Californian funds told to invest in their own backyard

California Treasurer Bill Lockyer (pictured) sent his deputy Steve Coony to a recent CalPERS board meeting to tell the pension fund they needed to do more to invest in their own backyard. Coony shares his views with conexust1f.flywheelstaging.com on how public pension funds can play a greater role in boosting California’s ailing economy.

Calling for a “recreating of the mindset of our (pension funds’) investment teams”, California chief deputy treasurer Steve Coony said investment committees and federal, state and local governments should look at projects that provide both competitive investment returns but also boosted the state economy.

It was a message Coony took to the recent CalPERS’ board meeting where he represented State Treasurer Bill Lockyer. The treasurer sits on the board of CalPERS, California’s biggest public pension fund, and also the $141 billion CalSTRS fund.

Coony told the board that CaLPERS could do more than its current $17.1 billion worth of investment in the state, and said State politicians would soon look for more involvement from public pension funds to help fund key infrastructure and create jobs.

“It (CalPERS’ investments) isn’t particularly moving the needle in terms of California jobs,” Coony told conexust1f.flywheelstaging.com.

Coony said, while he welcomed the investment in California by its public pension funds, the funding levels included investments in big public companies headquartered in California.

These investments were part of normal equity investment activities and did not truly reflect the level of targeted California investment, Coony said.

He estimated that – if equity investments in large publicly listed California headquartered companies are stripped out the figures – CalPERS actually specifically directed about $2 billion of its funding last year to the state.

While the cash-strapped California Government is one of the first to look for help from its public pension funds, Coony predicted it would not be long before the federal government and other states examined the pension industry and its role in the US economy.

“The use and importance of pension fund assets in the economy and the expenditures of pensioners themselves as an important footprint in the economy, all these things will become part of a much larger national discussion that we have to have,” Coony said.

“California needs to lead on this issue but we are not going to be alone for very long as far as the United States is concerned.”

The Californian constitution enshrines the independence of public pension fund investment decisions, and Coony said any move to seek greater investment in the State from pension funds would be sought through a consultative process.

Noting that the overriding concern was still to secure returns for members, he said funds could develop a closer relationship with state and local governments to formulate both appropriate models for investing and a list of attractive projects.

“This would be by invitation-only and this is the only way it would work,” he said.

“The biggest asset the public pension funds have is their very talented investment staff who are used to working together when it makes sense. The question is whether this can be done with considerably more joint activity, target selection and commitment and that will have to be agreed by the public pension funds and their investment committees one by one , or not agreed to by some.”

Coony said more investment was needed in two areas: to provide capital to both government and small- to medium-businesses via bonds and infrastructure partnerships.

California treasury predicts that it will need to spend more than $500 billion by 2030 to meet its infrastructure needs, yet the California government faces a budget crisis of its own.

Coony says the State budget has taken a 20 per cent revenue hit on the back of the hard economic times.

Treasury estimates there is a $200 billion shortfall in its future infrastructure needs to cater for a projected population that is predicted to swell to 50 million people by 2030.

Despite Governor Jerry Brown slashing spending it is still likely he will need to hike taxes and cut even deeper to close a $10 billion budget deficit.

Adding to the malaise, California has the worst credit rating of any US state government, making it expensive to borrow for future infrastructure projects.

In his previous stint in the Governor’s mansion in the late 1970s, Brown cast an eye over pension funds and their capacity to stimulate jobs growth and Coony says pension funds should not be surprised if the governor should come knocking again.

California’s 85 public pension funds are responsible for investing more than $500 billion in assets.

“If we have a tool that includes intelligent investment or seed money, I have to believe he (Governor Brown) is going to talk to people in the state that have $500 billion worth of investment capability,” Coony said.

“Then you would have to think he is going to ask for the pension funds’ advice if not their direct involvement. I have no special knowledge or specific statement from the Governor but he would not leave as important a resource as the State and local pension funds out of the play.”

Coony called on the CalPERS’ investment committee to use its skills to formulate a potential model for infrastructure investments, saying the United States was yet to see a model that worked for both funds and government.

“Among the things we are asking CalPERS, as a very sophisticated investor and strategic thinker, is to help come up with ideas for the kinds of investments it would find attractive and figure out if we can match up some of their resources and that of other public pension funds in the United States,” he said.

He envisaged funds and the government looking to develop a list of potential investments within the state rather than funds agreeing to particular quotas.

“The simplest way but not the most productive way to think about this is in terms of allocating some percentage and this has been done in the past and just results in folks finding creative ways to meet a quota,” he said.

“The most important thing is to develop a queue of investments that meet a certain criteria and ought to be attractive to investment teams as well. I think they exist and I think we are not talking about a huge percentage of what they (Californian funds) do. We are simply adding this as an ingredient in what they do and making sure they have good projects to look at.”

Coony dismissed diversification concerns raised by some funds and said that public pension funds had a long way to go before they had such a concentration of funding in California that it would warrant a diversification risk.

“If we are talking about infrastructure or private equity, I think if you look at the actual sliver of investments in those areas from all the State and national public pension funds in the United States we would have to go a long way to worry about too much being spent here rather than someplace else,” he said.

CalPERS’ investment in California represents 8.5 per cent of its total portfolio. Of the 18.5 per cent of $400 million it invested in infrastructure was in California.

CalSTRS’ spokesman Ricardo Duran said the fund invested $19.9 billion (15.3 per cent of its portfolio) last year in California.

Duran said CalSTRS aimed to invest 2 per cent of its portfolio into rural and low socio-economic areas that struggle to attract capital.

In 2001, CalPERS also sought to direct more investment to similar capital-starved areas of the state, through launching its California Initiative and allocating $475 million to nine private equity funds. A second injection of $550 million was made to the initiative in 2006.