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California pension systems stand to lose millions by divesting from coal

By   /   November 5, 2015  /   News  /   No Comments

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IT WON’T BE PAINLESS: A law in California calling for the state’s public employee pension systems to divest from coal will likely cost millions.

No coal will likely translate into less money for the nation’s largest pension fund for state employees.

But at least for now, it appears the unions representing members of the California Public Employees’ Retirement System aren’t kicking up a fuss about the potential financial hit from a law calling for CalPERS to sell its holdings in companies that derive at least 50 percent of their revenue from coal mining.

“The CalPERS board has done a good job over the years,” said Carroll Wills, communications director for California Professional Firefighters, the largest firefighters union in the state with 30,000 members. “We trust their judgment on these things.”

Last month, Gov. Jerry Brown signed a bill calling on state pension funds to divest from 24 coal mining companies that have $83 million in holdings.

The law also affects the California State Teachers’ Retirement System.

CalPERS holds more than $300 billion investments, the biggest in the country, while the investments at CalSTRS are worth nearly $191 billion.

Coal is “a nuisance to public health and it’s inconsistent with our values as a state on the forefront of efforts to address global climate change,” said state Sen. Kevin de León, D-Los Angeles, who spearheaded the effort to pass the law. “California’s utilities are phasing out coal and it’s time our pension funds did the same.”

The divestment effort will probably cost the CalPERS fund millions, according to a financial expert.

Andrew Junkin, president of Wilshire Consulting, told the CalPERS investment committee Oct. 19 that previous divestment actions based on political motivations — such as withdrawing from funds in South Africa, Iran and Sudan — cost CalPERS between $4 billion and $8 billion.

The $83 million CalPERS holds in coal investments reportedly include thermal coal mining companies Peabody Energy and Arch Coal.

With coal companies under pressure from new regulations from the U.S. Environmental Protection Agency, the industry is going through its worst slump in decades and coal companies’ market values have dropped nearly 90 percent since 2011. That means divestment will almost certainly mean a financial loss for CalPERS and CalSTRS.

“CalPERS has a propensity to get out of markets right at the wrong time,” said Marcia Fritz, a certified public accountant and president of the California Foundation for Fiscal Responsibility, a nonprofit that has developed a reputation as a fiscal watchdog of the California pension system.

“They did that with real estate and I think they’re doing it with energy as well,” Fritz told Watchdog.org. “And I think they’re getting out of (coal) because it’s a political hot potato to stay in it when the governor is so pro-clean energy.”

Despite the potential losses, the response from some of the largest unions in the state has been muted.

“Those are judgments made by the (CalPERS) board are not things we have generally have gotten involved with,” Wills told Watchdog.org. “It’s been their call.”


HEAVY HITTER: At more than $300 billion, the California Public Employees’ Retirement System is the nation’s largest public employees pension plan.

Watchdog.org contacted some of the other public employees unions in the state, including the 7,000-member California Statewide Law Enforcement Association, the California Association of Highway Patrolmen, the California Correctional Peace Officers Association and the SEIU Local 1000 in Sacramento, but did not receive any responses.

While CalPERS pensioners will likely end up losing money in coal divestment, the $83 million holdings in coal represent just 0.028 percent of the $300 billion in the entire CalPERS fund. (NOTE: A previous version of this story incorrectly cited the percentage as .00028. Apologies for poor math skills.)

“It’s a pimple,” said state Sen. John Moorlach, R-Costa Mesa.

But Fritz said since California taxpayers pay for state employees and their pension systems, every dollar counts.

“They’re basically making a decision to reduce their returns on their pension assets and taxpayers have to back that,” Fritz said in a telephone interview. “It’s no different than spending money on something that’s not going to give us anything.”

Moorlach doesn’t like the coal divestment idea, either.

“It is not the role of the governor or the the state legislature to say how a pension invests this money, I’ve always said that,” Moorlach told Watchdog.org. “This is not our role. What are we doing having politicians getting involved in this? They can’t even balance their own budgets.”

Junkin told the CalPERS investment committee the pension can more effectively influence coal companies by staying financially involved with them.

“By divesting you are really giving up your voice, your ability to influence change,” Junkin said, according to Reuters. “And you’ve just sold it to somebody else. Those shares are going to get voted by somebody else now instead of by you, and you don’t get to advance your goals.”

RELATED: Under pressure in the U.S., coal still thriving internationally 

CalPERS and CalSTRS do have an escape hatch: The law Brown signed says the funds should only go through with coal divestment “if the action is consistent with the board’s fiduciary responsibilities.”

Fritz thinks the pensions should pass on divesting from coal.

“That would be the fiduciary thing to do,” Fritz said, noting the boards are political animals. “You’ve got people running for office, people up there because they’re paid by unions, people who are there because they want to win an election, or they want to say, ‘I got my pension fund out of coal.’ ”

In a statement, CalPERS praised Brown and de León but did not commit itself to definitely divest.

“Climate change represents risks and opportunities for a long-term investor like CalPERS,” said Anne Stausboll, chief executive officer for the pension fund and co-chair of the Ceres Board, the nation’s largest coalition of investors, environmental groups and nonprofit organizations advocating for sustainable business practices. “We have a fiduciary duty to protect the pension fund and mitigate the effects of climate change on our investments.”

Environmental groups have cheered the divestment law.

“This is a big win for our movement, and demonstrates the growing strength of divestment campaigners around the world,” said May Boeve, executive director of 350.org, after Brown signed the bill, adding that it’s time “to keep building on today’s news, and take every possible step to prevent climate catastrophe — including divesting California from oil and gas, and banning extreme energy extraction techniques like fracking.”

According to the law, a decision on coal divestment has to be made by July 2017.

“Our pension funds are an enormous part of our assets in California and when we lose money, we have to put the money back,” Fritz said. “But it’s hard for people to get that direct relationship. They’re going to see it when you have a loss in your asset base and the actuaries are going to come back and tell the agencies and the state that you’re going to have to put more money in because of asset losses.”


Rob formerly served as staff reporter for Watchdog.org.