Government Agency

California State Teachers’ Retirement System

Website:

www.calstrs.com/

Location:

West Sacramento, CA

Formation:

1913

Type:

Government agency

The California State Teachers’ Retirement System (CalSTRS) is a state government agency that manages pension and health benefits for public school educators in California. It relies on environmental-social-governance (ESG)-related investing for most of its funding. Despite currently having an investment portfolio value of approximately $243.2 billion,[1] CalSTRS was only 62.6% funded in June 2017. [2]

CalSTRS has faced criticism for investing in Chinese companies such as the surveillance company Hikvision, which has been blacklisted by the Trump administration for allegedly enabling the mass incarceration and surveillance of citizens in the Xinjiang region of China, a series of alleged crimes against humanity some observers have suggested rises to the level of cultural genocide. [3] Hikvision has been called the “corporate poster child for enabling Chinese human rights abuses,” as the firm’s security cameras are “visible atop the walls of detention camps incarcerating some one million or more Uighurs in Xinjiang.” [4]

Founding

The California State Teachers’ Retirement System is a government agency in California that focuses on providing retirement and health benefits to public school educators around the state. It is the largest educator-only pension fund in the world and the second-largest pension fund in the United States after the California Public Employees’ Retirement System (CalPERS). As of February 2020, CalSTRS had an investment portfolio value of approximately $243.2 billion. [5]

The board of directors for CalSTRS is comprised of the Director of Finance, State Controller, State Superintendent of Public Instruction, State Treasurer, three active members of CalSTRS which are appointed by members, one retired CalSTRS member, one school board representative, and three public representatives appointed by the Governor of California which are then confirmed by the State Senate. [6]

CalSTRS’s main focus is managing pension and health benefits for public school educators around California, but to fund those benefits the agency also focuses on environmental-social-governance (ESG)-related investing and “sustainable investment.” [7]

The agency was a signatory to the Global Investor Statement on Climate Change in 2014 which was signed by 409 investors that represented more than $24 trillion in assets. The statement called for governments around the world to; provide “stable, reliable and economically meaningful carbon pricing,” strengthen support for renewable energy, support new low-carbon technologies, and to develop plans to “phase out subsidies for fossil fuels.” [8]

CalSTRS also supported the Paris Pledge for Action in 2015 which allowed non-Party stakeholders to show support for the Paris Climate Agreement and participated in the United Nations-led Business and Investor Working Group on Carbon Pricing in the same year. The agency excluded global companies that received 50% or more of revenue from the sale of thermal coal from its investment portfolio in 2017 and approved a policy on carbon pricing consistent with the Paris Agreement in 2019, noting that the agency believes it’s important to develop ways to “price pollution will drive consumer behavior, business strategy, and investment flows.” [9]

CalSTRS is also part of the Climate Action 100+ coalition, which consists of more than 370 global investors that manage approximately $41 trillion in assets. Climate Action 100+ engages with companies that emit most of the world’s greenhouse gasses to push their goals towards those of the Paris Agreement. [10]

CalSTRS has invested approximately $2 billion in sustainability strategies for its investment portfolio. Around $288 million was invested into green bonds by the agency, and its Inflation Sensitive asset class invested $364 million in environmentalist energy generation techniques such as solar and wind power. Going forward as of 2019, CalSTRS plans to use techniques such as proxy voting to “influence public policy and corporate action” to support the goals of the Paris Agreement. [11]

The agency created a “Green Team” in 2006 after a directive from the Teachers’ Retirement Board which dictated that “climate change and environmental risk considerations” should be integrated into CalSTRS’ investment process. The team is charged with “Integrating environmental-related risks into each asset class’s processes and procedures,” and “continuing education on environmental-related risk issues and sustainable-themed investment opportunities.” [12]

CalSTRS also signed the Principles for Responsible Investment (PRI) which were developed in 2006 by a group of international investors. By signing the PRI, CalSTRS must incorporate ESG issues when deciding on an investment, incorporate ESG issues into its practices, ask for disclosure of ESG issues on invested entities, promote PRI in the investment industry, enhance the effectiveness of PRI, and report on its progress towards implementing PRI. [13]

Despite its ESG approach to investing, CalSTRS held over $6 billion, more than 2.5% of its investment portfolio, in conventional energy assets as of December 2019. [14]

Funding

Despite having an investment portfolio value of approximately $243.2 billion as of February 2020, CalSTRS’s funded status dropped to 62.6% in June 2017, meaning that the agency could only pay 62.6% of its liabilities. This follows a long history of CalSTRS being in debt. [15]

The California Government implemented a legislative payment plan in 2014 which was designed to divert the agency’s investment portfolio from insolvency and help the pension fund become 99.9% funded by 2046, however; as of June 2018, CalSTRS is still only 64% funded. [16] Although this is an increase from 2017, part of the payment plan relies upon CalSTRS staff increasing contribution rates from its beneficiaries. CalSTRS staff increased contribution rates by 0.5% three years in a row between 2014 and 2018. [17]

