California is known for a lot of things: our beautiful coasts, dynamic economy and thriving cultural diversity. But, one issue in particular consistently ranks our state near the bottom of every national poll and plagues our state by slowing business development: underfunded pensions.
The connection between a pension shortfall and economic development, especially for diverse communities, may not be immediately evident, but scratch beyond the surface, and it becomes clear the repercussions these state-based financial problems have on economic growth.
Though in recent years our state has carefully taken steps to address what looked to be an unsurmountable budget crisis through the leadership of Gov. Jerry Brown, we are not in the clear yet. Our state most recently scored among the lowest in the country on a “fiscal stress test,” highlighting the precarious financial equilibrium of our state. If our state is not able to cover budgetary needs, including funding pensions, then the government is forced to allocate funds from elsewhere to cover pitfalls.
This financial strain can manifest in any number of ways: stalled construction projects, reduced public school funding, tighter local budgets, etc. Oftentimes, these shortfalls disproportionately affect lower-income and minority areas.
Given the delicate financial dealings, the question becomes simple: What are the best investments for our state to help ensure pension liabilities do not have to be covered by other state funds?
According to the California State Teachers’ Retirement System’s recently released risk-mitigation strategies, the answer can be found in investing large-scale funds in a diverse number of high-yielding, low-risk investments. For example, low-risk hedge funds, real-estate development and more traditional investments, like energy, would help provide the state dependable investments. These strategies try to protect the state from any economic downturn.
Especially important to California is the way the state’s pensions invest in local communities. Since 2011, CalSTRS and the California Public Employees’ Retirment System have committed small investments back into the community by investing directly in minority- and women-owned businesses. Though these investments are small in the grand scheme of California’s pensions, they mean a lot to local businesses and diverse communities looking for funding to grow and develop. If some of the larger revenue sources are not yielding high results, or if the state cannot find the funds to cover shortcomings, the state is less likely to invest in these businesses.
Investing in the community can only be done when larger investments are yielding high results. Unfortunately, there are some in our state who want to politicize pensions, making our investments into political statements rather than based on fiduciary responsibilities.
Most recently, our state Legislature acted to divest the state from coal. In response to the measure, Chris Ailmain, CalSTRS’ chief investment officer, expressed hesitation at the measure, “I’ve been involved in five divestments for our fund. All five of them, we’ve lost money, and all five of them have not brought about social change.”
And taking place in Los Angeles in mid-May, the same activists who championed divestment from coal are planning a disturbing rally to shut down a local natural gas facility, a major source of local jobs. It’s clear the individuals promoting divestment do not have the best interest of our state in mind.
Diverse communities across the state are looking for new ways to grow and develop, but budget shortfalls and underfunded pensions can be detrimental to these communities, which makes our state’s delicate financial situation all that more worrisome for businesses owners across the state. One fixable solution is to ensure our state investments are made based on financial responsibilities, rather than political agendas.
Reuben Franco is CEO of the Orange County Hispanic Chamber of Commerce.
