Supporting a New Voice at CalPERS: Margaret Brown

Dear CalPERS members and others:

I am calling on you to cast your vote for Margaret Brown in the runoff election at CalPERS. I am hoping the many thousands of members who recently supported my candidacy will join with an even larger number of CalPERS members to elect a voice for political change.

There are at least four compelling reasons for you to vote for Margaret.

First is the diversity she will add to the CalPERS board. In these times, adding a woman to any board, but especially one involving the world of finance is vital. The exclusive gathering of males as the dominant voices at the table is as archaic as the internal combustion engine.

Second, Margaret Brown offers a willingness to listen to dissenting voices. The allegations of procedural wrong-doing at CalPERS have grown in recent years to include efforts to block meaningful public participation while muzzling dissent. Worse still, CalPERS executives have advanced measures to essentially privatize decision-making over public investments.

Third, Margaret Brown has demonstrated ability to act on behalf of CalPERS members. Too many board members, especially in the world of finance, are seduced into getting along with those occupying the executive suites. Margaret Brown possesses a willingness to take on those in power. In the context of a financial world run amuck, Margaret Brownʻs voice is a welcomed change.

Fourth - and perhaps most important to all Californians - Margaret Brown has expressed a willingness to step up and act on what may be the largest threat of the 21st century: a world of fossil-fueled crises. At a time when too many of CalPERS board members reside in a world of denial, a narrow notion of advancing financial returns alone will provide cold comfort to a public increasingly threatened by fires, drought, rising tides, and super storms. 

CalPERS executives, as captives of private sector interests, represent an especially formidable opponent to the rule of law and the publicʻs interest; which makes it all the more important for each of us to elect leaders willing to challenge the status quo. For more background on CalPERS see my earlier posts at Calpolitico or read my recent book on California politics: The War on California: Defeating Oil, Oligarchs and the New Tyranny (Amazon.com).

I hope you will join me in supporting Margaret Brown.


Bruce H. Jennings, Ph.D.

The CalPERS Runoff Election: Margaret Brown & Michael Bilbreyʻs Responses

Todayʻs post includes responses from the two candidates - Margaret Brown & Michael Bilbrey - competing in  CalPERS runoff election, which begins on November 11 and concludes in early December.

The purpose of this post is to provide fuller information from each of the candidates for the many thousands of CalPERS members who voted for me in the recent election and must now decide between the two remaining candidates in the runoff election. For more background on the questions I have posed to each of the candidates, please see my previously posted message: Who Will You Endorse ?

From Margaret Brown:

As a so-called “permanent investor” that owns virtually all publicly-traded stocks, CalPERS cannot ignore the foreseeable consequences of business decisions that companies within the portfolia make, even if those consequences will not occur for many years. This reality is at odds with the timeframe of the vast majority of investors, where the average holding time of U.S. stocks is measured in seconds, and even a mutual fund with relatively low turnover trades out of almost all of its positions within a couple of years. 

This prevailing short-term mindset among investors gives rise to a false impression that long-term economic issues are somehow inappropriate as a proper investment consideration, when logic dictates that they clearly are relevant.  This reasoning clearly applies to situations where CalPERS portfolio companies have under-recognized, long-term liabilities that threaten the well-being and even survival of the companies.  This situation has occurred numerous times during CalPERS’ history.

For example, companies involved in the manufacture or use of asbestos products virtually all went bankrupt when the negative health impact of asbestos exposure became well-understood.  Similarly, many other companies over the years have experienced bankruptcy due to other types of environmental liabilities. More recently, tobacco companies avoided bankruptcy only because the federal government stepped in to impose a master settlement that capped liabilities resulting from the health impact of smoking.

With hindsight, it is easy to see that it would have been not only contrary to the interests of justice but unwise from the perspective of a properly functioning economy, upon which the welfare of CalPERS depends, for CalPERS to have sought to shield asbestos companies, polluters, or tobacco companies from the financial consequences of the business decisions they made. This is true even though at the time, the companies’ business decisions may have been made in good faith (for example, asbestos was perceived as a life-saving fire retardant for decades before its pulmonary dangers were understood).

Further, it is clear that economic efficiency and the interests of justice are aligned in wanting to see companies’ under-recognized, long-term liabilities appropriately recognized. As such, CalPERS should continuously seek a constructive role across its portfolio in identifying and calling out publicly for the recognition of such liabilities. If CalPERS' activities contribute at the margin to the earlier bankruptcy of CalPERS portfolio companies, then so be it. Presumably, the truth would come out eventually in any event, and it is better from the perspective of efficiency and justice that the truth be recognized sooner than later.

The statement I am making is purposely general because I am trying to demonstrate that the principles that I would apply to fossil fuel companies are defensible, to a large degree, because they are general and not motivated by sentiment against companies involved in extracting or burning fossil fuels.  Moreover, these principles I am offering are fundamentally economic and are, at their core, simply a statement of the accounting identity that companies and investors must recognize reasonably foreseeable liabilities. As such, there is absolutely no conflict between fiduciary duty and working in ways that might, at the margin, hasten the bankruptcy of fossil fuel companies. CalPERS didn’t create the fossil fuel liabilities that stand to swamp the value of myriad hydrocarbon extraction companies—those liabilities already exist. 

