Thursday, October 12, 2017

The Winds of Political Change

On the evening before the now infamous and furious fire broke out across my community in Santa Rosa,  I was drafting a letter of thanks to the many thousands of voters who supported my recent candidacy to help direct one of the worldʻs largest public pension funds. By 3 am my partner and I would take thirty minutes to select a few cherished items before fleeing the fires appearing on the ridge lines.

As the LA Times Editorial Board would write about the fires that began that evening, "It may well be the stateʻs worst catastrophe in recorded history by any measure...The superstorms that scientists warned would result from climate change? They are here. The day of reckoning isnʻt in the future. It is now." ("The Climate Change Fire Alarm from Northern California," LA Times, 10/12/17).

The connection between my writing on the politics of climate change is one that I have made for many years in the California Legislature as well as in public life: the various disasters we are witnessing often share a common linkage to the rise of fossil-fueled crises around the globe. For those who think of our changing climates as a remote threat, the events in Florida, Texas, Puerto Rico and California are a wake-up call. 

The cause of harrowing fossil-fueled disasters will continue to be debated as well they should. One cannot immediately conclude that the specific fire still enveloping my community can be easily assigned to the burning of fossil fuels. As we recognize, the construction of scientific proofs donʻt move as swiftly as the fires continuing to threaten my neighbors. What climate scientists and others have made clear is that we will increasingly be subjected to these kinds of destructive events by ignoring the over-sized role of specific sources, including the burning of fossil fuels. Yet, this parsing of causal factors overlooks the larger destructive role of fossil fuels in the national economy.

A central theme in my candidacy to become a board member with the California Public Employeesʻ Retirement System was designed to call attention to the linkage between how this pension fund manages public investments, especially those investments supporting the fossil fuel industries. As a participant in many political struggles, I have argued for many years that treating a variety of large-scale threats as isolated events - from pesticide poisonings of farmworkers and consumers to the pollution of rivers, lakes and oceans to the contamination of entire air basins to the proliferation of a multitude of toxic products - disguises the common trait for so many of these damaging events to an economy based on fossil fuels.

Despite the efforts of powerful industries seeking to reinforce a climate of denial and delayed actions, millions of Californians comprehend that the converging evidence gathered by scientists across the globe means that we must expeditiously exit fossil fuels. Not according to a time table designed to convenience corporations, but to foster a robust economy built on achieving a healthy economy for workers, communities, and those who too often are subjected to the damaging effects of a poisoned economy. It is at this juncture that public investments must engage in more decisive actions.

To date, the efforts to draw on public investments as a vehicle for supporting a healthy economy have been feeble. Efforts to divest, impose strict controls on damaging corporate decisions, redirect investments toward alternative energy, jobs and communities have been dismal. Worse still, CalPERS decision-making has been characterized by secrecy, curtailing public participation, and quieting the voices of those calling for actions to place California on a stronger path to an economy where the benefits are shared by all, not simply the stratospheric interests of the most wealthy.

The purpose of public investment decisions must surely include an assessment of whether certain industries now pose too great a risk to society at large. The evidence of risk associated with fossil fueled industries is becoming increasingly evident; whatever the short-term dividends that might accrue to CalPERS beneficiaries, the damaging effects are already far too expensive for the larger society.  The disasters of 2017 undermine the arguments of so-called financial benefits to pension funds which pale in comparison to the astronomical costs required to address the negative consequences of rising seas, worsening fires, and super storms.

Indeed, the arguments advanced by environmentalists decades ago are now being supplemented by the energy and financial analysts arguing that fossil fuels have outlived their usefulness. The alternatives to coal, the internal combustion engine, toxic products and associated industries are largely at hand. When joined with the consensus statements by scientists calling for an immediate economic transition as essential to avoid worsening disasters, the table has been set for everyone to join in the herculean effort to transform our economy.

While CalPERS represents a tiny cog in this effort, like other elements for one of the worldʻs largest economies, its potential influence is considerable. In order to hasten our economic transition, the members of CalPERS Board of Administration need to devise a much more aggressive agenda....

(stay tuned for more on this story)

Thursday, September 7, 2017

Los Angeles Presentation on September 21st !


