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Dissent on Divestment in LA

The purpose of a pension fund is to invest money and turn a profit for pensioners. That seems obvious to our readers, surely, but it’s apparently not so clear to the overseers of California’s biggest funds. The LA Times editorial board explains:

The day he was sworn in to the California Assembly, freshman Bay Area Democrat Ash Kalra filed his first piece of legislation: Assembly Bill 20, which would force the state’s two largest public employee retirement funds, CalSTRS and CalPERS, to divest from companies involved in building the disputed Dakota Access pipeline.

The bill, if it were to become law (and it shouldn’t), wouldn’t stop the project from being completed. The Army Corps of Engineers has already given final approval to the remaining section of the pipeline. It would, however, blow a multibillion-dollar hole in the pension funds — and the public pocketbook, because state and local taxpayers would be left to fill that hole.


Even those who opposed the Dakota Access pipeline, such as this editorial board, must recognize that AB 20 is a flawed and dangerous bill. For one thing, it is overly broad, requiring divestment from a company that operates multiple oil and natural gas lines as well as from major national banks that finance not just the pipeline’s construction, but also many of California’s businesses. California Public Employees’ Retirement System staff estimate that cutting investment in these companies would cost it at least $4 billion. California State Teachers’ Retirement System staff is still evaluating what divestment would cost that fund.

It would be one kind of irresponsible if CalPERS and CalSTRS were meeting their target returns. But they aren’t, and they’re massively underfunded in the first place. So it’s a whole new level of dereliction to limit the investment universe (and thus make it harder to earn money) in the name of some high-minded ideals. As the editorial board rightly notes, it’s not even likely that divestment will have any serious political impact. All it will likely do is impoverish pensioners.

We’ve long been on the record criticizing California for divestment; the real story here is that the LA Times is on board. It’s good to see that they get it. We hope this will prompt them and other pundits to consider the reality that, by underfunding pensions and prioritizing idealistic rhetoric over concrete results, governments in California and across the country are failing to meet their obligations to their constituents. In fact, we’d venture to guess, that might partly explain why so many people are mistrustful of government right now, and of state and local Democrats in particular.

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  • KremlinKryptonite

    It’s really sad to read these things. Then again, no one should be shocked that a CA legislator doesn’t under basic financial planning. Worst of all, the DAPL would actually take crude off roads and rail which are more dangerous, but this ignorant character can’t understand that. IQ is often at play. IQ’s between 80-90 mean the person is mentally 12-14 years old.

  • FriendlyGoat

    All they have to do is find other stocks to own in other lines of business which can produce similar or better returns.

    • Gary Hemminger

      This goes against a normal diversification concept in a portfolio. If was so easy to find stocks that produce similar or better returns, everyone would be doing it. It isn’t that easy.

      • FriendlyGoat

        Oddly enough for California, Facebook has been a good choice since late summer, 2011.

        • CapitalHawk

          You know what was a great investment for a while? Sears. But lately, not so much. Predicting is hard, especially the future.

  • Fat_Man

    There is a lot to be said for restricting pension plan investments to Federal and Municipal long term bonds.

    • LarryD

      Which means the pension plans are funded entirely by taxpayers, not by positive economic investments. Why does this seem like a good idea to you?

      • Fat_Man

        If you study the literature on the financing of insurance companies (and pension plans are life insurance policies) they reach the conclusion that obligations such as pension plans incur should be funded by matching maturities of long term bonds. Further the volitility of equities means that the plans will eventually have to make high payoiuts in years when equities are way down, which will further impair their ability to meet their obligations in the future. Finally, Investing in equities just invites the type of politicized posturing you see here.

        The rationale for investing in equities has been that the yields on equities are higher than those on bonds, which is true, but which does not account for volatility, nor for political risk.

        • LarryD

          That answers the question “why bonds and not stocks?”. But you specified “Federal and Municipal” which is government borrowing (repaid by taxpayers), not corporate borrowing (repaid by profits).

          • Fat_Man

            Because the supply of corporate bonds, per issuer, is limited, trading in them is often sporadic and involves high mark-ups. Further, credit analysis costs money, and is far from foolproof. Taxes are also paid out of profits of successful enterprises, but, they average across the whole economy and are less susceptible to idiosyncratic risk.

          • LarryD

            They are susceptible to systemic risk, though. American Interest has noted many cases of municipalities going bankrupt, usually over pension costs for their retired employees, States having problems, in part from the same cause. As for Federal bonds, take a look at the inflation over the last century, because there is the risk for Federal bonds, that they’ll be payed off in money worth much less than expected.

            If you want guaranteed safety, no such thing is available. The Japanese had to renege on their guarantees decades ago.

  • Thom Burnett

    This is a great idea. California should invest all it’s pension funds in renewable energy, minority owned businesses, and other important political causes. With any luck at all, their bankruptcy will happen while we have a Republican government unwilling to bail them out. Then they’ll be a living example of the difference between wishful thinking and fiscal reality that might save 40 or so of the other states in our nation.

    This country is full of people who refuse to believe nothing bad can happen from spending too much (despite Flint MI?!). The longer it takes for them to learn the more people it will hurt.

  • erstwhile_anonymous

    Sorry, didn’t realize that saving a planet for our grandchildren to live on was a “high-minded ideal”.

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