The California Public Employees' Retirement System (CalPERS) and the California State Teachers' Retirement System (CalSTRS) are big institutions, with big investment needs.
“CalSTRS is the nation's second-largest public pension fund with assets totaling approximately $215.3 billion as of September 30, 2017. The investment portfolio is broadly diversified into seven asset categories,” says the website for CalSTRS.
In July, the Sacramento Bee reported that CalPERS had $323 billion in assets, “about 68 percent of the funds it would need if it had to pay all of the benefits it owes to retirees and public workers.”
Both institutions are responsible for maintaining a balanced investment portfolio that provides retirement benefits to state workers. They have both had to increase their reliance on investment returns to fulfill this mandate, according to Tim Skillman, who spoke at the CalPERS annual Education Forum on Oct. 23-25. Skillman is a CalPERS employee who also serves on the board of the Association of California State Supervisors as the representative for Greater Sacramento.
Skillman said CalPERS had a ratio of two employees contributing to the pension for every one retiree as recently as 2001.
“Today that number has decreased, down to 1.3 active employees and employers contributing to the fund for every one retiree,” Skillman said.
CalPERS has even lowered its long-term investment discount rate by a half of a percentage point, meaning the department expects to make 0.5 percent less on long-term investments than in the past.
All this investment work means CalPERS and CalSTRS have been buying and selling large stocks lately. Tech stocks are large and doing well in the market, with authorities such as CNBC asserting that the gains are not just a bubble.
As recently as Oct. 31, Tyler Technologies announced that CalSTRS had $10.8 million in holdings in the company. This was a 6.3 percent reduction in the amount of Tyler stock the institution owned.
Such large holdings beg the question: How does a state purchase technology from well-known, reputable technology companies when it is also investing in those companies, without affecting the market?
“In the public equity space that is unlikely as it is a $80T global market. But if they invest in small or illiquid offerings, sure it is possible,” said Meb Faber, chief investment officer for Cambria Investment Management.
But small doesn’t describe CalSTRS or CalPERS.
“CalSTRS is a majority passive investor,” CalSTRS spokeswoman Michelle Mussuto wrote to Techwire. “This means we ‘own the market’ through investing in indexes – Russell 3000, NASDAQ etc. So any tech companies on the public market, we own by default. CalSTRS also invests in the private market in myriad funds, which may or may not contain tech companies.”
In order to protect from special interest and high risk investing, the California Constitution actually requires “diversification of risk across asset classes,” the CalSTRS Investment Policy and Management Plan reads.
The plan also requires a “prudent expert” standard for all decisions about investments. Those prudence standards are based on the 1974 Employee Retirement Income Security Act, a federal tax and labor law.
On the other end of investments, the California Secretary of State's Office maintains documents and examines whether a company is fit to do business with the state, isolating that information from investment arms. The state Department of General Services (DGS) furthers this separation by requiring all employees who handle contracts to submit a Form 700 every year, which is analyzed by department leadership.
“If there is a potential conflict that is identified in our review of these, then we make a point to remove the employee from any chain of command in the review of contracts that would or could have a potential conflict,” Jennifer Iida, a DGS public information officer, wrote to Techwire.
Every contract also includes a signature cover sheet that states: “By signing this form, I declare that I have no direct or indirect investments, real property, or interest in any company, business, entity, or organization that may involve this project or contract.”
