CalSTRS Rejects ‘Restrictive’ P.E. Bill

Mar 18 2008 | 12:14pm ET

The California State Teachers' Retirement System this month voted to oppose a bill that its board said would restrict its investment authority and have a negative financial impact on its investment portfolio.

The proposed state legislation—California Assembly Bill 1967—targets sovereign wealth funds and would prohibit CalSTRS and the California Public Employees Retirement System from making new investments or renewing current ones with private equity firms wholly or partially owned by a sovereign wealth fund affiliated with a country with a poor record on human rights. The bill would also 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.

According to CalSTRS, private equity was the best performing asset class in its portfolio in 2007, posting a 33% return. The $166.5 billion fund said the bill would increase costs to both its portfolio and to its operations with potential lost investment revenue estimated to 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 CEO. "This bill ignores the realities of the global financial marketplace where sovereign wealth funds are passive investors in a growing number of the most attractive investment opportunities in the world.”

He added that because of the global investment trend for blended public and private ownership structures, the bill could also apply to real estate and fixed income investment vehicles, which would further reduce investment income in the future as CalSTRS faces a $19.6 billion shortfall in long-term benefit liabilities.

“Legislation that cuts off investment opportunities will make it tougher for CalSTRS to close its long-term funding gap,” Ehnes said. “The state is ultimately responsible for funding pensions. Now is not the time to hamstring our investment ability as the state struggles with a budget deficit.”

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