Even though these principles are stated in a general way, I do want to acknowledge the special urgency of the climate change liabilities borne by various companies in the CalPERS portfolio. These liabilities are a threat to human civilization, which places them in a category that is distinct from any other financial liabilities ever experienced by investors. As such, CalPERS must not be silent and cannot afford to let an atmosphere of silence prevail.  CalPERS needs to support and participate in the relevant scientific, policy and investor forums searching for answers.  In particular it needs to strongly support those who are fighting to minimize sea level rises, since CalPERS owns billions of dollars of property along coastlines worldwide (and in California) that stands to be under water within a century.

Please feel free to contact me if you have any additional questions. 

Margaret




From Michael Bilbrey:

1. Many Americans have learned in legal filings submitted by cities and states that various petroleum corporations have engaged in an    organized campaign to deceive the public about the dangers associated with fossil fuels. As a prospective member of the CalPERS Board, what do you believe you can do to address the issue of climate change with respect to the negative consequences identified in authoritative scientific statements (e.g., The 5th Assessment of the Intergovernmental Panel on Climate Change)?

As a CalPERS board member I have access to academic research on the topic of climate change and this is an area where I have keenly focused.   I have been able to bring this research and data to the creation of the 5 year strategic plan and specifically the Climate 100 project where we are focusing our engagement activities on the top 100 carbon emitters in our portfolio.  We have 1. Many Americans have learned in legal filings submitted by cities and states that various petroleum corporations have engaged in an organized campaign to deceive the public about the dangers associated with fossil fuels. As a prospective member of the CalPERS Board, what do you believe you can do to address the issue of climate change with respect to the negative consequences identified in authoritative scientific statements (e.g., The 5th Assessment of the Intergovernmental Panel on Climate Change)?

As a CalPERS board member I have access to academic research on the topic of climate change and this is an area where I have keenly focused.   I have been able to bring this research and date to the creation of the 5 year strategic plan and specifically the Climate 100 project where we are focusing our engagement activities on the top 100 carbon emitters in our portfolio.  We have asked other institutional investors to join us in this engagement and released our findings at the recent PRI (Principles for Responsible Investing).  I have also worked to successfully place a climate scientist on the Exxon board through our successful engagement efforts and our ability to have a database of corporate directors, also known as 3-D. 

2. Some have argued that there is a conflict between meeting your fiduciary duty as a CalPERS Board member and your responsibility to protect CalPERS members and the broader public from the burning of fossil fuels. As a prospective member of the Board, what do you believe is the best course of action to reconcile such conflicts?

I have a fiduciary responsibility to provide benefits to the members of CalPERS.   In fulfilling this important responsibility, I consider a number of factors, including climate risk.  Our investment decisions consider the risks related to fossil fuels and

we have invested in a number of climate-friendly deals such as wind and solar farms to transition to clean energy.  These are deals that both meet our fiduciary responsibility to meet our return target and our ESG priorities.  I don't believe these priorities are mutually exclusive.  I can meet my fiduciary responsibilities as a trustee while also considering the risks of climate change. 

As you may be aware, there are a growing number of California cities filing law suits against major fossil fuel corporations seeking to address the damages already affecting numerous Californians as well as even greater future harms, including negative impacts affecting many, if not all CalPERS members. What course of action do you recommend CalPERS adopt in order to address the potentially massive liabilities facing fossil fuel corporations?

CalPERS has an important voice and one we use to engage with companies where we invest.  We believe that engagement is the most important strategy considering CalPERS size, 340 billion in AUM.  Not all institutional investors have the size and magnitude of the CalPERS fund so we are uniquely positioned to use our voice and influence to change corporate behavior.  We have had numerous successes and are committed to more as we implement our 5 year ESG plan.  You'll notice that I ask several questions during our board meetings on the progress our investment staff are making in implementing the plan and more importantly the changes in corporate behavior that are necessary to fully mitigate the risks associate with climate change.  I am personally motivated to create the right balance of maximizing our investment returns with a prudent level of risk.

In the event of opposition or delays from other CalPERS Board members and/or staff to act decisively to prevent the damaging consequences of fossil fuels, how might you support the urgent calls by scientists, public health experts and university faculty from around the world for expedited actions to dramatically reduce fossil fuel emissions while expanding investments in alternative energy?

CalPERS is a leader in its investments in alternative energy, including wind and solar farms.  I am committed to ensuring we have a world where future generations can thrive and that starts with this generation.  I have pushed to have more focus on ESG strategies and for the staff to report out on a regular basis our progress in implementing those

strategies.  I'm proud of the work that has happened to date but will not settle as well as continue to push for more attention and focus. I am proud to have attended the PRI in the past to learn firsthand the work they are doing as well as our colleagues in many other funds globally.  I have also worked to successfully place a climate scientist on the Exxon board through our successful engagement efforts and our ability to have a database of corporate directors, also known as 3-D. 

