President Biden issued his first veto this week, rejecting a bipartisan resolution from Congress that protected pensions from politicized investment strategies like Environmental, Social and Governance (ESG). As many Californians have learned over the years, pension funds that utilize similar strategies can be a recipe for disaster.
The president defended the veto, saying the resolution would, “put at risk the retirement savings of individuals across the country.” But his claim falls flat. New research from Mike Edleson and Andy Puzder found that ESG investing yields lower returns than investing without political constraints. Additionally, researchers at Boston College found that ESG has failed to achieve its stated social goals.
Last year, a fossil fuel divestment bill threatened the solvency of public pensions in California. That divestment bill would have continued the over 20-year practice of sacrificing retirees’ returns in pursuit of a political agenda. Fortunately, the bill was halted for the 2022 legislative session.
Now, Senate Bill 252 threatens to divest the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) from fossil fuels and prohibit any new investments in fossil fuel companies.
This bill comes as a growing number of states are pushing back against the Left’s radicalized ESG agenda. Most recently, a coalition of 18 governors led by Florida Governor Ron DeSantis is calling out politically motivated investing as a threat to the retirement security of millions of Americans.
Although SB 252 is the Golden State’s most recent divestment bill, CalPERS and CalSTRS have been allowing politics to dictate investments for the past 20 years. In that time, these funds have divested from tobacco and firearms, for example, and restricted plan managers’ ability to invest in fossil fuels.
When lawmakers are allowed to use retirement funds for their own political activism, investment returns suffer, and unfunded liabilities grow at a faster pace. This higher volatility means taxpayers must pay more in pension contributions when investment returns fall short of assumed returns.
Those pension contributions are no small fee. CalPERS is the largest pension system in the country by both total assets and members, with $508.6 billion in assets and over 2 million members. CalSTRS is the nation’s second largest pension system in terms of total assets and the sixth largest membership with $310.3 billion in assets and nearly 800,000 members.
Unfunded pension liabilities are some of the biggest budgetary problems for the state. The annual report, Unaccountable and Unaffordable, from the American Legislative Exchange Council (ALEC) revealed that California’s has greater unfunded liabilities across its state pension plans than any other state – more than $1.5 trillion according to the authors’ calculations. The nationwide total for all 50 states is $8.2 trillion.
In order to course correct, lawmakers in Sacramento should examine the latest ALEC model policy, the State Government Employee Retirement Protection Act, to serve as a guide for strengthening fiduciary rules to protect pensioners from politically driven investment strategies.
States where Californians are fleeing to, such as Arizona, Florida, Texas, and Utah, are all considering bills that protect public pensions and state funds from politically motivated investing. It’s time for Sacramento to ask, “What can we learn from them?”
Lee Schalk is vice president of policy at the American Legislative Exchange Council (ALEC).
Thomas Savidge is research director for the ALEC Center for State Fiscal Reform.