The California state legislature introduced a bill last month that would bar the state’s pensions from making new, additional and or renewed existing investment with private equity firms whose sovereign wealth fund stakeholders are associated with countries that are not signatories to at least five of six international human rights treaties.
While the bill has not specified which sovereign wealth funds or private equity firms it is targeting, most market observers believe the bill, if turned into law, would alter or end relationships between the California State Teachers’ Retirement System (CalSTRS), the California Public Employees’ Retirement System (CalPERS), and several major private equity firms that have sold management company stakes to entities affiliated with nations in the Middle East and Asia, including The Carlyle Group and Apollo Management.
The board of the CalSTRS meeting tonight in Sacramento, California’s state capital, voted to oppose the legislation saying it would be a “blow to the retirement security of teachers while doing nothing to ensure a better world.” Their cross-town cousin CalPERS will take up the matter on 17 March.
The Assemblyman who introduced the bill, Alberto Torrico, is a member and former chairman of the Assembly’s Committee on Public Employees, Retirement and Social Security. Today he spoke with PEO about his motivation and response to critics who say the bill would cost pensions billions in lost revenue. Excerpts of the conversation follow:
PEO: I understand you’ve introduced a bill in California that would limit the way that CalPERS and CalSTRS invest with private equity managers who have sold stakes to certain sovereign wealth funds. The bill is sponsored by the Service Employees International Union; did the union come to the committee [on Public Employees, Retirement and Social Security] and ask that you hear them out, or did the committee approach the union?
Alberto Torrico: In California we have a great tradition of using our pension funds in order to advance civil rights and human rights. We’ve targeted South Africa, we targeted Darfur last year, so this is just kind of a long tradition of these kinds of bills here in California.
The committee was not approached, nor did the committee approach [the SEIU] – it’s not really how we do bills in California. Each one of the members, we can introduce bills. So different ideas are floated around usually by staffers and we make a determination which bills we want to introduce. We have bill limits and different issues around which bills to carry, so I decided to carry this one.
Was there a specific event or issue that made you decide to act?
I was supportive of our efforts in Darfur, so we started to take a look at other areas and other investments using the retirement funds of public employees and this seemed to be – sort of the next kind of targets are these sovereign wealth funds.
Is there a particular sovereign wealth fund you’ve found concerning?
The sovereign funds associated with the United Arab Emirates.
They haven’t signed on to a number of [international human rights] treaties, there’s tremendous documentation regarding civil rights and human rights violations. It just doesn’t seem like we should be investing public funds to support those kinds of regimes.
Do you really think that this bill will have a visible affect on human rights in foreign countries?
I hope so. I mean, it’s part of a larger movement I think towards the protection and securing of civil rights and human rights all over the world. So I think that it is a piece of the puzzle.
There’s also a federal task force that’s been meeting on sovereign wealth funds. Are you interacting with them in any way?
We anticipate that we are going to, but I’ve not had any communications at this point.
What about communications with sovereign wealth funds themselves or with CalPERS or CalSTERS?
We’re always in communications with CalPERS and CalSTERS, they of course have raised their concerns with our office. I think that the concerns raised by CalPERS and CalSTRS are overstated, exaggerated. Similar to the claims that were made when we were taking action against [investments in] South Africa and Darfur. I still think at the end of the day this is the right thing to do, so we’re going to go forward.
You think some of their concerns are overstated. I know that one of them is very monetary in nature, which is basically that some of the best-performing private equity funds are the ones in fact that have sold stakes, or are expected to sell stakes, to sovereign funds. CalSTRS in particular has estimated that if this bill were to pass, they could lose as much as $5 billion in returns for their portfolio in the next five years. Is it their figure that you take issue with?
I take issue with the figure. I also, maybe I have more confidence in their ability to invest responsibly than they do. The staff was directed to make investments into socially responsible funds and there was an outcry about how those would lose money and then after 3 to 5 years of investing in those funds, guess who were the highest-yielding funds? The socially responsible ones. So I just think there’s always going to be concerns. I think they’re painting a worst-cased scenario, which I don’t think will happen. I think there will be an opposite effect as there was with socially responsible funds that CalPERS and CalSTRS have been investing in now for at least five years.
What would the opposite effect be in this particular case? Because you’re not mandating they make investments in other regions, you’re [only] taking something off the table for them.
They’ll find other investment opportunities. We aren’t short of investment opportunities. It’s a similar argument that was made against investing in socially responsible investments. The argument was we would lose money. Well, we didn’t. Those were the highest yielding funds. So if we take money out of these funds that they’re saying are strong funds and we’re forcing them to put money into more socially responsible investments, I think the outcome will be that they will have a greater profit. That’s what happened in the past.
When you say socially responsible funds, do you mean private equity funds?
[Yes], including private equity funds. But a vast array of funds investing in clean energy, infill housing, different kinds of investments.
Do you think that private equity firms in general are unpatriotic or unethical to be accepting investments from sovereign wealth funds?
No, I wouldn’t make a general statement like that. You have to make a case-by-case analysis, which countries are we talking about and the treatment of those countries’ citizens.
I noticed there’s also some language in the bill that has to do with whether or not a private equity firm is publicly listed. So it would be okay for CalPERS or CalSTERS to invest in a publicly listed private equity firm that has a sovereign wealth fund as a stakeholder?
That’s not the intent of the bill. I think that we drafted it narrowly to start. That’s something we’re looking at: tightening up the language as the bill proceeds.
Do you feel that there is support or pushback from your colleagues on this bill?
We haven’t had a hearing yet … [but] I am very confident that I will have the support of the Democrats and that the bill will reach the Governor’s desk.
What’s the next step for this bill?
It will be heard in the PERS committee, probably in the next 30-45 days, and then it will eventually move on to the floor of the Assembly for a full vote. And then it’ll go over to the Senate and then probably be on the Governor’s desk by August.
And do you expect this is something California Governor Arnold Schwarzenegger will support?
Our Governor makes a practice of not letting anyone know whether or not he would support or oppose a bill until it actually reaches his desk, so I have no idea what he’s going to do.