State Treasurer Seeks Investment in Poorer Areas

State Treasurer Philip Angelides today plans to unveil a proposal for narrowing California’s wealth gap by investing more than $8 billion in low-income communities through state pension funds and other government programs.

In a policy initiative to be distributed to state lawmakers, investment bankers and business leaders, Angelides is calling for 2% of the state’s massive pension fund portfolios to be directed toward everything from commercial real estate development to affordable housing in impoverished communities.

Angelides sits on state pension fund boards with combined assets of more than $280 billion and serves as head of the $34-billion state Pooled Money Investment Board. He has pushed to implement several initiatives that direct investments to poor communities while discouraging investments in risky overseas markets.

His new proposal calls on the massive pension funds as well as regional and local governments to vastly multiply those efforts.

“As the state’s chief investment officer, I feel an obligation to raise the issue to consciousness about the widening disparity of incomes in our state,” Angelides said Wednesday. “It is a matter that will affect not only our social fabric, but our economic strength and competitiveness over time.”

Patricia Macht, spokeswoman for the $168-billion California Public Employees Retirement System (CalPERS), said the board has a record of investing wisely in underserved California markets and will give “serious consideration” to the proposal.

All state pension fund investments must meet strict fiduciary standards, regardless of social benefit, she said, but the CalPERS board believes there are ample opportunities in poor urban areas.

“This is an area where in fact CalPERS has a demonstrated record,” she said.

Among existing CalPERS commitments are a $150-million investment in Earvin “Magic” Johnson’s theater developments, and hundreds of millions of dollars more in affordable housing.

Data is meager on returns from inner-city investments, making many fund managers reluctant to explore those options. But earlier state efforts have resulted in solid returns, according to Angelides. Other efforts, such as a real estate investment fund spearheaded by Mayor Richard Riordan, have won support of institutional investors.

Pension fund investments in risky overseas markets such as Indonesia and Malaysia, meanwhile, led to steep losses last year, and Angelides has pushed to curtail such practices.

The report, which follows a recent conference on the topic in San Francisco sponsored by Angelides, recommends that:

* More than $5 billion from CalPERS and California State Teachers’ Retirement System (CalSTRS) be invested in poor communities, a goal of 2% of the funds’ portfolios.

* $3 billion more go to initiatives such as home loans for low-and moderate-income areas, small-business loans, cleanup of contaminated sites and market research to spur increased private investment.

The report also calls on public pension funds to hire a more diverse group of investment managers. And it challenges local and regional government, the private sector and foundations to join the state effort.

Most of the initiatives can move forward if Angelides garners enough support from CalPERS and CalSTRS board members, although some will require state legislation.

State pension funds grew by more than $74 billion in 1998 and 1999 in the strong economy. However, California has the greatest gap between rich and poor of all but four states, and it widened during the last decade, according to the California Budget Project. Economic inequality has been cited as a threat to continued prosperity by Federal Reserve Chairman Alan Greenspan and President Clinton, among others.

While many investors remain wary of poor communities, that is beginning to change.

“We think that these are good, safe investments, that reality is much better than some people’s perception,” said Stanley P. Gold, president of Burbank-based Shamrock Holdings, which manages the real estate investment fund launched by Riordan to invest in low-income areas.

That fund is expected to close in the next 30 to 60 days at $75 million.

Added K. Robert Turner, managing partner of Canyon Capital Realty Advisors in Beverly Hills: “We think the underlying fundamentals of the urban opportunity are the most compelling in the country at the moment. We don’t believe that suburban markets offer nearly the returns.”