, before serving additional time for other charges and enhancements that can add years to their sentence.”

A vote’s consequences

Through Prop. 57, new regulations were slated to come into effect instituting a credit system for inmates hoping to reduce their sentences. “The main regulation is the credit earning system, according to the California Department of Corrections and Rehabilitation,” KXTV noted. “For milestone completion credits, an inmate can earn them when they complete a specific education or career training program that’s also attached to attendance and performance requirements. Prop. 57 increases the amount of time an inmate can earn for these types of credits from six to 12 weeks per year.”

“Rehabilitative Achievement Credits are where inmates can participate in approved self-help groups or other activities promoting the rehabilitating or positive behavioral changes in an inmate. Inmates are able to earn up to four weeks of these credits annually. The last are Educational Merit Credits where inmates who successfully complete and achieve a GED, high school diploma, college degree or alcohol and drug counseling certifications.”

Working the numbers

Although the state’s prison population is closing in on the court-mandated limit of around 116,000, the new regulations must still be approved by California regulators. “If that happens, parole eligibility would change April 12,” KSBY noted. “There would be a public comment period. The early release would be phased in starting May 1, while the public review is underway. Final approval is possible by October.” In another shift, the Associated Press reported, the rules “would let the state phase out a long-running program that currently keeps nearly 4,300 inmates in private prisons in other states.”

That regime came under criticism last year as the federal government withdrew similar efforts. “California has transferred prisoners to private institutions, some of them in other states, for more than five years to relieve overcrowding in state prisons, but state, and local, use of them is beginning to be questioned,” the Chronicle reported last year. “One Bay Area lawmaker has called for the state to stop sending inmates to prisons far from their families or California inspectors, and another legislator is moving to stop cities and counties in California from contracting with private prisons to hold federal immigration detainees.”

Parole push

Continued pressure to limit action on some rules could come from law enforcement. “Police and prosecutors opposed the move for easier parole, arguing it would put dangerous offenders back on the streets too soon,” Voice of America recalled. “The new rules also change the process that prosecutors and victims use to object to early parole, doing away with lengthy formal parole hearings in favor of written statements. Prosecutors say victims have the right to be heard before any decision for parole is made.”

The new rule on parole “remains the top concern for the California District Attorneys Association,” San Mateo County District Attorney Steve Wagstaffe, the group’s president, indicated to the Associated Press. “Under the changes, prosecutors and victims would have 30 days to object in writing to the earlier paroles. It’s a much different process than the hours-long hearings used to consider parole for life-term inmates such as followers of cult leader Charles Manson, for instance, and the governor will have no role in the largely administrative decisions.”

The Los Angeles Times broke the story this week of how UC pension officials had sold $30 million in holdings in companies that run private prisons. Such companies are criticized by activists who believe they are unaccountable and that the U.S. criminal-justice system is much too quick to consign young offenders to prisons for long periods, making it highly unlikely they will lead productive lives. The UC decision was both applauded and criticized, per the Times:

“By selling their shares they’re sending a message … that the UC system is against human rights abuses,” said Kamilah Moore, who graduated from UCLA in 2014 and is a field organizer for the Afrikan Black Coalition, a student advocacy group. …

 

Xavier Harris, who graduated this month from UC Merced, where he was a member of the black student union, said he was encouraged by the move. “It shows [administrators] are listening when we said this is an issue that affects our friends and families,” he said. “They should be in the business of education, not profiting from incarceration.” …

 

Ivo Welch, a finance professor at UCLA’s Anderson School of Management, said that UC administrators may be too sensitive to outside pressure.

 

“If you start going down the list of Fortune 500 companies, I’m sure we can come up with reasons we should divest from each one,” he said. “I’m almost left speechless by how we pamper student whims.”

Previous divestment decision also based on risk

In September, UC sold its $200 million worth of shares in companies in the coal and oil sands extraction business. UC officials had a slightly different tone in describing this divestment, acknowledging student protests but also saying there were legitimate questions about risks. This is from a Reuters report:

Chief Investment Officer Jagdeep Bachher said slowing global demand, an increasingly unfavorable regulatory environment pose insurmountable challenges for coal mining companies.

 

The profitability of companies focused on developing crude from Canadian oil sands has also fallen amid low global oil prices, Bachher said, making those companies increasingly risky investments.

But the next divestment target of student activists — Israeli-owned businesses or corporations that do considerable business with Israel — seems likely to be vastly more difficult to achieve. Such a politically fraught decision would be made by UC regents, not by staff. And the man generally considered the most influential regent — billionaire financier Richard Blum, husband of Sen. Dianne Feinstein — is an intense critic of the BDS (Boycott Divestment Sanction) movement that seeks to punish Israel for its treatment of Palestinians.

In 2013, he abstained from joining an otherwise-unanimous vote to approve the selection of Sadia Saifuddin as a student representative on the regents board in 2014-15. Saifuddin was a leader of the BDS movement at UC Berkeley and belonged to campus groups that the Simon Wiesenthal Center said were explicitly anti-Semitic.

