Gold Is Where You Find It

Joe Nation at Stanford’s Institute for Economic Policy Research says that California’s public employee pension funds may be underfunded by $200 billion. The Orange County Register says the taxpayer is ultimately on the hook for whatever the pension fund shortfall turns out to be. The estimates vary. “An analysis by the Foundation for Education Choice estimated California public retirement systems’ unfunded liabilities at $326 billion, more than three times the state’s own estimate.”


One estimate goes as high as half a trillion dollars. “Nation’s findings, issued by SIEPR on Thursday, follow a previous study conducted by four Stanford students who estimated that the three state employee pension plans – CalPERS, CalSTRS and the University of California Retirement System – could be underfunded to the tune of $500 billion.” The LA Times argues that things won’t be so bad if pension managers can get good returns. “Nation based that figure on a “risk-free discount rate” that projected that the funds would earn an extremely conservative average return of 4% a year. California pension administrators consider a 4% return as too low and base their forecasts on average annual returns of between 7% and 8%.”

State public pensions are clearly underfunded.  With the taxpayers in revolt, there are limited ways to meet the crisis. One way the state can meet its obligations is simply to cut current employment to pay retirees. “The growing obligation could force local governments to devote half of their payroll over the next 18 years to pay for such so-called unfunded liabilities.”  But that would be ridiculous.  The other alternative is for the pension funds to make more money on investments. The Union-Tribune says that fund administrators are “scrambling as hard as they can to ramp up investment returns”. Calpers claimed it got a 13.3% return on investment last year. According to the Wall Street Journal


Chief Investment Officer Joe Dear said Tuesday the latest report showed a gain of more than $40 billion from the lowest point of the recession in March 2009. “We also beat our benchmark of 12.95% and eclipsed return targets for every asset class except real estate,” he said.

The results exceeded Calpers’s long-term annualized earnings target of 7.75% and raised its 20-year return average through June 30 to 7.65%.

Calpers said it saved almost $300 million in fee reductions with external managers, has eliminated low-performing funds from its portfolios and is developing new risk-management tools.

As part of that effort, the pension fund will put $500 million into “Green” investments, a move which the Los Angeles Times reports will “go into firms that work to reduce greenhouse gas emissions, produce renewable energy, create clean water and waste options or support carbon trading efforts.”

The strategy is a shift for the nation’s largest public pension fund in that it will be managed internally and it will support “top performers that have improved share value and also done good for the environment,” said Calpers board President Rob Feckner. Previously, it had invested on externally managed funds that excluded the worst environmental offenders.

To be considered by Calpers, companies must draw a material portion of their revenue from low-carbon energy, water, waste and pollution control, and other environmentally friendly activities. The strategy will be modeled after HSBC Holdings PLC’s (HBC) Global Climate Change Benchmark Index.


Investopedia explains that “Green investments are traditional investment vehicles (such as stocks, exchange-traded funds and mutual funds) in which the underlying business(es) are somehow involved in operations aimed at improving the environment. This can range from companies that are developing alternative energy technology to companies that have the best environmental practices.” By making these investments, Calpers is tying its future to the “Green” industry. Green investments are not risk-free however. MSN Money warned in 2007 of a “Green Bubble”, which so far has not yet materialized. The Green industry has plugged along since then. The Financial Times said that returns on investment varied by shade of color. Some “dark green” funds were so restrictive they passed up otherwise lucrative prospects. But “light green funds” allowed investors to make money and “make a difference”.

But if environmentalism was no longer seen as making a difference nor required by government, the bottom could fall out of the industry. Green investments are linked to two factors. First, the intensity of environmental regulations and second, the perceived benefit of “green” activities. Reuters described the effect of a failure to pass environmental legislation in Congress as a setback for “Green” investment.


With the death of climate legislation in the U.S. Congress, Frank Alix’s job has become a lot tougher. Alix is co-founder and CEO of Powerspan, a New Hampshire-based company that says it has developed a technology for snaring carbon dioxide from power plants. Earlier this year, Alix had been optimistic that Congress would pass a climate bill, offering incentives for carbon capture and storage (CCS) and putting a price tag on emitting carbon. That would have caused a dozen utilities to install Powerspan’s equipment, he figured.

“We as a company and as a group of investors bet that the U.S. might provide leadership,” he says.

That didn’t happen under a Congress controlled by Democrats, and now that the Republican Party has taken control of the House of Representatives, it appears to be a virtual impossibility. There’s widespread agreement in Washington that climate legislation is completely off the table until at least the 2012 election, if then. And Alix’s projected market in the U.S. has evaporated. “Without a price on carbon, these projects will cost hundreds of millions of dollars and no one will do them,” he says.

“Without a price on carbon, these projects will cost hundreds of millions of dollars and no one will do them”. That would spell bad news for Calpers. Politics and investment have historically been linked together, especially in the Golden State. The nightmare scenario for California is that environmentalsm may eventually be seen, in whole or in part, as a scam — and optional too. In that situation, Green investments would neither be a regulatory requirement nor a perceived benefit. And in that case, Calper’s Green will go into Red.


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