The LA Times today is running a story about a group
that wants the UC Regents to divest their funds from “fossil fuels.” [If you listen to the recordings of past
Regents meetings on this blog, you can hear the group's representatives speak at recent public
comment sessions.] We have a student
regent-elect who has pushed in the past to divest from Israel. When a school shooting incident occurred in
Connecticut not so long ago, UC divested from gun companies. Court decisions regarding public disclosure
of info from UC investments in private equity funds have made it difficult for
UC to invest in such funds. [No such
disclosure constraints are imposed on private universities.] On a somewhat related issue, Calpensions.com
is running a story about CalPERS which includes some info on an initiative
passed in 1992: “But investments made for
social goals can conflict with the CalPERS duty to give member benefits top
priority. Proposition 162 in 1992 also gave CalPERS sole control of its funds,
a safeguard against legislative raids or meddling.”
There is a cautionary note here which can be summed up in a
number: 7.5%. That is the rate of return
currently assumed over the long-term for annualized earnings in the UC pension
fund. If the fund turns out to earn less
than that – and there is no guarantee that it will earn 7.5%/annum over the
long term - the unfunded liability will in fact be higher than currently
estimated and ultimately there will be a tapping of the UC budget in some way
to pay for it. There is also a simple
fact. While there is no guarantee UC
will be able to earn 7.5%, there is no way it will earn 7.5% in a normal
economy with a normal inflation rate (if we ever get back to that) by investing
only in U.S. Treasury securities. That
is, there is a virtual guarantee we won’t get the needed 7.5% without holding stocks over the long run. The current yield on a conventional 30-year
Treasury bond is below 4%. [And maybe
some folks would object even to holding Treasuries because of this or that
federal policy.]
The most general rule of finance is to have a broad
portfolio which includes many different assets.
Yes, you can always find some period in which some stock or set of
stocks – which represent a practice or activity you don’t like – earned less
than some other. But any broad portfolio
is going to include some stocks of some firms somebody doesn’t like because of
something those firms do.
As has been pointed out many times in this blog, the UC
pension fund is not an old folks’ issue.
Retirees will get their pensions regardless of how pension investment is
managed. If you are a young faculty
member or other UC employee and plan to stay at UC for a long career, however,
the pension fund is not “other people’s money” that can be redirected away from
something somebody doesn’t like without cost to you and your colleagues or
co-workers. No, that doesn’t mean that
every investment decision UC has ever made was wise. But it does suggest that 7.5% is not just an
abstract accounting figure; anything that is done by the Regents in UC investing policy has to focus
on 7.5%.
The LA Times article is at: http://www.latimes.com/local/la-me-college-divest-20130826,0,4449441.story.
The CalPensions.com article is at: http://calpensions.com/2013/08/26/calpers-pushed-to-invest-through-minority-firms/.
There is an obvious attraction to other people’s money. The question is whether you are the other people:
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