CalPERS Policies Lost City $22 Million, HB Claims

By Dan Jamieson

Policies that excluded investments in tobacco companies, South Africa and other investments have cost Huntington Beach pension plans managed by CalPERS about $22 million in lost profits, according to a draft report from the City’s Finance Commission and City staff.

A subcommittee of the Finance Commission, working with City staff, used a November 2018 report from CalPERS’ own consultant, Wilshire Consultancy Group, to estimate the impact on plans managed for Huntington Beach employees. The Wilshire report estimated that divestment policies cost CalPERS funds overall about $8.5 billion from inception of the policies through June 2018.

Overall, the CalPERS funds had 2.4 percentage points in forgone profits. The same loss percentage was applied to the City’s pension plan assets to come up with the $22 million figure.

The biggest portion of CalPERS’ loses–1.5 percentage points–came from disinvestment from South African companies, a policy which began in 1988 and ran through 1994. Disinvestment from tobacco, begun in the first quarter of 2001 and continuing, has cost the funds one percentage point. Other areas of disinvestment had little impact.

According to the draft memo of the analysis, City staff reviewed the Huntington Beach-related findings with an actuarial firm, along with a CalPERS’ actuary. Both agreed the estimates were reasonable, the memo says, but the results are susceptible to timing and cash flows into the CalPERS funds.

The Wilshire report “provides a high-level estimate of a very complex calculation, so the results should be treated carefully,” the memo concludes.

Although environmental, social and governance (ESG) factors are widely used in the investment industry, they’ve been controversial among some City officials and others who blame ESG policies for poorly funded pension funds.

Without the divestment program, the City’s unfunded pension liability would have decreased 5.6%, to $392.3 million from the current $414.4 million, and the funded status would have improved to 70.5% funded from its current 68.8%.

Although CalPERS still excludes certain investments like tobacco companies, Michael Cohen, CalPERS chief financial officer, and Jason Perez, a CalPERS board member and Corona, Calif. police officer, assured the Finance Commission at a January 29, 2020 meeting that the pension funds’ investment professionals are focused on maximizing returns.

The divestment policies covered by the Wilshire report “is about policies that I don’t think our current board is going to pursue,” Cohen said. “The policy right now is that these types of decisions are investment decisions, and the individual investment choices aren’t made by the board, they’re made by the [CalPERS] investment professionals.”

“Our fiduciary duty is to .. make the returns, period,” added Perez, an ESG critic who was elected to the CalPERS board in October 2018. “The current board has the position that we do not divest.”

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