Three-quarters of the state’s school districts’ pension obligations are contributed to CalSTRS, and the rest go to the California Public Employees’ Retirement System (CalPERS). Before the payment plan created by the state, districts were paying $2.8 billion to the retirement agencies in 2013-2014, but in 2018-2019 those costs almost doubled. In 2017-2018 pension costs amounted to around 8% of K-12 districts’ budgets but will increase to approximately 11% in 2020-2021. [18]

Before the payment plan in 2014, teachers, districts, and the state paid altogether 21.5% of payroll to pension contributions, but by 2022-2023, it will increase to 40%. This increase is not only due to the legislation, but also because of CalSTRS’s optimistic earnings forecasts which have cut the expected annual rate of return on investments from 8% to 7% over the past decade. [19]

CalSTRS also revealed its 2020 plans to cut its allocation in public equity from 50% to 42% and increase its allocation in private equity from 9.4% to 13%. The agency will also increase its real-estate allocations from 13.9% to 15%, and allocation to inflation-sensitive real assets from 2.7% to 6%. [20]

Controversies

CalPERS received criticism due to the controversy surrounding former chairman Gilbert Chilton after he pleaded guilty to tax evasion, misuse of funds, extortion, and conspiracy in 1987. Chilton admitted to accepting a $1.5 million payoff in exchange for arranging a $50 million loan to a Texas oil drilling scheme which was operated by a man who was convicted of oil and gas securities fraud. Chilton and his girlfriend at the time went on the run for nearly four years after he left his wife and children and retired from his position at the pension fund in 1982. [21] U.S. District Judge Raul Ramirez sentenced Chilton to 15 years in prison in 1988. [22]

CalSTRS also held a large number of shares in Hangzhou Hikvision Digital Technology Co, commonly known as Hikvision. Hikvision, a Chinese surveillance company that has been blacklisted by the Trump Administration, has been described as China’s “Big Brother” firm[23] which, along with seven other companies, allegedly enabled the mass incarceration and surveillance of citizens in the Xinjiang region. CalSTRS owned 4.35 million shares with a market value of $24,414,000 in the surveillance company at the end of June 30, 2018. [24]

The president and CEO of the risk consultancy RWR Advisory Group, Roger Robinson, called Hikvision the “corporate poster child for enabling Chinese human rights abuses,” as the surveillance company’s security cameras are “visible atop the walls of detention camps incarcerating some one million or more Uighurs in Xinjiang.” [25] Robinson, who also served on the National Security Council during the Reagan administration and also served as the chairman of the Congressional U.S.-China Economic and Security Review Commission, noted that CalSTRS also “owns Chinese sovereign bonds valued at over $4 million,” meaning that Americans, through CalSTRS, are investing in Chinese sovereign bonds that are “issued directly by the Chinese government, with the proceeds to be used at its sole discretion.” [26]

