AB 20, the controversial bill designed to pressure CalPERS and CalSTRS to divest of funds of companies involved in the construction of the Dakota Access Pipeline (DAPL), received more bad press today. The Orange County Register published an op-ed calling the legislation “problematic” and highlighting the negative effect of divestment on the state’s pension funds.
Economist Dr. Wayne Winegarden of the Pacific Research Institute stressed what the effects of increasing the pension shortfall would be:
Without properly accounting for risk, California’s public pension systems are currently underfunded by $170 billion, or around 7 percent of total state GDP. This is a tremendous burden that, if not properly addressed, will either result in large future tax increases, large future spending cuts, or significant reductions in promised pension benefits to future retirees.
The size of the unfunded liabilities of California’s public pension systems are inter-twined with the pension funds’ returns. The higher the investment returns, the lower the unfunded liability. And, the reverse is true as well — the lower the investment returns, the higher the unfunded liability.
Dr. Winegarden also cautioned against politicizing the pensions funds:
It is also not the role of California’s public pension funds to make public policy regarding the Dakota Access Pipeline, and whether it should be built. Whether the Dakota Access Pipeline should have been built was a political decision that is properly made in Washington, D.C., and the impacted state capitals.
Unfortunately, AB20 is not the first-time the legislators in Sacramento have tried to use the pension funds for political purposes. While we all applaud divesting from state sponsors of terror like Iran or taking a stand during the time of Apartheid South Africa, this trend should not accelerate to address partisan causes that a sub-set of politicians find distasteful. The negative impacts on CalPERS and CalSTRS will grow as the investment funds become increasingly politicized.
Read Dr. Winegarden’s full op-ed here.