The Misleading Arguments of Those Who Fight Against Pension Reform

Weakening pensions is a choice, not an imperative. The crisis is political, not actuarial.

– Susan Greenbaum, guest editorial, Al Jazeera America, October 20, 2014

With this thesis highlighted, Greenbaum, a retired professor of anthropology at the University of South Florida, has just published a guest editorial that provides in one place a useful example of the distortions, demonizing and inversions of logic used by those who fight against pension reform. To understand why public employees, and their union leadership, remain sincere in their delusions regarding pensions, Greenbaum’s missive may serve as Exhibit A. Because she has joined a chorus that is funded not only by the billions that are spent by public employee unions on political and educational propaganda each year, but also funded by elements of those same Wall Street financial interests they routinely deride.

Let’s examine some of these misleading arguments and tactics, in no particular order:

(1) Identify key reformers, demonize them, then accuse anyone who advocates reform of being their puppets. Greenbaum identifies a lot of “demons,” i.e., opponents, who have been the victims of character assassination for years: John Arnold, a “hedge fund billionaire,” Charles and David Koch, the “conservative billionaire brothers,” and, of course “Wall Street [whose] shenanigans, not sound financial knowledge, posed the real threat to the solvency of these funds.” The fallacy here, notwithstanding the vicious and unfounded attacks that have tainted these individuals, is that whether or not pensions are financially sustainable or equitable to taxpayers has nothing to do with who some of the reformers are. And what about liberal democrats who advocate pension reform, such as San Jose mayor Chuck Reed, Chicago mayor Rahm Emanuel, former Rhode Island treasurer and gubernatorial candidate Gina Raimondo, and countless others? Are they all merely puppets? Absurd.

(2)  Assume if someone advocates pension reform, they must also want to dismantle Social Security. While there are plenty of pension reformers who have a libertarian aversion to “entitlements” such as Social Security, it is wrong to suggest all reformers feel that way. Social Security is financially sustainable because it has built in mechanisms to maintain solvency – benefits can be adjusted downwards, contributions can be adjusted upwards, the ceiling can be raised, the age of eligibility can be increased, and additional means testing can be imposed. If pensions were adjustable in this manner, so public sector workers might live according to the same rules that private sector workers do, there would not be a financial crisis facing pensions. There is no inherent connection between wanting to reform public sector pensions and wanting to eliminate Social Security. It is a red herring.

(3)  ”Public sector pension plans would be financially healthy if they had not been invested in risky derivatives, especially mortgages.” This is a clever inversion of logic. Because if pension funds had not been riding the economic bubble, making risky investments, heedless of historical norms, then public employee unions would never have been mislead by these fund managers to demand and get unsustainable enhancements – usually granted retroactively – to their pension benefit formulas. The precarious solvency of pension funds today is entirely dependent on asset bubbles. Most of these funds still have significant positions in private equity investments, which are opaque and highly volatile, and despite recent moves by some major pension funds to vacate hedge fund investments, they still comprise significant portions of pension fund portfolios. What Greenbaum either doesn’t understand or willfully ignores is a crucial fact: if pension funds did not make risky investments, they would have to bring their rate-of-return projections down to earth, and their supposed solvency would vaporize overnight.

(4)  ”Weakening pensions is a choice, not an imperative. The crisis is political, not actuarial.”This really depends on how you define “weakening.” If you weaken the benefits, you strengthen the solvency. The fundamental contradiction in Greenbaum’s logic is simple: If you don’t want pension funds to be entities whose actions are just like those firms located on the proverbial, parasitic “Wall Street,” then they have to make conservative, low risk investments. But if you make low risk investments, you blow up the funds unless you also “weaken” the benefit formulas.

To drive this point home with irrefutable calculations, refer to a recent California Policy Center study “Estimating America’s Total Unfunded State and Local Government Pension Liability,” where the impact of making lower risk investments that yield lower rates of return is calculated. If, for example, state and local public employee pension funds in the United States were to lower their rate-of-return to a decidedly non-”Wall Street,” low-risk rate of return of 4.33% (the July 2014 Citibank Pension Liability Index Rate), and invest their $3.6 trillion in assets accordingly, their aggregate unfunded liability would triple from today’s estimated $1.26 trillion to $3.79 trillion. The required annual contribution (normal plus unfunded) would rise from today’s $186 billion to $586 billion. The alternative? Lower benefits.

