Symbolic Gesture On Coal Will Ding California Pension Funds – OpEd


Lawrence McQuillan’s book, “California Dreaming: Lessons on How to Resolve America’s Public Pension Crisis,” documents the unsustainable financial condition of California’s public pension programs, looming crises caused by, among other things, overly generous retirement benefits and unrealistic assumptions about the rates of return earned on investments.

Unless action is taken quickly by, for example, switching from defined benefit to defined contribution retirement programs, McQuillan predicts an economic disaster of epic proportions for California’s taxpayers, who will be forced to cover ever-growing unfunded liabilities of the California Public Employees’ Retirement System.

Well, action has just been taken, but it is one that only makes the problem worse: Senate Bill 185, signed by Gov. Jerry Brown, will require CalPERS and the California State Teachers’ Retirement System to nix investments worth between $100 million and $200 million for CalPERS and about $40 million for CalSTRS.

The investments at issue are stocks held by CalPERS and CalSTRS in thermal coal. At the end of fiscal year 2014, CalPERS reported managing assets worth about $322.3 billion and so being required to sell up to $200 million in coal stocks affects less than 1 percent of its investment portfolio.

But the two state pension funds now own few, if any, individual thermal coal equity shares; just as people do, the funds invest primarily in mutual funds. SB 185 thus will set in motion negotiations with private fund managers to prune coal stocks from their portfolios or, if that is not possible, to cash out and move the proceeds to socially responsible funds that do not invest in coal.

Either way, CalPERS and its members will suffer capital losses. Coal stocks have fallen dramatically over the past several years owing to anti-fossil-fuel public opinion; divesting now means that such investments will be sold at prices well below those that prevailed when the stocks were bought.

Political correctness on so-called climate change thus imposes a cost on current and future public employees and taxpayers. California’s symbolic action will have little or no impact on coal companies themselves, though, because other investors will buy the stocks CalPERS and CalSTRS dump at fire-sale prices.

Moreover, even if California actually drove down the market prices of thermal coal shares, celebration is not necessarily in order. Coal companies would then have less capital to invest in proven and commercially scalable clean coal and carbon capture technologies that have much lighter carbon footprints than older, dirtier coal-burning methods.

One consultant pegs the capital loss associated with all past CalPERS divestments (in tobacco and firearm manufacturers as well as other politically incorrect investments in South Africa, Iran, Sudan and some emerging markets) at $4 billion to $8 billion, putting California’s indulgence of anti-coal sentiments in an entirely new light.

That estimate, if accurate, should drive angry pensioners and taxpayers into the street demanding that state officials rescind their precipitous action on SB 185, which adds to the total loss.

Coal is cheap and abundant. Californians—even the staunchest green of them—would want those newer technologies to be available as backups for generating power when the sun doesn’t shine and the wind doesn’t blow.

William F. Shughart II

William F. Shughart II is Research Director and Senior Fellow at The Independent Institute, the J. Fish Smith Professor in Public Choice in the Jon M. Huntsman School of Business at Utah State University, and past President of the Southern Economic Association. A former economist at the Federal Trade Commission, Professor Shughart received his Ph.D. in economics from Texas A & M University, and he has taught at George Mason University, Clemson University, University of Mississippi, and the University of Arizona.

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