References

  1. “CalSTRS at a Glance.” CalSTRS.com, August 27, 2012. https://www.calstrs.com/calstrs-glance. ^
  2. Jacobius, Arleen. “CalSTRS Funded Status Declines to 62.6% Following Rate-of-Return Decrease.” Pensions & Investments, May 11, 2018. https://www.pionline.com/article/20180511/ONLINE/180519963/calstrs-funded-status-declines-to-62-6-following-rate-of-return-decrease. ^
  3. Cronin-Furman, Kate. “China Has Chosen Cultural Genocide in Xinjiang-For Now.” Foreign Policy, September 19, 2018. https://foreignpolicy.com/2018/09/19/china-has-chosen-cultural-genocide-in-xinjiang-for-now/. ^
  4. Herbst-Bayliss, Svea. “U.S. Pension Funds Took Positions in Blacklisted Chinese Surveillance Company.” Reuters. Thomson Reuters, October 15, 2019. https://www.reuters.com/article/us-hikvision-pensions-focus/u-s-pension-funds-took-positions-in-blacklisted-chinese-surveillance-company-idUSKBN1WU191. ^
  5. “CalSTRS at a Glance.” CalSTRS.com, August 27, 2012. https://www.calstrs.com/calstrs-glance. ^
  6. “CalSTRS at a Glance.” CalSTRS.com, August 27, 2012. https://www.calstrs.com/calstrs-glance. ^
  7. “ESG Investment Policy.” CalSTRS.com, February 13, 2017. https://www.calstrs.com/esg-investment-policy. ^
  8. “Global Investor Statement on Climate Change.” IIGCC.org. Accessed April 15, 2020. https://www.iigcc.org/download/20142015-global-investor-statement-on-climate-change/?wpdmdl=1599&refresh=5e94bd0903a101586806025. ^
  9. “CalSTRS Low-Carbon Economy.” CalSTRS.com. Accessed April 15, 2020. https://www.calstrs.com/sites/main/files/file-attachments/lowcarbonfactsheet.pdf?1580754105. ^
  10. “CalSTRS Low-Carbon Economy.” CalSTRS.com. Accessed April 15, 2020. https://www.calstrs.com/sites/main/files/file-attachments/lowcarbonfactsheet.pdf?1580754105. ^
  11. “CalSTRS Low-Carbon Economy.” CalSTRS.com. Accessed April 15, 2020. https://www.calstrs.com/sites/main/files/file-attachments/lowcarbonfactsheet.pdf?1580754105. ^
  12. “CalSTRS Green Initiative Task Force.” CalSTRS.com. Accessed April 15, 2020. https://www.calstrs.com/sites/main/files/file-attachments/greeninitiativetaskforce2019.pdf?1581620343. ^
  13. “CalSTRS Green Initiative Task Force.” CalSTRS.com. Accessed April 15, 2020. https://www.calstrs.com/sites/main/files/file-attachments/greeninitiativetaskforce2019.pdf?1581620343. ^
  14. Nittler, Lynne, “Will CalSTRS and CalPERS Divest from Fossil Fuels?” Cool Davis, December 27, 2019. https://www.cooldavis.org/2019/12/27/will-calstrs-and-calpers-divest-from-fossil-fuels/. ^
  15. Jacobius, Arleen. “CalSTRS Funded Status Declines to 62.6% Following Rate-of-Return Decrease.” Pensions & Investments, May 11, 2018. https://www.pionline.com/article/20180511/ONLINE/180519963/calstrs-funded-status-declines-to-62-6-following-rate-of-return-decrease. ^
  16. Owens, Elijah. “CalSTRS Stresses the ‘Importance of Acting Quickly’ to Maintain Funding Progress.” Chief Investment Officer. Accessed April 15, 2020. https://www.ai-cio.com/news/calstrs-stresses-importance-acting-quickly-maintain-funding-progress/. ^
  17. Owens, Elijah. “CalSTRS Stresses the ‘Importance of Acting Quickly’ to Maintain Funding Progress.” Chief Investment Officer. Accessed April 15, 2020. https://www.ai-cio.com/news/calstrs-stresses-importance-acting-quickly-maintain-funding-progress/. ^
  18. Fensterwald, John. “New Data Detail Soaring Costs of California School Pensions.” EdSource. EdSource, March 26, 2019. https://edsource.org/2019/new-data-detail-soaring-costs-of-california-school-pensions-2/610118 ^
  19. Fensterwald, John. “New Data Detail Soaring Costs of California School Pensions.” EdSource. EdSource, March 26, 2019. https://edsource.org/2019/new-data-detail-soaring-costs-of-california-school-pensions-2/610118. ^
  20. McElhaney, Alicia. “CalSTRS to Cut Public Equity Allocation in Favor of Private Markets.” Institutional Investor. Institutional Investor, February 3, 2020. https://www.institutionalinvestor.com/article/b1k5vpqldjnhvh/CalSTRS-to-Cut-Public-Equity-Allocation-in-Favor-of-Private-Markets. ^
  21. “Ex-Teachers Pension Chief Pleads Guilty in Loan Case.” Los Angeles Times. Los Angeles Times, September 25, 1987. https://www.latimes.com/archives/la-xpm-1987-09-25-mn-6716-story.html. ^
  22. “Former Chief of State Teachers Retirement System Sentenced.” Los Angeles Times. Los Angeles Times, January 21, 1988. https://www.latimes.com/archives/la-xpm-1988-01-21-mn-37518-story.html. ^
  23. “Hikvision: US Pension Funds Invest in China ‘Big Brother’ Firm.” BBC News. BBC, March 29, 2019. https://www.bbc.co.uk/news/world-us-canada-47753085. ^
  24. Herbst-Bayliss, Svea. “U.S. Pension Funds Took Positions in Blacklisted Chinese Surveillance Company.” Reuters. Thomson Reuters, October 15, 2019. https://www.reuters.com/article/us-hikvision-pensions-focus/u-s-pension-funds-took-positions-in-blacklisted-chinese-surveillance-company-idUSKBN1WU191. ^
  25. Herbst-Bayliss, Svea. “U.S. Pension Funds Took Positions in Blacklisted Chinese Surveillance Company.” Reuters. Thomson Reuters, October 15, 2019. https://www.reuters.com/article/us-hikvision-pensions-focus/u-s-pension-funds-took-positions-in-blacklisted-chinese-surveillance-company-idUSKBN1WU191. ^
  26. Billingsley, Lloyd BillingsleyLloyd. “CalSTRS’ Massive Investments in China but Disinvests From American Companies.” California Globe, November 25, 2019. https://californiaglobe.com/section-2/calstrs-massive-investments-in-china-but-disinvests-from-american-companies/. ^
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California State Teachers’ Retirement System

100 Waterfront Place
West Sacramento, CA