Pensions & Investments reports that CalPERS’ investment committee has pleaded with the CalPERS staff not to go ahead with its 5-year plan to unwind its in-state private equity investment program.
I could certainly understand why the staff would want to 1) protect themselves from the politics that would seem to invariably accompany an in-state investment program, and 2) not have to worry about the in-state investment program returns dragging down the fund’s overall performance (more on that in a bit). Aside from that, I see in-state investment programs as creating serious questions of political legitimacy. I believe that the beneficiaries (and, in this, perhaps also the taxpayers generally, since they may be responsible for shortfalls) should support such an investment program. But why would they in this case? P & I reports the returns from the program:
“The most recent commitment in the program, $560 million to a Hamilton Lane fund of funds in 2006, has shown an internal rate of return of 0.86% as of Dec. 31 compared to its benchmark’s 6.9% return.
Another $475 million committed to 10 managers in 2001 has shown an annualized -6.4% IRR as of Dec. 31 when the performance of one of the funds — the GCP California Fund, with a 94% IRR — was excluded, according to an analysis of the California-only private equity program presented to the board.“
It should come as no surprise that the returns are below the benchmarks. Historically, it is hard to find state-run directed investment programs that perform as well as private investments, in part because such programs have been known to serve as vehicles for political patronage and corruption, but also for the more banal reason that the universe of potential investments is constrained. Of course, the private returns may not include all of the social benefits that may come from the state-run investments, but there are certainly social benefits from the private investments–it is just that they may not benefit various voters or other particular constituencies in California. But if the benefits are that great, why not spell out the benefits to the public and take a vote? Californians (and I write as a native Californian) are used to voting on just about everything.
Well, as a matter of fact, some proponents of in-state investments attempted to get a proposal on the 2012 ballot that would require “all State and local public pension or retirement systems to invest and maintain at least 85 percent of their assets in California businesses in which at least 70 percent of the employees are employed within California by January 1, 2016.” The initiative did not garner the required number of signatures. And thank goodness. The California Legislative Analyst’s Office offers this appraisal of the fiscal impact of the proposed initiative:
- “Potential increase in state and local pension contribution costs of billions of dollars per year (as measured in today’s dollars), depending on how this measure is implemented. Unknown, but likely not significant, net long-term change in state economic activity and related state and local revenues.”
If the Legislative Analyst’s Office is right that the investment of 85% of the hundreds of billions in California public pension assets in California businesses is not likely to have a significant, net long-term effect on economic activity and related state and local revenues, what effect will a much smaller program have (besides, of course, likely diminished returns for the fund)?