2. Some have argued that there is a conflict between meeting your fiduciary duty as a CalPERS Board member and your responsibility to protect CalPERS members and the broader public from the burning of fossil fuels. As a prospective member of the Board, what do you believe is the best course of action to reconcile such conflicts?

I have a fiduciary responsibility to provide the promised benefits to the members of CalPERS.   In fulfilling this important responsibility, I consider a number of factors, including climate risk.  Our investment decisions consider the risks related to fossil fuels and we have invested in a number of climate-friendly deals such as wind and solar farms to transition to clean energy.  These are deals that both meet our fiduciary responsibility to meet our return target and our ESG priorities.  I don't believe these priorities are mutually exclusive.  I can meet my fiduciary responsibilities as a trustee while also considering the risks of climate change. 

3.  As you may be aware, there are a growing number of California cities filing law suits against major fossil fuel corporations seeking to address the damages already affecting numerous Californians as well as even greater future harms, including negative impacts affecting many, if not all CalPERS members. What course of action do you recommend CalPERS adopt in order to address the potentially massive liabilities facing fossil fuel corporations?

CalPERS has an important voice and one we use to engage with companies where we invest.  We believe that engagement is the most important strategy considering CalPERS size, 340 billion in AUM.  Not all institutional investors have the size and magnitude of the CalPERS fund so we are uniquely positioned to use our voice and influence to change corporate behavior.  We have had numerous successes and are committed to more as we implement our 5 year ESG plan.  You'll notice that I have asked several questions during our board meetings on the progress our investment staff are making in implementing the plan and more importantly the changes in corporate behavior that are necessary to fully mitigate the risks associate with climate change.  I am personally motivated to create the right balance of maximizing our investment returns with a prudent level of risk.

In the event of opposition or delays from other CalPERS Board members and/or staff to act decisively to prevent the damaging consequences of fossil fuels, how might you support the urgent calls by scientists, public health experts and university faculty from around the world for expedited actions to dramatically reduce fossil fuel emissions while expanding investments in alternative energy?

CalPERS is a leader in its investments in alternative energy, including wind and solar farms.  I am committed to ensuring we have a world where future generations can thrive and that starts with this generation.  I have pushed to have more focus on ESG strategies and for the staff to report out on a regular basis our progress in implementing those

strategies.  I'm proud of the work that has happened to date but will not settle and continue to push for more attention and focus. I am happy to say that I have an excellent relationship with my fellow board members and know I can express my views, opinions and concerns and they listen. 

Michael Bilbrey

The CalPERS Board Election Continues - Who Will You Endorse ?

The first round of elections for one of the seats on the Board of Administration at CalPERS (Position B on the previous ballot) resulted in no candidate achieving a majority of votes. CalPERS members have another opportunity to decide who will represent them in one of the worldʻs largest public pension funds. The previous election was sufficiently close that the runoff election may be decided by a relatively small number of voters. It is not surprising that the finalists - Margaret Brown and Michael Bilbrey - each contacted me, requesting my endorsement.

 

The relationship between private returns on investments and damaging public consequences has become a hot topic for public pension funds. Californiaʻs Controller Betty Yee and state Treasurer John Chiang, both board members at CalPERS and CalSTRS, have questioned pension holdings of coal companies or gun manufacturers. Still others have challenged investments in tobacco, pesticides, and so on.

For many of us who have served in Californiaʻs Legislature, the issue of fossil fuels reflects a long-standing conflict between private and public interests. While historically occupying an economic centerpiece, fossil fuels are increasingly viewed as an archaic and inherently hazardous industry actively engaged in delaying its replacement by a newer generation of cleaner and safer industries. Even more profoundly, thousands of scientists from around the world have documented fossil fuels as posing a threat to the survival of civilization beyond the 21st century. 

On October 18, 2017 I asked the two CalPERS candidates to respond to a series of questions relating to the mounting evidence of damaging consequences resulting from fossil fuels and their role as prospective board members at CalPERS, as follows:

 

Dear Margaret Brown and Michael Bilbrey:           

My congratulations to each of you as finalists for the CalPERS Board of Administration runoff election. I intended to write you earlier but my work has been interrupted by the fires surrounding my neighborhood in Santa Rosa.

Since receiving your request for my endorsement in the runoff election, I have developed a set of questions to help me make that decision as well as providing some guidance for the many thousands of voters who cast a vote for me during the CalPERS general election.

During my campaign I emphasized the importance of the CalPERS investment decisions as a means of affecting corporate behaviors more broadly. Following conversations with numerous CalPERS members, I have good reason to believe a clear statement of your position on one particular issue - the role of CalPERS investment decisions with respect to the damaging consequences of fossil fuels - may be pivotal for gaining the favor of many voters who supported my candidacy. Having served for many years as a senior environmental policy adviser to the California Legislature as well as writing a book on this topic (The War on California: Defeating Oil, Oligarchs and the New Tyranny), your position is clearly important to me as well.

