Other Group

California Public Employees’ Retirement System

Website:

www.calpers.ca.gov/

Location:

Sacramento, CA

Formation:

1932

CEO:

Marcie Frost

The California Public Employees’ Retirement System (CalPERS) is a government agency in California that is the United States’ largest government worker pension fund. [1] It engages in shareholder activism by using proxy voting, advancing left-of-center corporate policies in the interests of government worker unions. [2]

CalPERS focuses on investing to gain most of its revenue. The fund has been criticized for “incredibly concerning” investments which include shares worth approximately $3.1 billion in around 300 Chinese companies, some of which include military contractors such as China Shipbuilding Industry Corporation and companies blacklisted by the United States for creating surveillance and internment camps in Xinjiang province, including Hikvision. [3]

The agency has also been criticized for its mandatory payment plans aimed at employers and client agencies which have been increasing in recent years. The plans were one of the reasons that multiple California cities have been in bankruptcy cases. [4] CalPERS has used state laws it implemented with the help of politically powerful government worker unions to ensure a city is unable to cancel payments to CalPERS if it is going through bankruptcy and to place a lien on property in a city if city chose to use a different fund to provide retirement benefits. [5]

Background

The California Public Employees’ Retirement System (CalPERS) is a government agency in California and is the United States’ largest government worker pension fund serving slightly fewer than 2 million members as part of its retirement system. It provides approximately 1.5 million members with health benefits. [6] The agency pays for its member benefits through a mixture of employer and employee contributions but acquires the majority of its funding through its investments. [7]

CalPERS was founded in 1932 as the State Employees’ Retirement System (SERS) but changed its name to the California Public Employees’ Retirement System in 1992 to differentiate itself from retirement systems in other states. [8]

The agency’s main focus is managing pension and health benefits for public workers, retirees and their families, but to fund those benefits, CalPERS also engages in left-of-center-activist environmental-social-governance (ESG)-related investing and “sustainable investment.” [9] CalPERS managed $372.6 billion in assets as of 2019, with more than 1,300 school districts and 1,500 public agencies in California participating in the system,[10] and attributes ESG investments as a core theme across its investment portfolio. [11]

CalPERS launched the Sustainable Investment Research Initiative (SIRI) in 2013 intending to improve the agency’s understanding of “sustainability factors and the impact they may have on companies, markets, and investment intermediaries.” This led to CalPERS adopting a heavier ESG approach as a paper selected and debated at the SIRI Symposium in 2013 claimed that “successful corporate social responsibility (CSR) engagements give rise to a positive one-year abnormal return of 4 4 percent,” and that positive returns are more noticeable with “engagements on the themes of corporate governance and climate change.” [12]

CalPERS helped found the non-profit sustainability advocacy organization Ceres in 1989, and partnered with the organization to launch the Investor Network on Climate Risk (INCR) in 2003. The agency also vowed to “reduce energy consumption” in its Real Estate unit’s core portfolio by “20 percent over a five-year period,” and created the Environmental Technology Investment Program in 2004. [13]

CalPERS also revised its Forestland Policy to include ESG principles in 2007, created its Sustainable Operations Program in 2009, assisted in developing the Mercer Report “Climate Change Scenarios– Implications for Strategic Asset Allocation” in 2010, and approved an implementation plan for its Total Fund ESG Integration in 2012. [14]

CalPERS engages in shareholder activism by using proxy voting. According to its 2014 “Towards Sustainable Investment & Operations” report, CalPERS used proxy voting to change the inner workings of companies such as Walmart, Apple, JPMorgan, Nabors Industries, Chesapeake Energy, BHP Billiton, and Hewlett-Packard. [15]

CalPERS is also actively engaging in the Carbon Asset Risk Initiative, which in 2014 called on “45 major oil, gas, coal, and electric power companies to stress-test financial risks that climate change poses to corporate business plans.” The agency then requested that these companies review how they would manage these risks, and to reduce greenhouse gas emissions by 80% by 2050. Companies contacted include BHP Billiton, Rio Tinto, Vale, American Electric Power, Royal Dutch Shell, and ExxonMobil. [16]

CalPERS highlighted in 2019 that it would focus highly on ESG-related issues when using proxy voting, naming climate change, corporate board diversity, and the compensation of top executives as its main focus issues. Both BP and Shell committed to reducing carbon emissions, with Shell announcing that the reductions target would be linked to compensation of its top 150 executives. Another part of the agency’s 2019 ESG plan involves investment officials pushing for more diverse corporate boards, including an increase in female members. [17]

