Pension Crisis

Forced Coal Divestment Robs California Pension Fund of Revenue

Millions lost when political influence overrules financial acumen.


Coal Mine

Thank political ideology for California's public employee pensions missing out on a chance to improve stock performances and make up for part of a huge problem with the chronic underfunding that puts taxpayers on the hook for billions in liabilities.

In 2015, lawmakers passed a bill subsequently signed by Gov. Jerry Brown forcing the California Public Employees' Retirement System (CalPERS) to divest all of its coal investments by July 2017. And they have, for the most part.

The decision was pushed by Democratic environment-minded lawmakers wanting to "take a stand" against fossil fuel companies and against climate change, as the Sacramento Bee notes. While the move was clearly political, there wasn't much outrage because at the time it wasn't really a bad business decision. Coal companies were not performing well and CalPERS' own investment report for last year determined that their coal investments were worth less than half what they paid for them.

The performance of the coal industry, however, was also political, burdened as it was by executive orders for heavy regulation put into place by President Barack Obama.

Then President Donald Trump happened. Trump has stripped away some of those executive orders, causing a resurgence in the fortunes of several of those companies. As a result, stocks are bouncing back in value. Had CalPERS hung onto them for a few more months at least, they'd have recouped more of their losses. Shares for one company alone are worth 15 times more than they were just a year ago:

CalPERS in its report said it divested shares from 14 coal companies that were worth $14.7 million when the pension fund sold them. Stocks for 13 of the 14 companies are worth more than they were a year ago when the pension fund was divesting from the industry.

The entire portfolio is worth more than $300 billion, and if this were an isolated incident it would be small potatoes and easier to forgive. But it's not. Lawmakers frequently attempt to use CalPERS investments to make political statements of opposition. The Bee notes this year lawmakers have tried to force the pension fund to divest from companies in Turkey, from companies that help build the Dakota Pipeline, and even companies that would work on Trump's supposed border wall.

In 2013 CalPERS sold off its investments in gun companies and has made many other divestment choices entirely based on what lawmakers and the politically influential see as socially responsible without any sort of consideration of the financial consequences.

If it were a private retirement fund, who would object? There are many funds out there folks invest in that revolve around trying to make socially responsible investments and still hammer out positive returns.

But this is a public employee pension fund, and returns are guaranteed. California taxpayers end up paying the difference when divestment leads to financial loss. Lawmakers and political activists risk the citizens' money in order to make statements like this. And California cities have suffered tremendously due to growing pension obligations, having to cut back on services, lay off employees and even file for bankruptcy.

To its credit, CalPERS warns against these sorts of divestments, with good reason. It is not actually "responsible" to threaten the financial stability of the pension fund to make a political statement. But, as with every other poor financial decision by lawmakers, they know they aren't the ones who have to deal with the consequences.