More recently, Blum has fought for a tough UC speech code protecting Jewish students from what he depicts as steadily escalating intimidation and bullying from UC students associated with the BDS movement and other anti-Israeli groups. This led Los Angeles journalist Conor Friedersdorf to write a piece for The Atlantic about free speech on campus that compared Blum with students at UCLA who seek to regulate and punish other students for being insensitive to or insufficiently concerned about minorities.

“Until our prison conditions rival those of our forward deployed military, I will not be sympathetic to prisoners,” Gorell said.

In 2009, a federal three-judge panel forced California to address the state's prison overcrowding and “inhabitable living conditions.” The California Legislature has chosen to appropriate $315 million from the General Fund to the Department of Corrections and Rehabilitation “to address capacity needs, prison population levels, recidivism rates, and factors effecting crime levels.”

“I support this bill with a heavy heart,” Gorell said. “I do not want to spend this money on prisons. But the feds forced our hands.”

Gorell said when he served as a Deputy District Attorney in Ventura County, he traveled up and down the state looking at prisons. “While it wasn't how I would want to live, the conditions were befitting prisoners,” he said.

“I also saw men and women in uniform living in worse conditions,” Gorell added, “dozens to a tent, 130 degrees, for long periods of time.”

Gorell is a Lt. Commander in the United States Navy Reserve, and recently completed two one-year tours to the Middle East and Afghanistan. He told me there are still tens of thousands of “forward deployed” military, stationed in locations around the world where they can be called to action in a millisecond.

Gorell reminded Assembly colleagues the only reason they were debating the prison issue is because the federal government intervened on behalf of prisoners, and issued a court order requiring California to reduce what they deemed “prison overcrowding.”

“This is not a long term solution,” Gorell lamented.

Why does California care?

When the federal government intervened on behalf of prisoners, and issued a 2009 court order requiring California to reduce what they deemed “prison overcrowding,” it sent politicians into a frenzy and subsequent spending spree. But the Dec. 31, 2013 federally-imposed deadline looms large, now leaving limited options.

Gov. Jerry Brown and Sen. President pro Tem Darrell Steinberg, D-Sacramento, actually compromised on their dueling prison bills this week. They amended Steinberg's SB 105 to reflect the changes, and moved it to the Assembly for a vote, where it passed 75-0.

By Joseph Perkins

California faces a Friday deadline to schedule the early release of hundreds, if not thousands, of state prison inmates. The deadline was imposed two weeks ago by a three-judge panel of the Ninth U.S. Circuit Court of Appeals, which determined that the Golden State has made insufficient progress in reducing the nation’s worst prison overcrowding.

In May last year, the U.S. Supreme Court upheld the Ninth Circuit’s 2009 court order that California reduce its prison population to 137.5 percent of capacity, a level above which, the High Court agreed, constituted “cruel and unusual punishment.”

California made initial progress toward meeting the lower court’s June 2013 deadline, with the state inmate population shrinking by 4,000 a month as of last October, according to a Los Angeles Times analysis of state prison population reports.

However, monthly declines have since slowed to fewer than 1,000 a month as most low-level offenders — convicts sentenced for non-violent, non-sexual and “non-serious” crimes — have been turned out of state prisons.

That makes it difficult for California to identify a substantial number of inmates remaining in the state prison system who, as the Ninth Circuit panel put it two Fridays ago, are “unlikely to reoffend or who might otherwise be candidates for early release.”

That’s why state officials informed the lower court that California intends to petition for a higher ceiling on the state prison population of 145 percent of capacity, rather than 137.5 percent.

But even if the court approved the higher capacity — a doubtful proposition — it is unlikely California would even reach that more lenient target. That’s because the state is in the process of ending the practice, initiated in 2006 by former Gov. Arnold Schwarzenegger, of housing inmates in out-of-state private prisons to ease in-state overcrowding.

The Department of Corrections reports that there currently are some 9,300 California convicts serving their time in such states as Arizona, Oklahoma and Mississippi.

The state plans to bring all of them back to California by 2016, beginning with 2,000 inmates housed in an Oklahoma correctional facility that will be returned to this state’s overcrowded prison system by the end of 2013.

It remains to be see if California reconsiders its plan to end its contracts with out-of-state prisons in the wake of the deadline challenge it faces this Friday, and the considerably more daunting deadline that awaits a mere ten months from now, when the state’s prison population must be no more than 137.5 percent of capacity.

The nation’s worst prison overcrowding would not be so bad had the Democrat-controlled state government not bowed to pressure from the politically influential California Correctional Peace Officers Association (which represents prison guards employed at the 33 state prisons) to shutter California’s private prisons.

Indeed, over the past decade, the state government has cancelled contracts with Corrections Corporation of America, Cornell Corrections and GEO Group (formerly Wackenhut), resulting in the closure of seven private correctional facilities here in California.

Those private prisons would be most useful in helping the state to comply with the federal court order under the state’s prison system is currently operating.