CalSTRS Board Opposes Proposed Legislation Barring Investments with Ties to Sovereign Wealth Funds
Restricts Teachers Pension from Private Equity Investments
SACRAMENTO, CA – The California State Teachers’ Retirement System (CalSTRS) trustees voted today to oppose California Assembly Bill 1967 due to its restriction to the board’s investment authority and significant negative financial impact to the investment portfolio.
The proposed state legislation targets foreign government-controlled cash reserves called sovereign wealth funds and would:
- Prohibit CalSTRS and the California Public Employees Retirement System from new or renewing investments with private equity companies wholly or partially owned by a sovereign wealth fund affiliated with a country with a poor record on human rights.
- Require extensive research, evaluation and reporting by CalSTRS on foreign affairs before making a new investment in firms affiliated with sovereign wealth funds that are not prohibited by the bill.
“This bill would be a blow to the retirement security of teachers while doing nothing to ensure a better world,” said Dana Dillon, Teachers’ Retirement Board chair and teacher/librarian with the Weed Union Elementary School District. “We have a strong record of addressing these issues in our investment decisions. Our geopolitical risk policy is the first of its kind among U.S. pensions. AB 1967 may be well intentioned, but is a dead wrong solution.”
For more than 20 years CalSTRS has had policies to help define the role of social risks in making investment decisions. In 2006, to further reduce CalSTRS’ exposure to international crises, CalSTRS added a screen of 20 socio/geopolitical risks factors for managers to use when evaluating investment opportunities. In 2007, the trustees voted to support the Principles for Responsible Investment, an investor initiative in partnership with the United Nations Environment Program Finance Initiative and the United Nations Global Compact.
The Teachers’ Retirement Board directs the $167 billion portfolio that fuels 75 percent of every pension dollar paid to California’s public school educators. CalSTRS members do not get Social Security for their California teaching service, most entirely depend on CalSTRS for their retirement security.
AB 1967 targets private equity investments, which in 2007 was the best performing asset class in the CalSTRS portfolio, posting a 33 percent return. The bill increases costs to both the portfolio and to CalSTRS’ operations. The potential lost investment revenue is estimated to be from $1.5 billion to $5.3 billion over five years.
“We can’t eliminate the portfolio’s best performers by banishing the top-tier private equity firms,” said Jack Ehnes, CalSTRS Chief Executive Officer. “This bill ignores the realities of the global financial marketplace where sovereign wealth funds are passive investors in a growing number of the most attractive investment opportunities in the world.”
Due to the global investment trend for blended public and private ownership structures, AB 1967 may also apply to real estate and fixed income investment vehicles. This will further reduce investment income in the future as CalSTRS faces a $19.6 billion shortfall in long-term benefit liabilities.
“Legislation that cuts off investment opportunities will make it tougher for CalSTRS to close its long-term funding gap,” Ehnes said. “The state is ultimately responsible for funding pensions. Now is not the time to hamstring our investment ability as the state struggles with a budget deficit.”
Sovereign wealth fund is a term that generally describes a government’s investment fund. These funds represent significant sources of worldwide investment capital, mainly from oil revenues. According to the U.S. Congressional Joint Economic Committee, the 39 largest sovereign wealth funds hold $3.2 trillion in assets.
Assembly Bill 1967 must go through the legislative process, which includes hearings and votes by the Legislature before the Governor signs the bill into law.
Established 95 years ago, the California State Teachers’ Retirement System is the second-largest public pension fund in the United States. It administers retirement, disability and survivor benefits for California’s 813,000 public school educators and their families from the state’s 1,400 school districts, county offices of education and community college districts.