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Dunn & Done

By Lucy Dunn

Dunn & Done
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Can you see clearly now?

This blog is written by Lucy Dunn and features special guest co-author Dr. Wallace Walrod, vice president of Economic Development & Research for the Orange County Business Council.

I serve on a local business advisory committee to the South Coast Air Quality Management District – folks charged with clearing the air for better health and visibility.

They’ve done a good job over the last 40 years. The air quality of Southern California has gotten much better even with major population growth and economic development.

But there is always one more rule to impose, one more particulate to regulate, one more greenhouse gas to consider – it’s government’s job to do that – and one more business fails to grow or simply folds under the weight and cost of compliance. Not just air quality but add the tens of thousands of regulations, fees and taxes coming out of numerous local, state and federal agencies today. And millions of folks out of work, a stagnant economy in California and a bottom ranking on any objective list as the nation’s “worst place to do business.”

As a result, California suffers continuing annual $27 billion dollar budget shortfalls, government employees’ pensions at risk of funding shortfalls, ballot measures, tax-increases/extensions.

You get the picture.

So I asked one government employee the other day, “Do you know where your CalPERS or CalSTRS pension money is being invested?”

“No, never thought about it,” he said.

“Stocks, bonds, mutual funds, real estate, investments in BUSINESS,” said I. “CalPERS and CalSTRS are invested in every type of business – from oil to medical to tech to manufacturing, small and large. And every time a new regulation or tax is passed impeding business growth, you inflict another wound to your own personal wealth creation, your own pension security.”

Lost in translation is the fact that CalPERS is one of the largest investors in stocks of California companies and other California investment vehicles. As of Dec. 31, 2010, approximately $23.2 billion, or 10.3 percent of CalPERS total assets, are invested in California. Then, $7.5 billion is invested in the stocks of California companies, $5.8 billion in fixed income, $5.4 in AIM (Alternative Investment Management such as private equity and venture capital) and $4.5 billion in California real estate.

For example, from the CalPERS website: “The CalPERS Nationwide Single Family Housing Program and Member Home Loan Program, and our private equity investments through limited partnerships that are either headquartered in the state or have charters to invest in California, are just a few examples of programs designed to provide superior risk-adjusted returns for the system and invigorating support for the state’s economy.” (Emphasis added.)

However, due to this state’s miserable business climate and regulatory environment, CalPERS investments will not generate “superior returns” in its California equity or real estate investments. CalPERS recently debated whether to decrease further its projections. While CalPERS unfortunately does not break out returns on its California portfolio, the likelihood is great that these investments are producing substandard returns, leading to an overall underperformance and making the pension gap larger by the day.

A significant part of the solution could simply be fixing California’s overall regulatory environment and business climate issues, therefore paving the way to increased CalPERS and CalSTRS returns over the long term.

A first step would be to perform a study on the actual investment return/performance of CalPERS and CalSTRS California investments, and see where opportunities are for improving that performance in our own backyard.

When business thrives, it pays taxes, hires folks who pay taxes and government receives legitimate funding for its programs, public employees and pension benefits. Everyone wins. California’s self-inflicting wounds must stop. To grow business and directly benefit government employees and their pension investments, cut those regulations, stop those crazy pieces of legislation, limit litigation and incentivize jobs creation for a thriving economy.

Clearing the air in this state could take on a whole new meaning. How refreshing.

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