Those who fight against pension reform willfully ignore additional key points. They continue to claim public sector pension benefits average only around $25,000 per year, ignoring the fact that pension benefits for people who spent 30 years or more earning a pension, i.e., full career retirees, currently earn pensions that average well over $60,000 per year. Public safety unions still spread the falsehood that their retirees die prematurely, when, for example, CalPERS own actuarial data proves that even firefighters retire today with a life-expectancy virtually identical to the general population.

Propagandists who oppose urgently needed reform should recognize that pension reform is bipartisan, it is a financial imperative, and it is a moral imperative. They need to recognize that the sooner defined benefits are adjusted downwards, the less severe these adjustments are going to be. They need to understand that for many reformers, converting everyone to individual 401K plans is a last resort being forced on them by political, legal and financial realities, not an ulterior motive. They need to stop demonizing their opponents, and they need to stop stereotyping every critic of pensions as people who want to destroy retirement security, including Social Security, for ordinary Americans. And if they wish to defend Social Security, then they should also be willing to apply to pension formulas the tools built into Social Security – including its progressive formulas whereby highly compensated workers receive proportionally less in retirement than low income workers. Ideally, they should support requiring all public workers to participate in Social Security, so that all Americans earn – at least to the extent it is taxpayer funded – retirement entitlements according to the same set of formulas and incentives.

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Ed Ring is the executive director of the California Policy Center

This article originally appeared on the CPC website UnionWatch.org.

City of Stanton Proposes Higher Taxes Instead of Cutting Pay and Benefits

On November 4th, voters in Stanton, California, will be asked to vote on a 1 percent sales tax increase, which if approved will raise their sales tax to 9 percent – the highest in Orange County. Nestled in the heart of Orange County, tiny Stanton, a city of barely three square miles in size with a population in 2012 of 38,915 residents, is an unlikely candidate for the spotlight, when California’s local ballots are about to be inundated with over 140 local tax increases affecting many cities and counties that are ten times bigger. But Stanton is ground zero in a battle over how to manage municipal budget deficits, because if their voters approve this tax increase, cities throughout Orange County will follow suit.

We’re not talking small potatoes here. Stanton currently only retains 1 percent (one-eighth) of the 8 percent sales tax they currently collect. According to Stanton’s Consolidated Annual Financial Report for the fiscal year ended 6-30-2013 (page 9), their total sales tax revenue for that year was $3,683,199. If they increase their sales tax rate from 8 percent to 9.0 percent, they should double the amount of sales tax collections retained by the city. A spokesperson for the city of Stanton confirmed they project the new sales tax will add $3.1 million to their projected annual sales tax revenues. How does that compare to their spending?

According to Stanton’s “Measure GG,” the city “now faces a $1.8 million structural budget deficit.” This means the sales tax increase is expected to eliminate their budget deficit with $1.3 million left over. But if you evaluate Stanton’s expenditures, there is an alternative to new taxes. How does the city spend most of their money?

To answer this, again, look no further than the “Whereas” section of Measure GG. The third “Whereas” states “public safety is a top priority in Stanton and represents over 70 percent of the City’s General Fund budget, and without a local funding source the City will be forced to significantly cut public safety services.”

It’s quite clear that Stanton has already cut everything else. Based on information reported to the California State Controller’s Office, in 2012, the City of Stanton had 26 full-time non-safety personnel. Their average base pay was $74,146 per year, with negligible overtime, and “lump sum” payments averaging $4,700 per year, mostly to management. The lowest full-time regular rate of base pay was $42,359 for an administrative clerk. When you pile on the employer payments for retirement health care (average per year $8,691) and for their 2 percent at 55 pensions (average per year $15,693), the total pay and benefits for Stanton’s 26 non-safety employees in 2012 averaged $104,990. Nice work if you can get it. But it represents less than 18 percent of Stanton’s estimated direct personnel costs.

Finding information as to just how much Stanton pays for police and fire protection is not easy, but a reasonably accurate estimate is possible. According to Stanton’s city website under “Fire Services, we learn “there are a total of 21 firefighters who serve the City of Stanton.” Under “Police Services,” we learn “the Sheriff’s Department provides 44 staff members to the City of Stanton.” If we make just one assumption – that the rates of pay earned by the sheriffs and firefighters assigned to Stanton are representative of the rates of pay earned by all Orange County sheriffs and firefighters, we can estimate how much Stanton incurs in direct personnel costs for public safety. Pay for Orange County sheriffs can be found using 2012 data reported by Orange County to the CA State Controller. Pay for Orange County firefighters can be found from 2013 data recently obtained by the California Policy Center directly from the Orange County Fire Authority. Here goes:

OC Public Safety

Based on the data and assumptions as noted, on average, Stanton’s 21 firefighters earn a direct pay and benefits package of $217,956 per year; Stanton’s 44 sheriffs earn an average direct pay and benefits package of $186,682 per year. The source data used for these calculations and others cited in this post can be downloaded here “Stanton_2014_Statistics.xlsx” and readers are invited to point out any errors in calculations or reasoning therein.

There are a lot of takeaways here. For example, if Stanton were to join with other Orange County cities who contract for their police and fire protection and negotiate a 14 percent decrease to the average total pay and benefits their police and firefighters earn, they would eliminate their structural deficit of $1.8 million – and their firefighters would still earn average pay plus benefits, after the reduction, of $187,285 per year, and their sheriffs would still earn average pay plus benefits, after the reduction, of $160,412 per year. The average household income in Stanton during 2012 was $48,146.

A final observation – CalPERS has announced a 50 percent increase in required annual pension contributions, to be phased in between now and 2017. If Orange County’s independent pension system follows suit, and there is no evidence their financial imperatives differ significantly from CalPERS, then Stanton’s annual required pension contributions will increase by $2.2 million per year – nearly all of that for public safety. So even if Measure GG passes, the projected surplus of $1.3 million will probably be more than offset by increased pension contributions. Expect more taxes, or start cutting pay and benefits.

It is always important to emphasize that public safety employees deserve to be paid a premium to compensate for the risks they take to protect the public. But Stanton’s citizens and elected officials, and their counterparts in cities throughout Orange County, will have to decide where to draw the line on that premium. Perhaps the facts should speak for themselves.

Ed Ring is the executive director of the California Policy Center.

 

 

2013 CalPERS Payouts Online at Transparent California

CalPERS financial struggles are draining state taxpayers. The ever-increasing contribution rates it demands from state and local governments have already bankrupted several cities. Even for more financially stable agencies, increased CalPERS contributions have crowded out other spending priorities or tax relief.

While discussions about unfunded liabilities and projected rates of return are necessary and important, the average member of the public is too busy to dive into the details.

That’s why the recent release of CalPERS’ 2013 base payouts, including retiree names, on TransparentCalifornia.com is so important.

For the first time, average Californians can quickly and easily see how much CalPERS paid out to retirees in 2013. The names and payouts are available here.

Even a casual glance at the data shows the root cause of CalPERS’ financial struggles: It’s paying tens of thousands of its government retirees pensions that dwarf what private-sector households make while working full-time.

The U.S. Census reports that the median household income in California is $61,400. This includes households where two adults are working full-time. The data on Transparent California though shows that the average 2013 pension for those who worked 30 years or more and received a full year’s pension was $64,448 for the year.

For those who retired in 2000 or later, the average pension was $68,403.

And whose taxes are going to increase to ensure that the retiree making over $64,400 a year receives a generous cost of living adjustment next year and every year thereafter? The working couple, despite making less in salary than the public servant receives in retirement. No wonder so many people have a hard time saving for their own retirement — they’re already subsidizing the retirement of California’s government employees.

Unfortunately, Social Security isn’t going to provide these private-sector families with equity. While the average 30-year government employee will collect an average payout of over $64,400, that’s more than twice the maximum Social Security benefit of $31,704 that a private sector retiree could receive after working for 35 years and retiring at the age of 66. In contrast, some government workers retire as early as 50.

These high pension payouts are actually understating the compensation received by CalPERS retirees. These payout amounts do not include health benefits received by retirees that are worth up to $18,000 a year.

Just a glance at the list of highest paid retirees shows why taxpayers should be so outraged.

Mark Bucher is the president of the California Policy Center.

Federal Judged Rules CalPERS Pensions Can Be Cut

A federal judge ruled yesterday that CalPERS pensions can be cut in bankruptcy like other debt. He rejected the argument that the giant system is an “arm of the state” with pensions protected by federal law and two state laws on contracts and liens.

U.S. Bankruptcy Judge Christopher Klein, who has called the issue of whether CalPERS pensions can be cut in bankruptcy a “festering sore,” delayed until Oct. 30 a ruling on whether Stockton can exit bankruptcy without cutting pensions.

Stockton does not want to cut pensions, arguing they are needed to be a competitive employer, particularly for police. The city reached agreements with three bond insurers owed $265 million, all labor unions, retirees and other major creditors.

But Stockton could not negotiate an agreement with a lone holdout, two Franklin bond funds owed $36 million, triggering a trial in May on the Stockton “plan of adjustment” to cut debt and emerge from the bankruptcy filed two years ago.

Franklin argues that an exit plan that provides full payment of the city’s “massive” pension liability, while paying Franklin a penny on the dollar, cannot be confirmed under the federal bankruptcy code requiring fair treatment of creditors.

Klein issued his CalPERS decision after receiving extensive written briefings from both sides he requested at the May trial. His lengthy oral ruling, covering the disputed legal points in detail, may be followed by a written decision.

“We have a plan that proposes not to adjust pensions,” Klein said. “I have concluded that pensions could be adjusted, at least the CalPERS contract could be adjusted, and by inference the pensions could be adjusted.”

 

A federal judge ruled in the Detroit bankruptcy last fall that pensions can be cut. CalPERS joined in the appeal, arguing that Detroit has a city-run plan and that CalPERS is an arm of the state whose operations are protected under federal bankruptcy law.

“We disagree with the judge’s opinion on the issue of pension impairment,” CalPERS said in a news release. “This ruling is not legally binding on any of the parties in the Stockton case or as precedent in any other bankruptcy proceeding and is unnecessary to the decision on confirmation of the City of Stockton’s plan of adjustment.

“CalPERS will reserve any further comment until such time as the court renders its final written decision. What’s important to keep in mind is what the City of Stockton stated in court today: that they can’t function as a city if their pensions are impaired.”

Matthew Jacobs, CalPERS general counsel, said in a separate news release: “The real precedent of today’s proceedings is that even if municipalities are allowed to impair pensions in the rare situation of bankruptcy, cities like Stockton can make the smart decision to protect the pension promises for their public employees.

“The city has made a choice to protect pensions for its public employees and find a reasonable path forward to a more fiscally sustainable future. This is the right decision. While we disagree with today’s ruling on pensions, we are hopeful that Judge Klein will approve Stockton’s plan. Providing great services to a city requires great employees and Stockton said today in court that it can’t function as a city if pensions are impaired.”

CalPERS has taken several steps, some going back decades, to avoid a ruling like the one Judge Klein made yesterday.

Vallejo officials said they considered cutting pensions in bankruptcy, but chose not to try after CalPERS threatened a lengthy and costly legal battle. Vallejo cut deals with all creditors, avoiding a rare trial as on Stockton’s plan to “cram down” debt.

The Vallejo bankruptcy prompted public employee unions to back legislation requiring cities to get permission from a state panel to file bankruptcy. Some union officials said the threat of “pulling a Vallejo” could affect labor contract bargaining.

The bill, AB 506 in 2011, was altered to require an attempt in neutral mediation to reach an agreement with creditors before filing bankruptcy. Stockton failed to get an agreement during a 90-day mediation before filing for bankruptcy on June 26, 2012.

A month later San Bernardino made an emergency filing for bankruptcy without first trying mediation. Then San Bernardino, saying it was in danger of not making payroll, took an unprecedented step: skipping payments to CalPERS for a year.

The failure to make payments gave the California Public Employees Retirement System grounds to terminate its contract with the city, probably triggering a deep cut in pensions for San Bernardino current workers and retirees.

Last June San Bernardino announced an undisclosed agreement with CalPERS, reached in closed-door mediation, to pay the $13.5 million in skipped payments, plus several million more in penalties and interest.

San Bernardino is still struggling to reach agreements with labor unions, receiving court approval to modify a firefighter contract. City officials have said they do not expect to have a debt-cutting plan of adjustment until early next year or later.

In the Stockton bankruptcy, Judge Klein said during the trial in May that one of his options was ruling on whether CalPERS pensions could be cut without necessarily finding that Stockton pensions should be cut.

Part of his analysis yesterday that CalPERS pensions are not state “governmental or political powers” protected under federal bankruptcy law is that while state workers are in CalPERS by statute, cities choose to join CalPERS.

Klein said California cities have the option of forming their own pension systems, joining a county pension system, hiring a private pension provider or withdrawing from CalPERS, if they can afford to do so.

He concluded that benefits not prescribed by state law are not “governmental or political” powers protected by the federal bankruptcy law, but instead are unprotected “business powers.”

Klein said a CalPERS-sponsored state law preventing cities from rejecting their CalPERS contracts in bankruptcy is “flat-out invalid” under the constitutional “supremacy clause” giving federal law priority over state law.

The judge said another CalPERS-sponsored state law that gives CalPERS a lien on all city assets, except wages, when they declare insolvency is an invalid attempt by the state Legislature to “edit” the federal bankruptcy law.

Stockton argues that its employees and retirees have a fair share of the bankruptcy burden with pay cuts, workforce reductions and the elimination of retiree health care, a $545 million long-term debt replaced with a $5 million lump sum.

Klein’s ruling on Stockton may hinge on the city’s decision to place Franklin in the same class of debtors as retirees, who voted to accept the big cut in health care with the promise that their pensions would not be cut.

The low payment to Franklin is similar to the retiree health care cut. Franklin argues that it was “punished” for rejecting a city offer in closed-door mediation and unfairly placed in the debtor class to be “swamped” by the retiree approval of their health care cut.

The city argues that Franklin is properly in the class because most of its debt is unsecured. After the judge ruled that Franklin’s collateral (two golf courses and a park) were valued at $4 million, Stockton amended its plan to pay that amount.

But Franklin wants payment for the remaining $32 million of unsecured debt.

This article was originally published on Calpensions.com

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. 

 

Palo Alto’s Proposed New Pension Tax – Oops, Hotel Tax

Fungible – definition – “able to replace or be replaced by another identical item; mutually interchangeable.”

On November 4th, Palo Alto voters will be asked to approve Measure B, with only a simple majority required for passage. According to a summary compiled by the California Taxpayers Association, “2014 Local Elections,”Measure B “increases the city hotel/motel tax by 2 percent and extends the tax to apply to online bookings, to fund general city services.”

According to an article in the Silicon Valley Business Journal entitled “Palo Alto 2 percent hotel tax hike headed for November ballot,” “About $4.6 million would be generated annually through a combination of the potential tax increase and funds generated by several new hotels slated to open in the city.”

Analysis of raw data downloaded from the California State Controller’s website, and available for review on the spreadsheet produced by the California Policy Center “Palo_Alto_2012_Stats.xlxs,” the total employer pension contribution made by the city of Palo Alto to CalPERS in 2012 was $20.7 million. That includes $1.9 million of pension contributions that are supposed to be made by employees via paycheck withholding, but which the city helpfully pays for them. On the spreadsheet ref. tab “Palo Alto Payroll SCO 2012” column O, rows 2-12, “Employees Retirement Cost Covered” [by employer].

As documented here, and here, Palo Alto, like all CalPERS participants, will be required to increase their pension contribution by 50 percent between now and 2017, i.e., by around $9 million per year.

The hotel tax, if passed, will cover less than half of Palo Alto’s imminent contribution increases to CalPERS. Expect more tax increases, and fewer city services, or…

Palo Alto, like Watsonville, and nearly every other local entity that is asking voters to increase taxes this November, needs new taxes to help comply with the incessant, irresistible, escalating, insatiable demands of CalPERS. They can say the money is for anything they want. But money is fungible.

As Carl DeMaio, former San Diego council member and current congressional candidate, once famously put it, framing policy options as either involving higher taxes or fewer services is a “false choice.” The third rail of California politics, still deadly to any politician, state or local, who moves beyond rhetoric to action, is lower compensation and pensions. But it is an option. One more market downturn, and it will magically morph from an option to an imperative.

Here’s a summary of Palo Alto’s city worker average compensation:
–  Police – Base pay plus overtime $116,401, benefits incl. pension, $48,075, total $164,476.
–  Fire – Base pay plus overtime $132,011, benefits incl. pension, $49,326, total $181,337.
–  Other – Base pay plus overtime $90,306, benefits incl. pension, $36,140, total $126,446.

From the city website, here are highlights from Palo Alto’s “salaries and benefits:”
–  Fully paid employee and dependent dental and vision plan.
–  Fully paid life and disability insurance equal to annual salary and long term disability plan (not included in State Controller data).
–  Two to five weeks vacation, 12 holidays, and 12 paid sick days.
–  90 percent paid employee and dependent medical plan.

From data obtained by the California Policy Center’s Transparent California project, here are the average pension benefits for city of Palo Alto retirees since 2000 (i.e., since benefit formulas were enhanced):
–  For 30+ years of service, $91,348 per year.
–  For 25-30 years of service, $75,437 per year.
–  For 20-25 years of service, $53,946 per year.

To put this in perspective, while veteran employees of the city of Palo Alto are paying for 10 percent of their annual health care premiums, middle aged married couples working as private sector independent contractors with base incomes comparable to the average non-safety Palo Alto city worker are paying household premiums – either to individual health insurers or on the exchanges – including deductibles, of approximately $30,000 per year. Thirty thousand dollars. While their taxes then pay for 90 percent of these same premiums as they apply to their public servants.

To further put this in perspective, while someone working for the city of Palo Alto may retire after 30 years work with a pension that averages $91,348 per year, an independent contractor with comparable annual earnings will contribute 12.4 percent of their gross earnings to Social Security – more than virtually anyone in local government contributes to their pensions via withholding – in return for a projected Social Security benefit of around $25,000 per year beginning after 40+ years work. Yet their taxes are being increased to maintain these pensions for their public servants.

In Palo Alto, and in general throughout the Silicon Valley, the wealthy elites condone the public sector union greed that has lead to this abominable inequity. They are so rich they consider it churlish to question levels of compensation that to them, seem such a pittance. In turn, because their excessive compensation effectively exempts them from its consequences, public employees and their unions support the misanthropic policies of this elite – artificial scarcity in the name of environmentalism; causing higher prices for housing, land, energy and water.

The solution to the challenges of social equity is not higher taxes to benefit government workers. The solution is to lower the cost of living for everyone through resource development and capitalist competition. To do this, government workers and their unions will have to make common cause with ordinary private sector workers, instead of with the wealthy elites and their political cronies who reside in an insular and privileged world, filled with utopian visions and plans for everyone.

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Ed Ring is the executive director of the California Policy Center.

Pension funds feel heat on climate change issue

This piece was originally published on Calpensions.com:

CalPERS signed a United Nations pledge in Montreal last week to measure the “carbon footprint” of its $296 billion investment portfolio, with the goal of reporting the results before a UN climate change conference in Paris late next year.

CalSTRS announced in response to a UN climate summit in New York last week that its investments in “clean energy and technology,” now valued at $1.4 billion, will be increased to $3.7 billion over the next five years.

UC Regents voted on Sept. 17 to reject a student-led call for divesting fossil fuels from a $91 billion investment portfolio (three-quarters in retirement funds), but did not rule out using divestment later after developing a new investment framework.

Pension funds have used their investment clout for targeted social goals, notably divestments or stock boycotts of apartheid South Africa and tobacco. Curbing the use of carbon-emitting fossil fuels said to be disastrously warning the climate is a much larger global undertaking.

“We call on other investors to join us in assessing the climate risk in their investment portfolios and using that knowledge and insight in their investment decision,” Priya Mathur, the CalPERS board vice president, said in the carbon pledge news release.

President Obama called for more worldwide action to reduce climate change as he spoke at the UN climate summit in New York last week. “Nobody can sit on the sidelines on this issue,” he said.

Consultants announced last week that 180 institutions (pensions, religious, philanthropic, local governments and others) have pledged to divest fossil fuel holdings worth $50 billion, including the $860 million Rockefeller fund, founded on an oil fortune.

A coalition of groups announced that nearly 350 global institutional investors, managing $24 trillion, called on government leaders to phase out fossil fuel subsidies and provide “carbon pricing,” which would help redirect investments to clean energy.

Carbon pricing, charging a tax or fee for emitting a ton of carbon dioxide, is favored by many economists as a workable way to reduce global warming. The concept has the support of CalPERS and CalSTRS.

“If a meaningful price on carbon emissions is established, CalSTRS believes its clean energy and low-carbon investment could grow to almost $9.5 billion, nearly seven times the current level of investment,” Chris Ailman, CalSTRS chief investment officer, said in the climatesummit news release.

California has a limited form of carbon pricing with a “cap-and-trade” program for oil refineries, power plants and large factories. As a cap on greenhouse gases tightens, industries must cut their emissions or buy an “allowance” from other firms or the state.

Calling for action on climate change, demonstrators marched through Manhattan last week at the climate summit, as many as 400,000 in some estimates. But there also are climate change skeptics. Summit news reports showed contrasting views of how the issue is viewed in the political arena.

National Public Radio reported that Chris Lehane, a Democratic strategist for a committee putting money from billionaire Tom Steyer into a half-dozen close races, said, “In many of these campaigns, climate is being used as a wedge issue, focused on Republicans.”

Fox News reported that Dan Simmons of the Institute for Energy Research said a recent Gallup poll found 41 percent think the economy is America’s biggest problem, while only 1 percent cited the environment and pollution. “Limiting greenhouse gas is not something that the majority of Americans consider one of the most pressing issues of our time,” he said.

CalPERS and CalSTRS have moved away from divestment, troubled by the cost, no hard evidence of results and legislative meddling. They prefer to use their status as shareholders for “constructive engagement” with companies to push for change.

California Public Employees Retirement System consultants estimated that a 1987 law requiring divestment of South African-connected firms cost CalPERS $529 million, and not being able to invest that amount boosted the total to $1.86 billion by 2006.

South African divestment cost the California State Teachers Retirement System $600 million to $750 million, the consultants said. Similar costs resulted when CalPERS and CalSTRS voluntarily divested tobacco stock.

The two big pension funds clashed with the Legislature over a 2007 law requiring divestment of foreign companies doing defense or energy business in Iran. Labor-backed Proposition 162 in 1992 gives public pension systems sole control of their funds.

Now climate change is creating a new wave of pressure. Last July the mayors of Oakland, Berkeley and Richmond published an article in the Sacramento Bee urging CalPERS to join their cities and San Francisco and Santa Monica in fossil fuel divestment.

The mayors said that if global warming is to be limited to 2 degrees Celsius, believed to be the best chance of avoiding runaway climate disruption, no more than a third of proven fossil fuel reserves can be consumed prior to 2050.

If governments act to control climate change, the mayors said, the companies will have to leave most of their reserves in the ground, even though they continue to spend hundreds of billions exploring for new reserves.

“A growing ‘carbon bubble’ — overvalued companies, wasted capital and stranded assets — poses a huge risk to investments in fossil fuels,” the mayors said.

When the CalSTRS board was urged to divest fossil fuels last June, similar arguments were made by Deborah Silvey and Jane Vosburg, representing teachers and retirees with the 350 Bay Area Divestment Campaign.

The international grassroots campaign founded by author Bill McKibben takes its name from the view of some scientists that the current carbon dioxide in the atmosphere, 392 parts per million, must be reduced to 350 ppm to avoid a climate tipping point.

After a 10-campus student group, “Fossil Free UC,” urged divestment, UC Regents appointed a task force on sustainable investing. The regents adopted the task force recommendations during a well-attended meeting Sept. 17.

The goal is to develop a framework for sustainable UC investing by next July that includes ESG (environmental, social and governance) factors. An evaluation of ESG strategies is to include “whether to use divestment.”

Regent Bonnie Reiss said that making the case for divestment should be an “uphill battle” because of fiduciary obligations. Reiss and Regent Gavin Newsom suggested a look at coal holdings, which Stanford University plans to divest.

The University of California also will “allocate $1 billion over a period of five years to solutions-oriented investments such as renewable power and fuels, energy efficiency, and/or sustainable food and agriculture.”

Meanwhile, 350.org groups throughout California have been working to get the support of CalPERS and CalSTRS members and unions and may soon launch a formal divestment campaign, “Fossil Free California.”

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.