Funding

Due to the fears of the COVID-19 pandemic in 2020, and the related drop in the stock market, funding for CalPERS dropped significantly in February 2020. In January of the same year, the agency’s investment portfolio managed to reach a $400 billion milestone before dropping down to $385 billion at the end of February. [18] Since then, the agency has lost even more of its investment value, which has fallen by an approximate total of $69 billion between mid-February and early April of 2020. Even at its peak of $404 billion in investment value, CalPERS was still short of the amount it is required to pay for all the benefits it will owe. [19]

CalPERS, which before the recession in October 2007 hit a record high value for the time of $260 billion, saw a large drop when the recession became worse, and its value hit a record low of $165 billion in 2009. [20]

According to the CalPERS website, for every dollar that the agency pays for in pensions; 58 cents comes from investment earnings, 29 cents from employer contributions, and 13 cents from employee contributions. [21] Despite this, and despite a large amount of money the agency has in terms of asset value, CalPERS is approximately 70% funded, meaning that it only has enough money to pay for around 70% of its short-term and long-term liabilities. [22]

CalPERS’ target for its annual return-on-investment percentage in 2019 was 7%, however; it managed to achieve 6.7%, which was down from the 8.6% return it achieved in 2018. CalPERS also has private equity, which is an investment class that includes funds and investors that directly invest in private companies. The agency’s private equity returns in 2019 amounted to 7.7%, a huge drop from 2018, which saw a return of 16.1%. [23]

Controversies

Impact on Public Services

CalPERS has received criticism for its mandatory payment plans aimed at employers and client agencies. Due to pension promises being virtually impossible to change or cut completely once promised, and the fact that CalPERS is a government agency, any shortfall the agency receives will be paid by the state or local governments through taxpayer dollars. [24]

The agency is receiving increasingly large amounts of money from local governments around California. In the 2015-2016 financial year, the agency received $330,858 from the Stanislaus Consolidated Fire Protection District. CalPERS took the money from the district to help fund its pension benefits for police officers and firefighters, who have the most generous benefits and incur the highest costs for employers. [25]

CalPERS then received $397,981 in the 2016-2017 financial year, $517,834 in 2017-2018, and budgeted for $842,404 in 2019-2020. Due to the increasing costs, the district was forced to cut staff and operations as smaller communities in the surrounding area could not continue to pay for its services, leading to a reduction in income. Despite the loss of income, the retirement costs continued to rise, reaching 46% of the district’s payroll in 2019. [26]

The Stanislaus Consolidated Fire Protection District’s chief closed a fire station in October 2019 due to an operational deficit of $925,000 in the district’s budget. Despite this, CalPERS announced that its mandatory payment will exceed $1 million by 202-2022. [27]

Municipal Bankruptcies

CalPERS also received criticism for its pension plans from other cities in 2015 after the agency spent millions of dollars defending itself in bankruptcy cases of two California cities.

One case involved the city of Stockton, which received the approval of a recovery plan from U.S. Bankruptcy Court Judge Christopher M. Klein who labeled CalPERS as a “bully” for wrongly insisting that Stockton had no other choice but to pay workers the full pensions they were promised. [28] San Bernardino was the second bankruptcy case, which faced legal challenges from two companies that were owed $50 million by the city. The companies asserted that it was illegal for the city to pay CalPERS to fund workers’ pensions, while they received nothing. Both Stockton and San Bernardino noted that increasing payments to the agency was one of the reasons the cities were forced to file for bankruptcy. [29]

CalPERS, with the help of politically powerful government worker unions, had introduced two state laws that force cities to continue payments to the agency despite the financial situation the city is in. The first law ensures a city is unable to cancel payments to CalPERS if it is going through bankruptcy, and the second law allowed CalPERS to place a lien on property in a city if the said city chose to use a different fund to provide retirement benefits. In the case of Stockton, the lien would have cost the city $1.6 billion. [30]

CalPERS, despite local governments already struggling to pay the large mandatory fees, also changed a policy in 2018 which reduced the amount of time it would take for the recuperation of future investment losses the agency obtained, from 30 years to 20 years, meaning that the California state government, and thousands of local governments, will have to increase their mandatory payments to the agency. [31]

Investments in the People’s Republic of China

The California agency has also been criticized for its investments in Chinese companies.

