Investing in California's Fiscal Future
Matt Fong for Treasurer
California's public pension funds do not invest enough of their
portfolios in this state's economy. The Public Employees Retirement
System (CalPERS) and the State Teachers' Retirement System (STRS) invest
only 10 percent of their combined $120 billion portfolio in California's
business. Further, only a small percent of the fees paid by these funds
for investment advice and services is paid to California firms.
CalPERS and STRS have invested in two segments of the state's economy,
however, that have been the backbone of California's success; the
building industry and emerging businesses. Although CalPERS has invested
about $700 million in construction of California residential real estate,
this is less than one percent of the pension's investments. The STRS
fund has no such program. Further, only one percent of the portfolios
are invested in small to medium sized California businesses. These
businesses are the backbone of California's economy and form the breeding
ground for the leading edge ideas and products that have made our state
competitive in the worldwide marketplace.
I propose that we increase CalPERS and STRS portfolio holdings of
California investments. Expanding these funds' investment in residential
real estate construction and in small and emerging California businesses
will generate thousands of jobs for Californians. If we increase
portfolio investment by three percent in these two areas alone, over
250,000 intermediate and permanent California jobs will be created.
For example, an additional residential construction investment of 1.5
percent of the combined $120 billion CalPERS and STRS portfolio would
require an additional $1.8 billion commitment. The additional investment
will provide 27,000 more homes for Californians and over 200,000 new
California jobs. Although many of these will be temporary construction
jobs, it will create permanent jobs in the communities where these
investments are made. An additional 1.5 percent investment of the
combined portfolio in emerging, mezzanine, and maturing small businesses
will create at least 50,000 additional jobs in this state.
I also propose that, to the greatest extent possible, both funds utilize
the services of California investment firms. For example, I propose that
a "California Fund" be created by each fund and that California
investment firms manage these California Funds. It only makes sense to
use investment advisors who know California investments because they are
located in California.
These investments must be made without compromising the overall objective
to maximize portfolio returns. Currently, CalPERS projects a 21 percent
return after fees for the residential construction program. Investments
in small to medium sized businesses are projected to result in a return
of approximately 15 to 20 percent for both funds. These are excellent
returns on these investments that increase the overall return for both
This modest three percent increase will increase the percentage of
California investments from 10 percent to 13 percent. With California
Gross State Product between 12 and 13 percent of national Gross Domestic
Product, I believe this is a prudent reallocation of portfolio assets.
As State Treasurer, I will use my position as a member of the investment
committees of CalPERS and STRS to create a California residential housing
construction program at STRS, to expand CalPERS' investment in
residential housing, to introduce a small business loan program in both
funds, and to increase equity investment in emerging business
Investing in California's Fiscal Future
California pension funds, the State Teachers' Retirement Fund (STRS) and
the California Public Employees Retirement System (CalPERS) do not invest
enough in the two areas that in the past have been the backbone of this
The success of the building industry and the development of small to
medium sized businesses with leading edge ideas and products will help
fuel an economic recovery that will create the jobs needed to put
Californians back to work. The purpose of this paper is to demonstrate
the impact of greater investment of state pension funds on these two
areas of California's economy.
California has the world's seventh largest economy and is home to some of
the worlds largest corporate employers. The backbone of California's
business community, however, is made up of small businesses. Over 95
percent of California's businesses have fewer than 100 employees.1 These
businesses employ almost half of California's workforce.2 In Silicon
Valley, small businesses are the breeding ground for leading edge
technology that keeps the U.S. competitive in the world's marketplace for
Without affordable capital, many of these small businesses wither and
die. For the small hi-tech company, however, there is a more alarming
result. The hi-tech entrepreneur with a marketable idea or product will
go to other sources of capital outside the U.S. Unfortunately, in
exchange for capital, the right to the idea or product must be bargained
away to the competing country. With every piece of research and every
product that is lost to bargaining, California's competitive edge slips
California's real estate market historically has lead the state out of
slumping economic conditions. History is repeating itself. We have
begun to see a rise in real estate prices and housing starts have begun
to increase again. Despite the slow economic recovery, California's
lifestyle, weather, and opportunities continue to attract new residents.
It is estimated that by the year 2000 California's population will
increase to 36 million from the current 30 million.3 A substantial
investment will be required to provide housing for this ever increasing
How much do California's pension funds invest in California? CalPERS
only invests 10 percent of its more than $80 billion portfolio in
California businesses and real estate.4 It is estimated that STRS
invests a similar portion of its $40 billion portfolio in California.
This means that almost $100 billion of the combined $120 billion pension
fund portfolios is invested outside California.
To help get California's business community back on its feet and to keep
us competitive, I believe we should bring a portion of this $100 billion
back to businesses and communities in our state.
More investment in housing and in small to medium sized businesses will
have a direct and significant impact on California's economy. If we
increase these funds' investment in these two areas by only three percent
of their combined portfolios, we can generate over 250,000 jobs for
California. This investment will also provide new homes for Californians
and will protect leading edge ideas and products that will keep
Increasing investment by three percent of the portfolio will increase the
California investment to approximately 13 percent of the total
portfolio. With Gross State Product approximately 12 to 13 percent of
U.S. Gross Domestic Product,5 I believe this would be a prudent
reallocation of assets.
Investing in California Construction
Less than one percent of the CalPERS portfolio is invested in the
construction of single family residences in California.6 Nevertheless,
this modest investment has had a significant positive impact on
construction jobs for Californians.
