CalSTRS Board Rejects Law Barring Sovereign Wealth Investments

March 7, 2008 (PLANSPONSOR.com) - The California State Teachers' Retirement System (CalSTRS) trustees on Friday voted to oppose proposed state legislation that targets foreign government-controlled cash reserves called sovereign wealth funds.

In a press release CalSTRS said it is against California Assembly Bill 1967 due to its restriction to the board’s investment authority and significant negative financial impact to the investment portfolio. The proposed state legislation would:

  • Prohibit CalSTRS and the California Public Employees Retirement System (CalPERS) from new or renewed investments with private equity companies wholly or partially owned by a sovereign wealth fund affiliated with a country with a poor record on human rights, and
  • Require extensive research, evaluation and reporting by CalSTRS on foreign affairs before making a new investment in firms affiliated with sovereign wealth funds that are not prohibited by the bill.

“This bill would be a blow to the retirement security of teachers while doing nothing to ensure a better world,” said Dana Dillon, Teachers’ Retirement Board chair and teacher/librarian with the Weed Union Elementary School District, in the release. “We have a strong record of addressing these issues in our investment decisions.”

In 2006, to further reduce CalSTRS’ exposure to international crises, the system added a screen of 20 socio/geopolitical risks factors for managers to use when evaluating investment opportunities. In 2007, the trustees voted to support the Principles for Responsible Investment, an investor initiative in partnership with the United Nations Environment Program Finance Initiative and the United Nations Global Compact, according to the announcement.

The proposed bill targets private equity investments, which in 2007 was the best performing asset class in the CalSTRS portfolio, with a 33% return. The bill increases costs to both the portfolio and to CalSTRS’ operations. CalSTRS estimates the potential lost investment would be from $1.5 billion to $5.3 billion over five years.

“We can’t eliminate the portfolio’s best performers by banishing the top-tier private equity firms,” said Jack Ehnes, CalSTRS Chief Executive Officer, in the release.

Due to the global investment trend for blended public and private ownership structures, the legislation could also apply to real estate and fixed income investment vehicles, further reducing the system’s investment income in the future. CalSTRS faces a $19.6 billion funding shortfall.

“Legislation that cuts off investment opportunities will make it tougher for CalSTRS to close its long-term funding gap,” Ehnes said.

With concerns about a deepening global credit crisis unabated, major U.S. financial institutions have increasingly turned to sovereign wealth funds for capital infusions (See Wall Street Shores Up Finances With Overseas Capital ).

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