Here are my questions for you:

1. Many Americans have learned in legal filings submitted by cities and states that various petroleum corporations have engaged in an organized campaign to deceive the public about the dangers associated with fossil fuels. As a prospective member of the CalPERS Board, what do you believe you can do to address the issue of climate change with respect to the negative consequences identified in authoritative scientific statements (e.g., The 5th Assessment of the Intergovernmental Panel on Climate Change)?

2. Some have argued that there is a conflict between meeting your fiduciary duty as a CalPERS Board member and your responsibility to protect CalPERS members and the broader public from the burning of fossil fuels. As a prospective member of the Board, what do you believe is the best course of action to reconcile such conflicts?

3. As you may be aware, there are a growing number of California cities filing law suits against major fossil fuel corporations seeking to address the damages already affecting numerous Californians as well as even greater future harms, including negative impacts affecting many, if not all CalPERS members. What course of action do you recommend CalPERS adopt in order to address the potentially massive liabilities facing fossil fuel corporations?

4. In the event of opposition or delays from other CalPERS Board members and/or staff to act decisively to prevent the damaging consequences of fossil fuels, how might you support the urgent calls by scientists, public health experts and university faculty from around the world for expedited actions to dramatically reduce fossil fuel emissions while expanding investments in alternative energy?

For additional information, you are welcome to follow me on Facebook, visit my blog at Calpolitico (Calpolitico.blogspot.com), or read my book.

To provide transparency I am seeking a concise response that can be distributed publicly. I ask that you respond no later than November 3, 2017 so that voters have time to read and carefully consider your position on the issues. In the absence of any response, I will only be able to report that outcome to my many supporters.

Congratulations once again on your campaign thus far. I look forward to your thoughtful and timely response.


All my best,

Bruce H. Jennings, Ph.D.

 

 

 

Next up:  the responses.........

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)

Los Angeles Presentation on September 21st !

COME JOIN BRUCE JENNINGS AT OCCIDENTAL COLLEGE




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 !

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.

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.

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."

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

On July 20, 2017 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.

Honoring Labor....at CalPERS

Honoring Labor....at 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.

Bruce H. Jennings - Your CalPERS Candidate !

** Bruce H. Jennings will be speaking in Los Angeles at Occidental College at noon on 
September 21st - check this space for updates **

This post begins a discussion series focusing on the California Public Employee Retirement System. You may already recognize CalPERS as one of the worldʻs largest public pension funds. It is also a place where more than 250 members have nominated me as a candidate to serve on CalPERS Board of Administration - and I owe a considerable debt of gratitude to the hundreds of individuals who have supported me in this endeavor.  During the month of September, the 1.8 million members of CalPERS will cast votes electing two individuals to serve as Member-at-Large to the Board.

One of my objectives as a CalPERS candidate has been inspired by an array of public interest mentors who have guided my work in the Legislature to pursue a common goal: promoting citizensʻ rights to govern the nature and direction of Californiaʻs economy. Promoting citizen participation in managing one of the worldʻs largest economies is also an essential element to address the fossil-fueled crises of our time, a central argument in my book, The War on California. In each of these regards, there is much that needs to change concerning the management of CalPERS.

There are many junctures for Californians to influence the stateʻs economic and political future, including the more than $300 billion dollars managed by CalPERS on behalf of many of Californiaʻs public workers. While up-coming Board election is limited to members of the pension fund, many elected officials figure prominently in the governance of CalPERS (the Governor, Treasurer, Controller and others). While there is much to criticize at CalPERS, there is also a need to recognize the vital importance of public workers and their invaluable contributions over many years.

The politics surrounding CalPERS has been contentious for many years. Starting as a sleepy bureaucracy for receiving and disbursing retirement funds, CalPERS gradually became a more pivotal force with the expanding political might of public employees and their collective financial resources. By the 1960s, CalPERS became a potent tool for influencing corporate boards across the nation and around the world.  CalPERS also became a target for private sector groups eager to exploit economic opportunities for ʻhelpingʻ to manage public employeesʻ portfolios. 

The political role of CalPERS is a topic I will explore in greater depth in the coming weeks along with additional excerpts from my book on related topics. I do not pretend to possess vast knowledge about CalPERS; I am, therefore, especially interested in learning from the readers. Many of us who work politically have often benefited from the collective work of many minds working together, yielding not only important information, but often insights into paths for achieving political change.

As a belated apology, my absence for the past several weeks has been largely unavoidable owing to the launching my book as well as my bid to join the CalPERS Board. Thanks to family, friends and colleagues and the many readers who I hope will join the unfolding discussions.  While my previous writing schedule allowed for postings on Monday, Wednesday, and Friday, the next series will be a bit more episodic.

In addition to reviewing some of the larger controversies enveloping CalPERS, I will also punctuate my postings with observations on the continuing controversies surrounding cap-and-trade.

Thank you in advance for your attention and commentary.

