Costly pension divestment bills held in committee

Jul 6, 2022

Two bills that would have required state and local pension systems to make significant divestments were held in the Assembly late last month. The League of California Cities, along with other local government associations and state pension agencies, opposed both measures due to their potential impact on the pension fund system. 

SB 1173 (Gonzalez) would have prohibited the California Public Employees' Retirement System (CalPERS) and California State Teachers' Retirement System (CalSTRS) from making or renewing investments in the 200 largest publicly traded fossil fuel companies. Both CalPERS and CalSTRS would have had to completely divest from fossil fuel companies by July 1, 2030. 

The bill would have created the potential for significant investment losses and increased short-term and long-term costs for pension agencies and ultimately, local governments. “If CalPERS were to divest from fossil fuel companies and the companies performed well, employers and employees would bear the investment loss and transaction costs to maintain divestment through increased contribution rates,” CalPERS stated in its analysis of SB 1173.

Similarly, SB 1328 (McGuire) would have prohibited CalPERS and CalSTRS from making new investments in companies that supply military equipment to Russia or Belarus, as well as Russia- and Belarus-based companies determined by the U.S. government to be complicit in the invasion of Ukraine.

The bill also would have required local pension systems to fully divest from those companies. 

Cal Cities opposed both measures because of their impacts on local fiscal stability. With contribution rates stretching employer budgets thin, divestment would only further strain local budgets.

“Divestment limits investment opportunities, decreasing diversification, limiting returns, and increasing risk in our investment portfolio. … [Divestment] can spell higher contribution rates for CalPERS employers and their employees,” CalPERS explains in a general fact sheet on divestment.

In addition to increasing employer costs, divesting also removes the ability of pension fund managers to engage with corporations. When CalPERS divests, it gives up its “seat at the table” and misses out on opportunities to encourage companies to act in line with their core values and principles.

SB 1173 and SB 1328 were held in the Assembly Public Employment and Retirement Committee and will not advance. Assembly Member Jim Cooper, who chairs the committee, echoed Cal Cities’ broader sentiments about divestment.

"At a time when there is so much financial uncertainty and people are struggling to make ends meet, now is not the time to consider political divestment proposals that hurt the financial security of California’s pension systems,” Cooper said.