For those readers in the Los Angeles area, I am hoping you will join me at noon on Thursday,

September 21st at Occidental College where I will make a presentation on my book -

The War on California: Defeating Oil, Oligarchs and the New Tyranny.  I will join several of

Los Angelesʻ most notable public interest advocates in a not-to-be-missed discussion.

I hope you can join us at this free event !

Wednesday, September 6, 2017

The Lessons of Harvey

Todayʻs post is relatively short in an effort to respond to a question posed to me by a group of CalPERS members; in fact, they are quite angry.

Whatʻs the source of their anger? They are convinced I am covertly engaged in what several of them refer to as "social engineering" - a reference that is a bit vague, but seems to imply that they simply want the CalPERS Board to grow their investments. They appear agitated that considerations beyond making money are nonsense and have no place in the management of their retirement monies.

To be fair, their argument has traditionally received the support among many conventional financial managers in previous times. But as I noted in a recent post, such thinking is becoming very quickly challenged by not just critics of ʻold schoolʻ financial management, but large numbers of informed citizens.  The shortcomings of the older simply "growing our money" is perhaps best illustrated by the most recent natural disaster - Hurricane Harvey.

I question the notion that Harvey is natural because of the mountain of scientific evidence offered by climate and other scientists around the world. For most of the scientists, Harveyʻs severity and damage is linked to a variety of human activities, but especially specific industries including the fossil fuel industries; it is why many of us have taken to calling such events fossil-fueled storms.

It is precisely the link between the burning of fossil fuels and the threats to civilization that causes an increasing number of people to raise questions about the consequences of their investments. Indeed, investment managers across the globe now wonder whether investments in fossil fuels are not simply too risky. The economic destruction in Houston, now estimated close to $200 billion is ironically linked to the complex of petrochemical plants that have fostered these fossil-fueled storms. For many residents in the region, monthly pension checks do not begin to compensate them for the destruction of their homes, neighborhoods, and livelihood.

The question for CalPERS members should not be limited to simply how fast their investments can grow, but whether the negative consequences of certain kinds of investments will overwhelm whatever financial benefit they believe they are going to receive in the future. For those who think that even asking the question is non-sense, I suggest you take the time to consider what just happened to Houston. Or what appears about to happen to Florida. Or what may be on the horizon for many communities across California.

Sunday, August 13, 2017

The Broader Social Consequences of Investment Decisions

In an essay appearing last month in Institutional Investor ("Avenue of Giants,"July 1, 2017), Ashby Monk argued for a broader definition of fiduciary duty. In polling more than 40 large "pensions and sovereigns," Mr. Monk noted that more than half of those surveyed rejected the notion that their decisions would be guided by the consequences for the community they inhabit. The rationale, it appears, is such considerations are quite simply beyond their fiduciary duties.

Mr. Monk went on to note that narrowly defined notions of fiduciary duty, however rational for individual investors or pension managers fosters damaging consequences for the larger investment community. Monks went on to raise a series of questions:

  • Where will the breakout innovations in our industry come from if investors are bound by a prudent-person rule?
  • If some investors hide fees paid to external managers, doesnʻt such secrecy prevent boards from understanding the true cost of producing these returns?
  • If the price of ʻaccessʻ to a given fund is conditioned by outrageous terms or side letters, doesnʻt this further empower private managers to extract higher fees over time? 
Each of these questions illustrated practices by institutional investors posing a larger problem for pension fund managers. A too narrowly defined notion of fiduciary duty overlooks the negative  consequences for not just beneficiaries, but also the larger society. As mentioned in my earlier postings, these are problems requiring, among other remedies, a radical transparency.

Yet even a much greater transparency is not enough to address what is perhaps the most damaging disconnect between a narrowly defined notion of fiduciary duty and the most threatening of consequences in our time. As Monks notes, many institutional investorsʻ strict definition of fiduciary duty discourages them from considering climate change as a legitimate issue.