Trump administration National Security Advisor Robert C. O’Brien called some of CalPERS’ investment policies “incredibly concerning” in March 2020, adding that the agency is directing taxpayer money into Chinese companies that are connected to military expansion. [32] CalPERS holds shares worth approximately $3.1 billion in around 300 Chinese companies, some of which include military contractors such as China Shipbuilding Industry Corporation and companies blacklisted by the United States for creating surveillance and internment camps in Xinjiang province, including Hikvision. [33]

U.S. Representative Jim Banks (R-IN) alleged that CalPERS’ Chief Investment Officer Yu Ben Meng should be investigated due to a “long and cozy” relationship with Beijing and his “relationship to the Chinese Communist Party and a comparison of CalPERS investments in Chinese companies” before and after his hiring in 2008. [34]

Meng worked as deputy CIO with China’s State Administration of Foreign Exchange (SAFE) for three years, which is confirmed in a 2017 article in the Chinese Communist Party-controlled media outlet People’s Daily. The article asserts that Meng was recruited to SAFE by the Thousand Talents Program which provides monetary compensation to American citizens for information. [35] Meng told People’s Daily that “In a person’s life, if there is an opportunity to serve the motherland, this kind of responsibility and honor can not be matched by anything,” and added that he has a “deep attachment to the motherland.” [36]

References

  1. “CalPERS Story.” CalPERS. Accessed April 6, 2020. https://www.calpers.ca.gov/page/about/organization/calpers-story.

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  2. “Towards Sustainable Investment and Operations.” CalPERS. Accessed April 6, 2020. https://www.calpers.ca.gov/docs/forms-publications/esg-report-2014.pdf.

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  3. Rogin, Josh. “Opinion | For the U.S., the Biggest Financial Threat from China Might Not Be the Coronavirus.” The Washington Post. WP Company, March 12, 2020. https://www.washingtonpost.com/opinions/2020/03/12/us-biggest-financial-threat-china-might-not-be-coronavirus/.

    ^

  4. “California Public Workers May Be at Risk of Losing Promised Pensions.” Los Angeles Times. Los Angeles Times, March 17, 2015. https://www.latimes.com/business/la-fi-pension-controversy-20150317-story.html.

    ^

  5. “California Public Workers May Be at Risk of Losing Promised Pensions.” Los Angeles Times. Los Angeles Times, March 17, 2015. https://www.latimes.com/business/la-fi-pension-controversy-20150317-story.html.

    ^

  6. “CalPERS Story.” CalPERS. Accessed April 6, 2020. https://www.calpers.ca.gov/page/about/organization/calpers-story.

    ^

  7. Kagan, Julia. “CalPERS.” Investopedia. Investopedia, January 29, 2020. https://www.investopedia.com/terms/c/calpers.asp.

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  8. “CalPERS Story.” CalPERS. Accessed April 6, 2020. https://www.calpers.ca.gov/page/about/organization/calpers-story.

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  9. “CalPERS Story.” CalPERS. Accessed April 6, 2020. https://www.calpers.ca.gov/page/about/organization/calpers-story.

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  10. Kagan, Julia. “CalPERS.” Investopedia. Investopedia, January 29, 2020. https://www.investopedia.com/terms/c/calpers.asp.

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  11. “Towards Sustainable Investment and Operations.” CalPERS. Accessed April 6, 2020. https://www.calpers.ca.gov/docs/forms-publications/esg-report-2014.pdf.

    ^

  12. “Towards Sustainable Investment and Operations.” CalPERS. Accessed April 6, 2020. https://www.calpers.ca.gov/docs/forms-publications/esg-report-2014.pdf.

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  13. “Towards Sustainable Investment and Operations.” CalPERS. Accessed April 6, 2020. https://www.calpers.ca.gov/docs/forms-publications/esg-report-2014.pdf.

    ^

  14. “Towards Sustainable Investment and Operations.” CalPERS. Accessed April 6, 2020. https://www.calpers.ca.gov/docs/forms-publications/esg-report-2014.pdf.

    ^

  15. “Towards Sustainable Investment and Operations.” CalPERS. Accessed April 6, 2020. https://www.calpers.ca.gov/docs/forms-publications/esg-report-2014.pdf.

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  16. “Towards Sustainable Investment and Operations.” CalPERS. Accessed April 6, 2020. https://www.calpers.ca.gov/docs/forms-publications/esg-report-2014.pdf.

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  17. Diamond, Randy. “CalPERS Puts ‘Laser-Like Focus’ on ESG, Board Diversity, and Executive Pay.” Chief Investment Officer. Accessed April 6, 2020. https://www.ai-cio.com/news/calpers-puts-laser-like-focus-esg-board-diversity-executive-pay/.

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  18. Venteicher, Wes. “CalPERS Fund Drops by $15 Billion amid Market Plunge and Coronavirus Fears,” February 28, 2020. . https://www.sacbee.com/news/politics-government/the-state-worker/article240738951.html.

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  19. Walsh, Mary Williams. “Coronavirus Is Making the Public Pension Crisis Even Worse.” The New York Times. The New York Times, April 2, 2020. https://www.nytimes.com/2020/04/02/business/dealbook/coronavirus-public-pension.html.

