Precarious portfolio

Arnold Schwarzenegger is the governor of California.

Twice in recent years, California has used its economic power to make it clear to the world that it will not aid governments whose policies have been rejected by civilized nations everywhere.

In 2006, we divested from Sudan because of its role in the ongoing genocide in Darfur. The next year, we banned investment in Iran because of that country’s pursuit of nuclear weapons and its contributions to instability in the Middle East. I was proud to sign legislation making these moves, preventing California’s pension funds from investing in companies with active businesses in two of the world’s most offensive regimes.

So perhaps it appears inconsistent that I am opposed to a bill pending in our state Legislature that, in the name of human rights, would prevent the state’s pension systems from investing in certain private equity funds.


Yes, California is concerned about human rights violations. However, this measure, AB 1967, is an ineffective way to demonstrate California’s concern. It would not lead to the kind of change its proponents hope for -- and it would cause a deep wound to our retirement funds and government programs when we can least afford it.

The bill, scheduled to be considered in committee today, would prohibit the state’s public employees’ retirement system, or CalPERS, and teachers’ retirement system, or CalSTRS -- the two largest public pension funds in the U.S. -- from investing in private equity investment partnerships that do business with selected “sovereign wealth funds.” Sovereign wealth funds are investment funds owned by foreign governments.

AB 1967 would require CalPERS and CalSTRS to impose detailed and complex requirements on California investment officials to evaluate and monitor nations affiliated with an SWF and its compliance with half a dozen treaties related to human rights. The people administering our pension funds would essentially be required to become experts on human rights treaties.

I oppose this legislation for a number of reasons. Chiefly, this measure is unlike the legislation I signed with respect to Sudan and Iran. Those measures barred investment in entire countries. AB 1967 instead addresses investment into a relatively small class of investment vehicles. It does not send the same powerful signal to the world, would do little to address human rights and would impose a costly burden on California.

What’s more, if anyone thinks this bill will inhibit the ability of questionable sovereign wealth funds to invest, they are fooling themselves. Any sovereign wealth funds covered by this legislation would still be able to invest in the multitrillion-dollar public stock and bond markets around the world. They could also continue to invest in private equity funds that decline investment from CalPERS and CalSTRS as the result of this legislation. The investment possibilities that would still exist for these sovereign wealth funds would dwarf the size of anything addressed by this bill, so the bill won’t have the leverage it aims for.

Additionally, I oppose this manner of addressing human rights concerns because targeting an investment class like private equity ignores the dramatic changes that have taken place in the marketplace. The reality is that the private equity partnerships potentially affected by this bill own and provide capital to companies employing thousands of Californians. Many successful California businesses now flourish with private equity support, which represents an important economic engine for jobs and the economy. Steps that harm that growth -- steps that would bar California from working with these private equity companies in this economic slowdown -- are counterproductive.

This bill would also involve risk to our state services. CalPERS estimates that this legislation would cause it to forgo $12 billion in returns over the next 10 years. CalSTRS says it could lose up to $5 billion over five years. AB 1967 targets what has been the highest-performing component of their investment portfolios. At a time when the housing market and stock markets have slumped, our pension systems already face the prospect of billions of dollars of unfunded liabilities. If those are not met through investment earnings, they must be covered by cutting other government services, such as public safety, health and human services and education.

International human rights treaties ought to be dealt with by professional diplomats and the United Nations, with guidance from human rights organizations, not by California investment professionals.

California has a long history of socially responsible investing, going back to its divestment in firms that did business with the apartheid regime in South Africa. Our public employees’ and teachers’ retirement funds have more than $400 billion in assets, so when we act on principle in ways the world respects, markets and nations tend to listen. But there is an effective way and an ineffective way to wield influence. The measure now before the Legislature would cause more problems than it purports to solve.