Establishing Cap-and-Trade: The Climate of Subversion

[Todayʻs post recalls some of the earliest history of AB 32 - The Global Warming Solutions Act - and the conflicts surrounding both its passage as well as its implementation. More than simply a historic footnote, this history would eventually connect to the early policy discussions inside the Trump regime, including Congress, and the direction of ʻcontrolsʻ established on major industrial sources]

On September 27, 2006 Governor Arnold Schwarzenegger signed the California Global Warming Solutions Act into law, to impose a graduated cap on emissions of specific greenhouse gases; and, to allow those facilities responsible for such emissions to utilize market mechanisms to achieve the required reductions. Despite the Legislatureʻs extensive, time-honored tradition of crafting laws where words had specific meanings, the Solutions Act left considerable uncertainty as to the degree to which Californiaʻs climate change policy would be governed by regulatory controls that typically spelled-out who was responsible for reducing toxic emissions, in what amounts, the penalties for failures, and enforcement actions to including citizen ability to file legal actions against corporations… all versus market mechanisms.

At a time when climate scientists increasingly insisted that everyone needed to move decisively to quell the fossil-fueled storms of the 21st century, California was embarking on an uncertain path. Amidst celebrations by the stateʻs actor-governor, Hollywood stars and politicians proclaiming Californiaʻs new law, many public interest advocates wondered how many of the same corporations that had for so long been responsible for the largest market failure in history, were now going to be a part of a market “solution” to global climate change? Community activists in Los Angeles described the recent history of emissions trading as a disaster where public health was sacrificed amidst supposed benefits, far outside their neighborhoods. In places such as Wilmington, California, with its prominent oil refinery, activists wondered about the consequences for their community when Shell began trading emissions credits. In addition to concerns about greenhouse gases, They asked, how could emissions trading curb the use of other pollutants affecting the health of nearby communities?

Assessing the ‘trading’ provision of cap-and-trade in the Solutions Act struck many as theater of the absurd. Regulators, business owners, community activists, environmental lawyers, and private sector financial analysts were openly skeptical about the state’s entry into the world of emissions trading. Even though traditional command-and-control regulatory laws had many flaws, as businesses often complained about regulatory paperwork, many noted that AB 32 now required them to be savvy traders in a new commodity market. 

The relationship between the Solutions Act and other California law was by no means a trivial matter. The Golden State had already enacted a multiplicity of laws and regulations severely restricting the release of toxic chemicals into the air, and a larger array of laws placed California on a path toward eliminating fossil fuels as a source of energy in the 21st century. To all outward appearances the authors of the Solutions Act, breezed through the requisite policy committee. Behind the scenes, however, were serious misgivings about an ill-conceived approach whereby many of the same corporations responsible for emitting hazardous substances into the air should then benefit by credits for reducing emissions elsewhere. Over the previous two decades many activists had played a central role in advancing a series of laws placing California, not simply at the forefront of clean air legislation, but more important, placing significant restrictions on the use of fossil fuels in the state energy supply. Were these hard-earned gains to be undone?

As later reported by an high-ranking administrator in one of Cal EPAʻs agencies, Governor Schwarzeneggerʻs political leanings were clear before AB 32 was even signed into law:

“Governor Schwarzenegger and his staff were intent on delaying substantive work on climate mitigation [in order to protect] California industry - major Republican party donors - from any competitive disadvantage. Schwarzenegger wanted it both ways: to be a climate hero and to avoid alienating the business community. Likewise, the Administration made strenuous efforts to steer the draft legislation away from regulation and toward market trading. That put Schwarzenegger in direct conflict with Democratic leaders who insisted on ʻearly action measuresʻ and who strongly preferred direct emission controls. The latter is precisely why the Air Board was given the lead implementation role: it was world renown for adopting ambitious, technology forcing rules. The Administrationʻs counter proposal for a squishy, non-accountable, multi-agency implementation body was soundly rebuffed. The conflict boiled over once the bill was enacted.”

The early ʻtraitsʻ of Californiaʻs Global Warming Solutions Act would reverberate for years to come.

Market Mechanisms for Market Failures: Part I

[In todayʻs posting, we return again to the historic roots of Californiaʻs pollution trading scheme (aka AB 32, the Global Warming Solutions Act) and the many hard-won regulatory laws that preceded it. This history becomes important as a lens for understanding the contemporary politics of fossil-fuel induced crises, including the current push for deregulation by the Trump regime.]

The rising alarm surrounding air pollution during the 1960s lead to the passage of the Clean Air Act in 1970. The essential mechanism of the Act was to establish limits on the release of harmful air pollutants, which principally affected auto manufacturers, refineries, and heavy industries. The regulatory requirements of the Clean Air Act were largely aimed at technological changes, including filters to remove recognized pollutants and meet air quality standards. “By 1991, however, the Environmental Protection Agency had succumbed to the pressure of lobbyists demanding lax enforcement of the Actʻs rules or regulations associated with expensive emissions equipment. EPA targeted Southern California to test a plan that would potentially increase healthy air while reducing emissions by offsetting the cost of pollution controls ….The pilot project, called Regional Clean Air Incentives Market (RECLAIM) established a system for trading ʻpollution creditsʻ among polluters.”

