For many years, California’s public employee pension funds have made feel-good social activism a higher priority than generating returns for their retirees. And now that the funds are facing an utterly massive shortfall, the costs of this kind of politically folly are becoming painfully clear. From Reuters:
CalPERS is learning that social responsibility can be a drag. The $290 billion California pension manager may reinvest in tobacco stocks after a report found that exiting the sector cost it $3 billion of potential investment gains over 15 years.
… CalPERS generated a mere 2.4 percent return in the fiscal year ended last June, far short of its 7.5 percent target.
California’s pension funds, like the many others like it in cities and states across the country, have been woefully underperforming, in part because their basic mission—generating returns large enough to fund the retirement guarantees of public employees—have been corrupted by the social and political agendas of the unions and bureaucrats that control them. (The next frontier: Bill DeBlasio has called for the struggling New York City pension fund to divest from gun manufacturers). As we argued when CalPERS recently announced that it was responding to its dire financial situation by intensifying its green activism, these institutions desperately need to be reined in. In particular, they should be statutorily barred from adding bells and whistles to their portfolio until they meet their investment targets for several consecutive years and their finances are sound. As James Copland and Steven Malanga have argued, the legislature should also change the composition of the pension board, so that they “include citizen financial experts and a taxpayer advocate.”
If this kind of back-to-the-basics investment policy is unacceptable to the public sector unions, there are a number of options open to them. They could volunteer to have their members increase their own contribution schedules to make up for the pension funding gap. Or they could ask to dissolve public pension funds and have members gamble their own retirements, privately, on fashionable social causes. The important thing is that taxpayers—most of whom don’t have access to anywhere near the level of retirement security that CalPERS provides—are not forced to bail out the unions when their political stunts don’t work out.