Assembly Bill 20 Would Worsen California’s Public Pension Crisis
The average credit card debt in 2016 was $16,048 per household that carries a balance. Paying off this debt is an important financial goal. Obviously, this beneficial goal would be more difficult to meet if the Legislature imposed arbitrary restrictions on the types of jobs households with credit card debts can have. Yet, for some reason, California state lawmakers are applying this perverse logic to the state’s public pension systems.
CalPERS, CalSTRS and all public pension systems in California have an important responsibility — effectively managing the money entrusted to them on behalf of the current public employees, retirees and their families, and taxpayers. CalPERS alone manages the pension and health benefits for 1.6 million people in California.
Without properly accounting for risk, California’s public pension systems are currently underfunded by $170 billion, or around 7 percent of total state GDP. This is a tremendous burden that, if not properly addressed, will either result in large future tax increases, large future spending cuts, or significant reductions in promised pension benefits to future retirees.
The size of the unfunded liabilities of California’s public pension systems are inter-twined with the pension funds’ returns. The higher the investment returns, the lower the unfunded liability. And, the reverse is true as well — the lower the investment returns, the higher the unfunded liability.
This is where the potential impact from Assembly Bill 20 is problematic. Just passed by the state Assembly and working its way through the state Senate, AB20 would require CalPERS and CalSTRS to divest of its holdings related to the Dakota Access Pipeline. It continues a trend of politicians imposing unwarranted restrictions on the investment decisions of the managers at CalPERS and CalSTRS.
These investment restrictions impose real costs that are borne by current public employees and retirees. In the near-term, CalPERS and CalSTRS must reallocate their investment portfolios, possibly realizing losses, in order to comply with the preferences of politicians in Sacramento.
Longer-term, the costs can be even higher.
Fulfilling the mission of CalPERS and CalSTRS requires difficult investment decisions that balance the need for strong investment returns to meet future pension obligations with the need to manage short-term risks to sustainably meet near-term obligations.
Due to unrealistic investment expectations, consistent underfunding of the pensions from the Legislature, and overly generous pension promises, it is already unlikely that future promised benefits can be fulfilled. Imposing additional restrictions that constrain how the pension funds can allocate their assets creates new, and unnecessary, obstacles that further harm the interests of current and future retirees.
It is equally important to note that the assets of the public pension funds do not belong to the legislators in Sacramento. It is simply inappropriate for these politicians to use CalPERS and CalSTRS as a personal slush fund to support a partisan cause, or punish disfavored investments.
It is also not the role of California’s public pension funds to make public policy regarding the Dakota Access Pipeline, and whether it should be built. Whether the Dakota Access Pipeline should have been built was a political decision that is properly made in Washington, D.C., and the impacted state capitals.
Unfortunately, AB20 is not the first-time the legislators in Sacramento have tried to use the pension funds for political purposes. While we all applaud divesting from state sponsors of terror like Iran or taking a stand during the time of Apartheid South Africa, this trend should not accelerate to address partisan causes that a sub-set of politicians find distasteful. The negative impacts on CalPERS and CalSTRS will grow as the investment funds become increasingly politicized.
AB20 exploits the assets that are held for the benefit of public-sector workers for political ends. Such investment restrictions are not only arbitrary, they unnecessarily increase the risks facing California’s state and local public pensions.