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Who here is better to run a business? In 2011, Apple recorded a net profit of $6.62 billion and its highest September earnings ever. The California Public Employees' Retirement System ended 2011 with some sources estimating unfunded pension liabilities up to $240 billion and paltry 1.1 percent earnings on investments. Yet, CalPERS is using their 2.8 million Apple shares to influence Apple to reform its board election rules.
For two decades, overseers of California's state employee pension funds have placed ideological agendas ahead of investment returns. This has cost pensioners dearly, for no good reason. Thus, the pension board members appear to be in dereliction of their fiduciary duty to gain the best possible returns for the funds on which so many depend for their retirement.
The managers of CalPERS and California State Teachers' Retirement System – CalSTRS – have engaged in a politically motivated investing strategy that has put California government workers' pensions at undue risk.
California's constitution entrusts the pension board members with "sole and exclusive fiduciary responsibility over the assets of the public pension," and stipulates, "Assets shall be held for the exclusive purposes of providing benefits to participants in the pension."
In other words, it is illegal for a state pension fund board to pursue any goals unrelated to state workers' retirement security. Yet the managers of CalPERS and CalSTRS have allowed trendy political ideas to influence their decision-making. Instead of pensioners, they answer increasingly to the demands of union bosses, environmental advocacy groups, and activist institutional investors.
How do they get away with this? To mask their political and ideological investment agenda CalPERS board members use phrases like "triple-bottom line." As The Institutional Investor explained in July 2011 the "triple bottom line" would "incorporate environmental, social and corporate governance concerns – so-called ESG issues – across the Sacramento-based plan's entire $232.2 billion investment pool."
CalPERS' head of corporate governance, Anne Simpson, at a conference earlier this year hosted by the Investor's Network on Climate Risk, reiterated enforcing ESG issues: "The theme of the day is how to move from warm words to action, to the realm of the practical, going to meetings and signing letters isn't going to do anything unless we move the money."
Past examples of ESG values influencing CalPERS investments highlight the dangers of alternative motives for investing other than profits. Prior to their "triple bottom line" strategy, in 2000, CalPERS and CalSTRS launched the "Double Bottom Line" initiative, which included social activist and tobacco-free investment policies. CalSTRS later revealed that its tobacco investment ban had lost the plan $1 billion in gains and in 2008 conceded that it "could no longer justify" avoiding tobacco stocks.
CalPERS' development of a comprehensive plan to implement ESG issues in all investment decision-making plainly violates pension trustees' fiduciary duties: "Assets shall be held for the exclusive purposes of providing benefits to participants in the pension." Pension fund activism not only endangers government employees' retirement security, it undermines their freedom of speech by using their retirement assets to advance political agendas they have never assented to promote.
What can pension participants do? They can take legal action. Specifically, they can sue CalPERS and CalSTRS, both for breaching their constitutional fiduciary duty and for violating members' First Amendment rights by using their retirement funds for what amounts to forced political speech.
However, courts are fickle and lawsuits are time-consuming and extremely expensive. Lawmakers should not wait for courts to act.
Gov. Jerry Brown has stated his commitment to put California's finances in order. The state employee pension systems present him with an opportunity to show that he is serious about that. The governor should exercise his executive authority to remove board members whose ideological motivations have led them astray in the fulfillment of their fiduciary duties to state pensioners.
Gov. Brown must protect government workers' First amendment rights and pull the pension funds back into line with their proper function to solely provide benefits to workers.