It is clearly evident that among the pivotal issues confronting all Californians, is the urgent need to more fully comprehend the true costs of a fossil-fueled economy. Whatever the short-term calculus of satisfying a narrowly defined fiduciary duty at CalPERS, perpetuating fossil fuels and associated industries poses an existential threat to the survival of human civilization beyond the 21st century. As Governor Jerry Brown has noted, for those doubting the magnitude of climate threats, one only has to peruse the consensus statements by climate scientists (e.g. IPCC) to understand the especially damaging role of fossil fuels.

For these reasons, it is important for all voters to understand that the election of public-at-large board members of CalPERS in September is not merely a narrow choice regarding some abstract discussions about fiduciary duties and investment returns; elections of all sorts - from city councils to state treasurers to board members for one of the worldʻs largest pension funds will play an increasingly crucial role in making the urgently needed changes for transitioning to a new economy.

I look forward to posting more on this topic in future posts....and thanks for your readership and commentary.

Wednesday, August 9, 2017

Radical Transparency

As noted by Bloomberg News some days ago, "a recent Wall Street Journal editorial, hardly a left-wing Donald Trump critic, called on the president to adopt a new strategy on the Russia probe: "radical transparency." The recommended course of action is perhaps also fitting for the members of the Board of Administration at the California Public Employeesʻ Retirement System (CalPERS).

Among the harshest criticisms leveled at CalPERS is the lack of transparency surrounding varied decisions combined with a steadfast refusal to engage in open discussions regarding its policies. Indeed, another candidate as a board member at CalPERS has detailed sustained efforts by staff and current board members to prevent the necessary deliberations regarding specific policies.

The red-flag rising from such episodes at CalPERS is familiar terrain for anyone who has conducted reviews of state agency practices. In various over-sight investigations/hearings I conducted over my years with Californiaʻs Legislature, similar efforts to prevent more fulsome discussions often signaled practices that directors of agencies wanted to remove from public view. Some observers of CalPERS have referred to such issues as a problem of "CalPERS culture." Framing the issue as one of CalPERSʻ culture, however, is unnecessarily vague in addition to obscuring what needs to be done to turn things around at CalPERS.

Others in Sacramento have analyzed the so-called cultural problem at CalPERS more succinctly: "Look," as stated by one of my experts from the world of finance described the problem to me some years ago, "if you walk into CalPERS and talk to one or another of their financial consultants, you readily comprehend that too many of these folks view their jobs as preparing their vita for the next available position at Carlyle, Goldman, or some other outfit." The CalPERS problem, from this perspective, is not an abstract, fuzzy cultural attribute - it more closely resembles a more traditional problem of agency capture by a private interest. Too many in top management positions perceive their job as meshing their responsibilities with large financial interests, including private equity firms, instead of a career defined by serving the beneficiaries and people of California.

As still other critics have written, CalPERS management has become wedded with a system of rewards promoting risky behaviors when it comes to investments. Paralleling the kind of analysis provided by Michael Lewis (The Big Short), the CalPERS organization shares a potentially dangerous trait marked by many other "masters of the universe" from the world of finance - they have no skin in the game. Losing beneficiariesʻ money is simply an abstract risk having little bearing on various other rewards.

This system of rewards and compensation, revolving doors with clients, and critical reviews of management practices requires a much higher level of scrutiny. And these are only the initial steps necessary to ensure that the primary objectives of serving both beneficiaries and the public is on firm foundation requires a transformation from management practices obscuring decision-making at CalPERS. It is a policy premised on what we might term a "radical transparency."

Friday, August 4, 2017

Public versus Private Comparisons

A few weeks ago, while visiting friends at Californiaʻs capitol, a former colleague mentioned the horrible gap that CalPERS faces with respect to unfunded obligations. If you have followed the discussion of public pension funds over recent years, it is a common basis for beginning discussions about the troubling state of finances facing future generations. Not unlike the discussions surrounding social security, the topic typically moves to a linked discussion: why we must turn to ʻless generousʻ retirement benefits.  The fact that the less generous alternatives (401ks) have their own disastrous performance for a generation of retirees relying on such programs never seems to enter the discussion.

Part and parcel of the agenda for ʻdown-sizingʻ pension obligations is the message that public sector pensions quite simply donʻt measure up to private sector performance. The underlying theme is if CalPERS were run more like those plans managed by private corporations, things would be much better. All of which might sound compelling, unless one happens to have come across recent reports published by that hot-bed of radical financial reporting, Bloomberg News.

