More on Pension Initiatives: All Kinds of Clever Ideas Out There

Yesterday, this blog featured some developments that might impede public pension ballot initiatives getting on the ballot that could potentially override the Regents’ action last December revamping the UC pension system. It only costs $200 to file initiatives.

For that modest sum, the filer gets an analysis from the Attorney General (including summary description and title) and a fiscal analysis from the Legislative Analyst. Even initiatives that have a snowball’s chance in Hell get the same treatment – which clearly costs the state a lot more than $200.

Here is a summary of snowball-type pension initiative that someone thought was a real clever idea. It requires state pension funds (including UC) to invest 85% of their assets in California companies. The Legislative Analyst’s summary (excerpts) is below:

…Increases Required California Investments of Pension Systems. This measure amends the State Constitution to require public pension or retirement systems to "invest and maintain at least 85 percent of the system's assets" in California-based businesses. The measure defines a California-based business to be one "in which at least 70 percent of its employees are employed within California." Public pension or retirement systems would be required to comply with this new requirement beginning January 1, 2016.

…While the measure retains the Constitution's current prudent person rule language, it is unclear that the investment standards required under this measure would meet modern fiduciary standards of prudence. This is because the measure would require a huge concentration of investments in one economic market—California—that is responsible for only about 3 percent of world economic output…

Likely Decline in Average Annual Pension System Returns. If this measure were approved and implemented, it most likely would result in a decline in average annual investment returns for the state's public pension or retirement systems. In the short term, the systems could incur additional transaction costs to divest themselves of non-California assets, as required by this measure. Over the longer term, California's public pension systems would be forced to forego potentially profitable and sound investments in many non-California-based companies. Instead, they would be required to invest in California-based companies in which they do not now choose to invest. Overall, these investments potentially could result in lower average annual investment returns for the systems. Moreover, since activities of these businesses would tend to be concentrated in the California economic market, overall public pension investment returns probably would become more volatile, moving sharply upward or downward with trends in the California economy. As described above, changes in assumed public pension system investment returns would affect required employer contributions. The changes in public pension investment returns resulting from this measure would tend to increase required state and local pension contributions—potentially by billions of dollars (in current dollars) per year…

Full summary at http://www.lao.ca.gov/ballot/2011/110493.pdf

The actual text of the initiative is at http://ag.ca.gov/cms_attachments/initiatives/pdfs/i951_11-0018_(investing_public_employees_retirement_in_california_businesses).pdf

Over the years, there have been lots of clever and innovative ideas floating around. Not all of them catch on, of course. It would be best if most of them went the way of the one below, gone and forgotten: