The total bill: $10,330.37.
Since the mid 2000s, dozens of states have passed legislation requiring public pension funds to shed investments in companies working in Sudan as well as Iran, an increasingly hostile threat to global stability and U.S. national security. Most pension systems have reported fairly smooth transitions to what are sometimes described as “terror-free portfolios.” The Colorado Public Employees' Retirement system, for example, “not only met, but exceeded the schedule for divestment.”
In California, the narrative goes a bit differently. At the end of December, the California Public Employees' Retirement System (CalPERS) staff presented an estimate of what it spends annually “complying” with mandates to divest from companies in Sudan and Iran.
The total bill: $550,000.
CalPERS has a funny definition of “compliance.” It has not divested any stock nor honored the short “do not invest” list it released in 2006, complaining it would hurt the fund. In fact, CalPERS's board passed a policy in February 2009 stating that it would not divest from companies as the law demands, period. As CityBeat reported last year, CalPERS failed to disclose this decision to the state Legislature in its annual report.
CalPERS left a lot out of those reports—including a breakdown of exactly how much money it has invested in these corporations, a detail required under statute. Then-California attorney General Jerry Brown demanded a complete accounting and an Assembly committee grilled CalPERS leaders twice over its failure to divest. CalPERS argued that writing “engagement” letters to the companies was sufficient.
CalPERS's latest reports to the legislature, dated Dec. 31, 2010, indicate they have made little progress. As of Nov. 30, 2010, CalPERS had $23 million invested in two companies operating in Sudan which it says are immediately subject to divestment and $347 million invested in companies in Iran that also must be divested.
But CalPERS still hasn't divested, despite the $550,000 spent on “compliance.”
“If that's really true, they're incompetent,” says John Harrington, president of Harrington Investments, who has specialized in “socially responsible investing” for more than 30 years. “We're talking about a very sophisticated retirement system. It's ludicrous. I'd be embarrassed if a report came out telling that's how much I would be spending on a transition like this.”
However, not only were the figures inflated, but, also, much of the money was spent on finding ways to avoid divestment.
Approximately $425,000 of the estimate was for internal staff time. No new hires were made, no overtime paid out—CalPERS simply estimated how much time a staffer spent on the projects. For example, CalPERS Chief Investment Officer Joseph Dear spent 5 percent of his time working on Sudan-Iran divestment and 5 percent of his salary is $28,346. It's unlikely Dear would take the equivalent pay cut if the legislation were repealed.
The remaining $125,000 was paid out to three independent contractors (CalPERS could not provide a cost breakdown before CityBeat's deadline):
• RiskMetrics / MSCI was hired to screen investments for connections to Sudan and Iran. In 2009, the firm screwed up when it declared that CalPERS held $49 million in China Petroleum and Chemical Corporation, when the investment was actually in China Petrochemical Development Corporation, which has nothing to do with either nation.
Melany Grout, director of Conflict Risk Network (CRN), which screens companies for ties to Sudan and negotiates with companies on behalf of investors (including California State Teachers' Retirement System), questions the list CalPERS derived from RiskMetrics. The list seems incomplete and outdated compared with CRN's regularly updated “Sudan Company Report.” For one, she says, CalPERS lists Wartsila OYJ as one of the two companies subject to divestment; CRN recently removed Wartsila from its list.
What's more alarming, Grout says, is that CalPERS “concluded” its investigation into Sinopec Shanghai Petrochemical and determined it did not warrant divestment of $2.1 million in shares. Sinopec Shanghai is a subsidiary of China Petroleum & Chemical Corporation (also called Sinopec), which is prohibited under both the Sudan and Iran legislation, and virtually every other comparable pension system in the country includes Sinopec Shanghai on do-not-invest lists.
“Sinopec is one of the largest operators in Sudan,” says Grout, whose organization grew from the Sudan Divestment Task Force, whose lobbying efforts in California were recorded in the documentary Darfur Now. “In our reading of the California legislation, the definition of ‘company' extends to subsidiaries like Sinopec Shanghai Petrochemical.”
A spokesperson for RiskMetrics declined to comment for this story.
• Wilshire Consulting was contracted to estimate the impact of divestment on CalPERS's portfolio: between $6.9 million and $28 million in transaction costs and an annual impact between $155 million and $237 million in either direction. Experts in the field aren't buying Wilshire's analysis.
“Wilshire has been their apologist for years,” says Harrington, who promoted investment boycotts to combat Apartheid in the 1980s. “They were telling CalPERS what they wanted to hear on South Africa. They're paid to get CalPERS whatever they want, and if Wilshire is still their boys, they will continue to do that. These firms have no credibility with me.”
Mark Langerman, CEO of Terror Free Investing in Scottsdale, Ariz., goes one better.
“Have them call me and I'll do the transaction for a fraction of that,” Langerman tells CityBeat. “There are transaction costs that are going to be incurred. Those are nominal. They're always nominal…. It's done all day every day throughout the world. It's pretty simple and these guys need to wake up and do the right thing.”
A spokesperson for Wilshire declined to comment for this story.
• The final recipient of the funds was unnamed “external fiduciary counsel.” CalPERS says the firm advised the board that, based on Wilshire's estimates, divestment would be “inconsistent with the Board's constitutional fiduciary duties.”
Cliff Berg, a lobbyist for the Jewish Public Affairs Committee of California, which backed the Iran divestment legislation, questions whether CalPERS is acting in good faith.
“Rather than finding a way to make it work, they're hiding behind the ‘fiduciary duty' argument,” Berg says.
Berg says J-PAC will make this one of their priorities in 2011 and is skeptical of CalPERS's claim that it will reexamine its position on Iran, considering that the pool of companies working in Iran shrank in 2010.
“CalPERS's foot-dragging and failure to divest is inconsistent with the desires of the public, the state Legislature and the governor and is providing aid and comfort to a terrorist regime,” Berg says.