S&P 500’s Biggest Pension Plans Face $382 Billion Funding Gap

Brandon Kochkodin and Laurie Meisler provided the following on Bloomberg News: 
"People who rely on their company pension plans to fund their retirement may be in for a shock: Of the 200 biggest defined-benefit plans in the S&P 500 based on assets, 186 aren’t fully funded. Simply put, they don’t have enough money to fund current and future retirees. The situation worsened for more than half of these funds from fiscal 2015 to 2016. A big part of the reason is the poor returns they got from their assets in the superlow interest-rate environment that followed the financial crisis. It’s left a hole of $382 billion for the top 200 plans."
This morning in an updated version of the July article, Bloomberg repeated a similar magnitude of problem facing the retirees for many of the nationʻs largest firms. While many of these same corporations have used revenues to pay dividends to investors, payments to workersʻ pensions are an unmet and growing obligation. As described in Bloomberg: "Companies are eager to get out of the pension business. Most prefer 401(k) plans, where the employee alone bears the risk of falling short at retirement. More are also offloading their pension plans, paying insurance companies to take them on instead."(see "How America Dug a $375 Billion Pension Hole." Bloomberg, August 4, 2017).

The Bloomberg  report does nothing to relieve the deeper inquiry into troubling practices at CalPERS; it does, however, cast doubt on those who would advance the privatization of pensions as some kind of solution.

The record of private sector managed pension funds is not an inspired one for public sector workers. Indeed, the record of corporate managed pension funds underscores the importance of an open and democratic process in the management of pension funds --  a discussion that should be at the center of the upcoming election for Board members at CalPERS.

Thursday, July 20, 2017

Honoring CalPERS

Honoring CalPERS

It is not uncommon for legitimate criticisms of a larger policy or organization to morph into a narrative that unfairly characterizes entire groups of workers. Before launching my summary of various problems at CalPERS, I want to distinguish those occupying the upper reaches of management from the many thousands of other workers employed at the pension fund. Why ?

One of my early lessons in the California Legislature emerged with what for me was a novel political agenda: down-sizing government. While criticisms were readily available to attack the performance of any group of public workers, various partisans were always prepared to use such reviews as the basis for dismantling entire programs, departments, or agencies. Part of what the general public so often missed in the rough and tumble of politics is that those seeking to prove the virtues of running government like a business often engaged covert actions to discredit the work of public agencies. A casualty of these attacks often included not-so-subtle attacks on public workers including their inability to perform their jobs as well as their counter-parts in the private sector.

Arnold Schwarzeneggerʻs original campaign promise for "blowing up the boxes" - ridding the public of the waste and fraud in Sacramento represented a classic example of such baseless attacks on public workers. After months of internal reviews, audits, and task force meetings, many citizens recognized that the actor-governorʻs campaign posture, while perhaps a compelling sound-bite, reflected considerable ignorance regarding the millions of public employees who keep things running across the state.

Teaching our children, maintaining transportation, protecting our environment, and taking care of the elderly represent the daily accomplishments of public workers performing the essential tasks of a modern society. More crucially, public workers perform virtually all of these tasks in accordance to an agenda to enrich the lives of citizens, not to line the pockets of the wealthy. Indeed, it is the conflict between private and public interests that so often represents the heart of so many political battles - a dynamic that certainly appears evident in the conflicts at CalPERS.

At the heart of many critical reviews surrounding CalPERS has been the issue of public participation and inquiry into the management of the pension fund. To many, such arguments sound like a boring transcript containing an abundance of procedural minutia. Yet, beneath the mind-numbing back and forth is a deeper conflict, one involving a tussle between public and private interests. Indeed, it is a classic confrontation where the exclusion of public discussion and transparency reflects the anti-democratic character that so often accompanies private-sector decision-making.

As I explore the criticisms that have been leveled against CalPERS in the coming days, I hope readers will appreciate the important difference that so often exists between the responsibilities and duties of those holding positions of authority versus the much larger group of individuals performing the daily task to ensure for the retirement and well-being for millions of Californians.