While the authors of AB 32 pointed to an East Coast emissions trading program to limit CO2 emissions (RGGI) as an illustration of how cap-and-trade might operate, RECLAIM was a much closer approximation to the broad contours of the Solution Act. It is likely that the sponsors of AB 32 did not want to point to RECLAIM for one simple reason: it was “widely regarded as a failure due to the issuance of too many emission credits, resulting in weak prices.” Initiated as one of the earliest programs for emissions trading, RECLAIM faced challenges from the start. “Companies had an incentive to achieve escape routes (e.g., variances granted by local air districts) from caps placed on emissions.”

From its inception,  the Los Angeles Incentives Market (RECLAIM) confronted intensive scrutiny from community-based organizations. Communities were already suspect of the basic premise that pollution trading from oil refineries, rail traffic, and other industrial facilities would not impose an even greater threat to their well-being. Various community groups viewed the entire premise of providing regulatory flexibility to the private sector with a blunt skepticism, particularly regarding the benefits of a pollution-trading scheme designed by those working from office towers in New York, Washington, D.C., or San Francisco. The suggestion that they should join with national environmental groups who had designed AB 32 yielded open hostility among a large number of community-based groups in Los Angeles, “This wouldn’t be the first time that they threw us under the bus!”

Another controversy enveloping the proposed trading scheme related to  

what many public health officials referred to as ʻold scienceʻ versus ʻnew science.ʻ Early trading schemes such as RECLAIM emerged during an era when trading was founded on an already dated characterization of ʻpollutantsʻ as chemical hazards posing principally short-term harms. By the beginning of the 21st century, newly emerging scientific findings included a much broader array of harms, reflected in an expanded set of statutory terms (e.g., neurotoxins, microparticulates, endocrine disruption). Because the harms recognized latent effects impacting multiple generations, sometimes at exceedingly small exposures or other times based only the timing of exposures (i.e., first trimester for reproductive effects) legislative discussions moved from how to manage chemical exposures to a more pointed effort simply to eliminate the commercial production or release of substances posing inherent hazards.

Whereas various federal laws were firmly planted in an older model allowing private sector firms to release uncharacterized chemicals into the environment, public health officials and others conversant with these new scientific findings advanced precautionary approaches in law. By the early 2000s precautionary legislation became especially popular in California, with many calling for the rapid phase-out of various products containing bio-accumulative, biologically disruptive, and other such substances (e.g., mercury, lead, PBDEs). The operating premise for a variety of these laws was to prohibit the production, use and sale of substances posing inherent hazards. Lacking this preventative premise, the framing of the Global Warming Solutions Act, therefore, was instantly contentious.

A fundamental question confronting the Legislature turned on how to construct AB 32 within the framework of existing laws, and pointed to very divergent paths. Inside the Legislature, the question pivoted on whether to incrementally manage the release in a calculus of what was most efficient for business. The new research emerging was predicated on the urgency to eliminate these substances posing known and dramatic threats to human life and civilization extending for centuries into the future.

In the years following the enactment of Californiaʻs Global Warming Solutions Act, the question of whether the State should utilize market mechanisms to address a crisis precipitated by what many economists labeled ʻthe greatest market failureʻ would become a pivotal question. In 2017, the question would become dramatically more significant in the context of President Trumpʻs swiftly adopted agenda to dismantle strict regulatory controls, particularly with respect to any restrictions over fossil fuels.

And for readers who are forgiven for not following the minutia of market mechanisms, one additional event in 2017 yielded one more over-looked commentary on the failure of market mechanisms: the decision by the South Coast Air Quality Management Districtʻs Board to terminate the decades-old regional pollution-trading program: RECLAIM. Sparing readers the interesting details, it is enough to note that one of the Board members, the Honorable Sheila Kuehl, noted that Los Angeles was bringing an end to being gamed by fossil fuel interests; LA would revert to the reliable and certain results achieved by strict regulatory controls over emissions by petroleum refineries and other large emission sources.

I promise to provide a less wonky posting next time!

A Tyranny Larger than Trump

If you have had the opportunity to read even one of the recent editorials by the LA Times, you have likely found yourself re-enchanted with their thoughtful critique of Donald Trump. And if you are like many others around this state, you are even more thrilled with their tone. Without mincing words, the Times calls our newly elected President narcissistic, impulsive, untruthful, and both ignorant about political power and how to wield it effectively.

The Los Angeles Timesʻ attack is unrelenting, reflecting what the editorial writers sense is a surge of popular outrage and opposition by a vast number of Californians. Refreshingly, the Times is unequivocal not simply as a venting of frustrations, but noting that it is time to challenge the new President before things get even worse. The Editorial Board argues that rather than awaiting more 'alternative facts' and the further erosion of democratic institutions, their responsibility is to "lay out our concerns." These are expansive, ranging from the draconian use of federal police forces to deport and worsened livelihoods for millions of our fellow Californians, to the dismantling of health care policies, and an array of policies opposed to many of our most celebrated laws.

As noted by the Timesʻ editors, many Californians feel "uniquely threatened" and harbor a widespread sense of dread for being complicit in creating a place that is now targeted by the Trump regime, his partisans in Congress, and powerful private sector allies. But this is the juncture at which the marvelous editorial series gives too little attention to a much deeper and longer conflict. It may be fair to call Trump a tyrant, but the sources of his tyranny are more than merely his weird persona.