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  20. Venteicher, Wes. “CalPERS Fund Drops by $15 Billion amid Market Plunge and Coronavirus Fears,” February 28, 2020. . https://www.sacbee.com/news/politics-government/the-state-worker/article240738951.html.

    ^

  21. “Who Pays for CalPERS Pensions?” CalPERS. Accessed April 6, 2020. https://www.calpers.ca.gov/page/about/organization/facts-at-a-glance/pension-buck.

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  22. Venteicher, Wes. “CalPERS Fund Drops by $15 Billion amid Market Plunge and Coronavirus Fears,” February 28, 2020. . https://www.sacbee.com/news/politics-government/the-state-worker/article240738951.html.

    ^

  23. Singh, Preeti. “CalPERS’ Private Equity Returns Fall by 50% in Fiscal 2019.” Private Equity International, July 18, 2019. https://www.privateequityinternational.com/calpers-private-equity-returns-fall-by-50-percent-in-fiscal-2019/.

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  24. DeVore, Chuck. “$5.2 Trillion Of Government Pension Debt Threatens To Overwhelm State Budgets, Taxpayers.” Forbes. Forbes Magazine, May 31, 2019. https://www.forbes.com/sites/chuckdevore/2019/05/31/5-2-trillion-of-government-pension-debt-threatens-to-overwhelm-state-budgets-taxpayers/.

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  25. Walters, Dan. “Commentary: Pension Costs Hitting Home – Hard.” CalMatters. Accessed April 6, 2020. https://calmatters.org/commentary/pension-costs-taxes-firefighters/.

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  26. Walters, Dan. “Commentary: Pension Costs Hitting Home – Hard.” CalMatters. Accessed April 6, 2020. https://calmatters.org/commentary/pension-costs-taxes-firefighters/.

    ^

  27. Walters, Dan. “Commentary: Pension Costs Hitting Home – Hard.” CalMatters. Accessed April 6, 2020. https://calmatters.org/commentary/pension-costs-taxes-firefighters/.

    ^

  28. “California Public Workers May Be at Risk of Losing Promised Pensions.” Los Angeles Times. Los Angeles Times, March 17, 2015. https://www.latimes.com/business/la-fi-pension-controversy-20150317-story.html.

    ^

  29. “California Public Workers May Be at Risk of Losing Promised Pensions.” Los Angeles Times. Los Angeles Times, March 17, 2015. https://www.latimes.com/business/la-fi-pension-controversy-20150317-story.html.

    ^

  30. “California Public Workers May Be at Risk of Losing Promised Pensions.” Los Angeles Times. Los Angeles Times, March 17, 2015. https://www.latimes.com/business/la-fi-pension-controversy-20150317-story.html.

    ^

  31. Walters, Dan. “California’s Public Pension Crisis in a Nutshell.” fresnobee. The Fresno Bee, February 21, 2018. https://www.fresnobee.com/news/politics-government/politics-columns-blogs/political-notebook/article201110674.html.

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  32. Rogin, Josh. “Opinion | For the U.S., the Biggest Financial Threat from China Might Not Be the Coronavirus.” The Washington Post. WP Company, March 12, 2020. https://www.washingtonpost.com/opinions/2020/03/12/us-biggest-financial-threat-china-might-not-be-coronavirus/.

    ^

  33. Rogin, Josh. “Opinion | For the U.S., the Biggest Financial Threat from China Might Not Be the Coronavirus.” The Washington Post. WP Company, March 12, 2020. https://www.washingtonpost.com/opinions/2020/03/12/us-biggest-financial-threat-china-might-not-be-coronavirus/.

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  34. Alper, Alexandra. “U.S. Lawmaker Calls for Ouster of CalPERS CIO over China Ties: Letter.” Reuters. Thomson Reuters, February 13, 2020. https://www.reuters.com/article/us-usa-china-calpers/u-s-lawmaker-calls-for-ouster-of-calpers-cio-over-china-ties-letter-idUSKBN206310.

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  35. Hoonhout, Tobias. “Jim Banks Urges Firing of California’s Public Pension Head over Ties to China’s ‘Thousand Talents Program’.” National Review. National Review, February 13, 2020. https://www.nationalreview.com/news/jim-banks-urges-firing-of-californias-public-pension-head-over-ties-to-chinas-thousand-talents-program/.

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  36. 103817. “Ϊúÿһ㣨˲Ŵ´ҵ¼.” Ϊúÿһ㣨˲Ŵ´ҵ¼—-. Accessed April 6, 2020. http://society.people.com.cn/n1/2017/1002/c1008-29571359.html.

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California Public Employees’ Retirement System

400 Q Street
Sacramento, CA 95811