In recent decades many of the same themes of racist, xenophobic, elitist, sexist, and similarly egregious traits have been displayed by other presidents. Even if we can all readily agree that Donald Trump personifies the worst of these qualities, the threats posed by the current regime are much broader. Trump does bring new meaning to the rise of an authoritarian, if not fascistic, state. It is no small matter that his use of power in such a personal way threatens democratic practice in a fashion perhaps unprecedented in our nationʻs history.

I find it difficult to argue with any of the Timesʻ courageous editorials....save one, not-so-minor point: the origins of problems we confront are much larger than the man now occupying the Oval Office. The case can be made most persuasively by examining what is arguably one of the greatest existential threats to humankind: the distinct prospect that civilization and global ecology will severely damaged by the end of this century. Yet, the approaching cataclysm has a complex history predating 2016 and the current President. Which is not to say that Donald Trump will not make things spectacularly worse. But a more careful scrutiny of our predicament points out that focusing exclusively on Trumpʻs failures as a leader is largely a distraction.

Trumpʻs distractions move our collective scrutiny away from an enduring coalition of private interests, including some of the nationʻs wealthiest families and largest corporations. For one over-arching problem - fossil-fueled damages - the activities of the oil industry, its lobbyists and corporate allies have been documented for pursuing policies that have undermined clean alternative fuels while discounting the threats to surrounding communities, workers, and the environment. As if these negative features were not enough, the record of destruction extends to the systematic erosion of democratic institutions and practices as evinced by their out-sized role in the political process.

As reflected in the stories of public interest advocates contained in The War on California, the abhorrent and disastrous policies personified by President Trump have many linkages to earlier regimes and powerful political forces. We may discover, too late, that ʻsolvingʻ for the Donald does too little to address the other threats to democracy, society, and the environment. California, in this regard, holds an especially vital, some might say pivotal, role in preparing a political campaign aimed not simply at the small man seeking a balcony, but the many sympathetic officials who have been hard at work for many decades to defeat the works of public interest activists across the nation. 

The record of these conflicts are recorded in dozens of legislative measures stretching across decades. While covering a range of topics, there is one especially intriguing common theme bridging many of these struggles: the battle between private and public interests to control both politics and the economy in the Golden State. These are themes I will continue to explore in the coming weeks.

The Politics of Trading

[Todayʻs post follows from the last posted conversation with my brother, an expert on financial matters and our discussion in 2006 regarding a legislative proposal that would become Californiaʻs export model for addressing climate change: cap-and-trade]

"Casey, I've got a question." It was another of what were becoming more frequent calls to sound-out a private sector perspective on my political crisis du jour.  ”Go ahead” Casey answered, “What's the latest from the temple of doom?"  

I explained the outlines of the global warming bill, ending with a question about market mechanisms: "What do you make of the use of such an approach, especially emissions trading, since this seems to be where the bill is headed?"

"Bruce, Bruce, Bruce.....what's the matter?  Why haven't you given yourself over to the market?  It is a wonderful faith-based system and it makes it easier for you to sleep at night." Casey then walked through how various of his financial wizardry conducted on behalf of major corporations typically relied on a contract to specify the obligations and responsibilities for both parties.  

"So let me get this straight; you're saying this is a perfectly acceptable way to construct a program for reducing greenhouse gases, yet...?" Before I completed the question Casey interrupted, "No, I said that in corporate-land I have helped to define the financial terms for contracts. But in many instances the contract has followed a prime directive: if things turn sour, make certain that the other party is screwed to the wall. One of the wonderful parts of financial engineering is that virtually no one understands how any of this works. So my question to you is a simple one: who in the Legislature understands trading?  Or better yet, ask the legislators and their supporters if they can explain it to you in more than a couple of sound bites." Casey, not quite done, was saving the best for last.

"...Oh, and there is the second part of working with contracts. For all of the contracts that I have been party to, we would typically write up something about 1,000 pages long, just to make certain that we have a very thorough understanding of where this agreement will take us and, most especially, a very clear statement about when the contract has not been fulfilled, how it will be enforced and, most especially, what we get when the contract doesn't have the outcome that we have agreed on.”  

“...So, you’ve got to ask some additional questions” continued Casey. ”First, what does trading mean in this bill?  Second, what happens when greenhouse gases aren't reduced over some period of time?  And third, how extensive is the contract language?” "Well,” I responded, “the bill does not have any specific contract language as such. It is simply a vague statement regarding the use of market mechanisms to achieve a reduction in greenhouse gases."

"Well, whoopee! is all I can say," Casey laughed. "I know which side of that deal I want to be on....and it certainly isn't backing the people of California! ...By the way, let me know when this bill is going to the Governor so I can start shorting the state. Remember when Enronʻs traders giggled as California's bureaucrats came to the floor to make energy contract purchases?  This will be even better!"

I ended the phone conversation wondering if some of the materials I had used years earlier with groups of students at UC Berkeley might have prompted a better basis for considering the value of emissions trading among legislators and staff. A particularly thoughtful author, Tom Athanasiou, prominent in my syllabus, argued that solving global warming involved more than simply a re-jiggering of technologies to capture fugitive gases. Instead, the task required more fundamental changes.

“If greenhouse theory is correct, and the preponderance of evidence indicates that it is correct, humanity must drastically reduce its use not only of methane and CFCs (greenhouse gases), but of coal and oil as well, even though such a reduction means that the entire planetary economy must be re-structured -- to a degree that implies a fundamental break with the energy economy that has underlain capitalism from its earliest days. This is not a matter of a few technical fixes, of isolated reforms to an economy that can remain essentially unaltered.”

Sitting at my desk inside the capitol, I wondered if the architects of cap-and-trade really thought that cap-and-trade was an answer to the fossil-fueled threats of the 21st century. Or was this merely subterfuge; a political device for obscuring the urgent necessity to restructure one of the worldʻs major economies?

Californiaʻs Pollution Trading Scheme: Chapt 1

[to discover the exciting outcome of this weekʻs earlier post, you will have to await the publication of The War on California in the next few weeks; in the meantime, todayʻs post introduces the story about what will become the stateʻs most infamous ʻSolutionʻ to fossil-fueled climate crises.]

“Whatʻs that?” I queried of my fellow all-female consultants as we emerged from yet another meeting, as a van adjacent to the capitol’s south entrance deposited a bulky item on the well-manicured grounds.

“Itʻs the governorʻs podium,” my colleague responded. “See the govʻs seal on the front?”

“Yes, I see the podium, but whatʻs he carrying in his other hand?”  

Approaching the curb, we looked more closely. “Itʻs his platform!” She responded to my puzzled expression. “You know, the wooden box he stands on to appear larger than life when towering behind the podium.”

“You have got to be kidding me!”

“Come on Bruce, itʻs a Hollywood thing. For Schwarzenegger, this is all political theater.” As we entered the marbled halls, we were laughing. “Oh itʻs theater alright, theater of the absurd.”  

Within days my attention turned to the first in a series of broadly outlined discussions about what might appear in the proposal being finalized for hearing before my committee. The bill, eventually celebrated as one of California’s premiere environmental laws -- the Global Warming Solutions Act, popularly known as AB 32 advanced a program supporters referred to as “cap-and-trade;” something that its detractors would later refer to with as Californiaʻs pollution trading scheme. The basic architecture required regulatory agencies, including the California Air Resources Board to set limits on the largest emitters of greenhouse gases combined with a vaguely stated trading program.

This bill would contain an essential flexibility for these large emitters that made AB 32 very different from Californiaʻs classic regulatory approach. Beginning with a benchmark of total greenhouse gas emissions, a declining cap for these emissions would be imposed on the largest emission sources - designed to decrease total emissions to an earlier baseline - in this case, the earlier and lower 1990 measurement of total statewide emissions. Large emission sources, facilities such as refineries or energy plants owned by very large corporations, would be allowed to trade emission credits in an auction with other facilities not utilizing all their own credits. The concept held that as the cap on emissions decreased over time, credits would become more expensive, driving up the price of greenhouse gas pollutants. Companies would have various avenues to figure out how to deal with pollution, but eventually all emitters would be compelled to utilize less costly and less polluting alternatives.

From the start I found the billʻs title misleading, given that an array of California laws already addressed various facets of global warming. With the availability of plentiful regulatory mechanisms, why was these members of the Assembly so enchanted with trading mechanisms as a means for addressing the climate crisis? I would slowly awaken as to why the billʻs emphasis on a trading mechanism continually nagged at me. soon learn about a central feature that made this approach so distinctive.

During an early meeting with supporters, tentative language circulated for a bill being drafted by the Legislatureʻs attorneys that appeared to be suspiciously like the work of the larger environmental groups in Washington, D.C. (and quite unlike the product of Californiaʻs environmental advocates). One telltale characteristic was that language crafted by many of Californiaʻs environmental attorneys typically reflected an obsession with fine details, whereas proposals from inside the Beltway as well in Congress often proceeded with broad provisions. For many of us inside Californiaʻs capitol, the Congressional model of drafting overly broad provisions in law only invited challenges and delays by powerful opposing interests.   

Before launching legislation in D.C., one could first road test it in a state legislature. The main advocates in D.C. were laying the groundwork in California for a piece to follow as the national model, based on what they hoped would be the California law. A centerpiece of the bill used "market mechanisms" to define how global warming would be addressed, with the use of a trading scheme. Although trading had been used at that time in a program in Southern California, AB 32 advocates argued that theirs was a distinctive architecture.

At this point, as typical when working in the arena of concepts without benefit of actual language or empirical data, I resorted to a sophisticated technology honed by staff over many years. I picked up the phone to survey my ever-expanding universe of informal advisors stretching from journalists and physicians to regulatory scientists and activists in Los Angeles to gain from their deep knowledge. I was especially interested in the perspective of one who, over many years, was among the elite wizards responsible for pumping up the quarterly statements of major global firms through use of financial instruments. The source, of course, was my brother.