According to a July CalPERS report, with a $500 million investment in the
residential real estate construction program, 7,700 single family homes
have been built.7 This commitment created almost 60,000 jobs, both
construction jobs and other supporting jobs, in the communities.8
Although STRS invests in other aspects of the real estate market, to date
the fund has not begun an investment program aimed at direct investment
in residential real estate construction.
With an additional investment of 1.5 percent of the combined CalPERS and
STRS portfolios, over 27,000 new homes will be built for Californians.
In addition, constructing these new homes will generate over 45,000
construction jobs and over 150,000 supporting jobs in the community for a
total of almost 200,000 new California jobs.
Of course, new investment must be made with the objective to maximize
portfolio rate of return. Currently, CalPERS projects a return of 20.63
percent after fees.9 With a overall portfolio return of 10 to 12
percent, these investments actually outperformed most other assets.
State Pension Fund Investment in California Emerging Businesses
One of the most common reasons for small business failure is
undercapitalization. California pension funds have the resources
available to provide adequate capital for small businesses, to lower the
cost of capital for these businesses and to protect the propriety of
California generated manufacturing ideas and hi-tech products.
These funds, especially CalPERS, already have established a track record
for investment in small businesses. Although these investments are just
reaching their 5 year maturity, returns of 15 to 20 percent are
projected; an excellent return for the portfolios.
How much do California pension funds invest in these California
businesses? Right now, about 1 percent of the portfolios of both CalPERS
and STRS is invested in emerging companies and small businesses.10
Unfortunately, only a third of those funds are invested in California
As State Treasurer, in my capacity as a member of the investments
committees of both CalPERS and STRS I will urge those committees to
increase their investment not only in California emerging businesses, but
also mezzanine and maturing small business with products ready for
marketing. My proposals include direct equity investments and direct
loans to small businesses, and an expansion of the state's small business
loan guarantee program.
According to a 1993 survey conducted by Coopers & Lybrand for the
National Venture Capital Association, the average investment needed by a
new small businesses to create one job is $48,570.12 Approximately
25,000 jobs would be created if both CalPERS and STRS invested only 1.5
percent more of their combined $120 billion portfolios. Assuming many of
these jobs will be of a manufacturing nature, approximately 2.5
supporting jobs13 will be created for every new manufacturing job created
with the capital invested by CalPERS and STRS. A total of over 50,000
new jobs could be created in the communities where these investments are
As State Treasurer, I also will use my position on the Board of CalPERS
and STRS to introduce a new program of offering small business loans to
California entrepreneurs. Currently, ten public pension funds in the
U.S., including funds in New York and Texas, have small business loans
totaling $852 million.14 Neither of California's public pension funds
offer such a program.
Finally, I will sponsor legislation that expands the state's small
business loan guarantee program. Right now, through the Office of Trade
and Commerce, the state offers loan guarantees up to a maximum of
$350,000 for California businesses.15 Unfortunately, many loan
requirements for small businesses, especially in the hi-tech industry,
exceed the $350,000 maximum guarantee.
I propose to double the state loan guarantee to a $ 700,000 maximum.
This will provide more opportunities for small California businesses to
get their ideas and products to consumers. Will this expansion be
expensive for the state? I don't think so. Since the loan guarantee
program was initiated in 1968, the default rate has been 3 percent.16
This loan portfolio has been well managed and with careful screening, the
default rate can remain low.
Availability of capital is one of the keys to creating new business and
new jobs in California. Although the state's two public pension funds
have combined portfolios of $120 billion, surprisingly little is invested
in California businesses. Further, with all the premier California
investment firms around the state, both funds pay a high portion of their
professional fees to non-California firms.
Two important segments of California's struggling economy could gain
significant benefit from additional investment by STRS and CalPERS. The
residential real estate construction program begun by CalPERS and the
investment of both funds in small and emerging California businesses
should be expanded. With modest increases in the investment portfolio
commitment in both programs, over 250,000 intermediate and permanent new
California jobs could be created.
In my capacity as a member of the investment committees of both CalPERS
and STRS, I will urge more investment in residential construction and in
emerging, mezzanine, and maturing small California businesses. I will
also introduce a small business loan program for CalPERS and STRS.
Finally, I will sponsor legislation to expand the existing small business
loan guarantee program.
The creation of a "California Fund" in each of the pension funds that is
managed by California investment firms that know investment opportunities
in this state will result in more California jobs and more business for
1. State of California, Labor Market Information (Report 524), page 9.
Third Quarter, 1990.
3. California's Economic Growth, 1991 Edition, Center for Continuing
Study of the California Economy, page CAL-42.
4. The Sacramento Bee, page A25, Thursday, May 5, 1994. This
information also verified with Jim Burton, Deputy Executive Director of
CalPERS on 5/31/94).
5. The UCLA Business Forecast for the Nation and California, The John E.
Anderson Graduate School of Management at UCLA, March 1994. Comparison
of Table 5, page Nation B.11 and Table 3, page California-B.5 shows
California Gross State Product at between 12 and 13 percent of U.S. Gross
6. California Public Employees Retirement System, Investment Portfolio
Profile, prepared for the June 13, 1994 Investment Committee Meeting.
8. Statistics provided by Keith Olberg of the California Building
Industry Association: Impact Fee Manual, National Association of
Homebuilders, (Revised 1/90), p. II-5 -- 1.8 construction jobs per home
built; What 100 New Jobs Means to Community, Economic Policy
Division-U.S. Chamber of Commerce (3/93), p.10 -- 3.21 jobs created for
every construction job.
9. California Public Employees Retirement System, Investment Committee
Agenda, Item 25, August 15, 1994, page 25.0.
10. 1992/1993 Annual Reports for both CalPERS and STRS.
12. Third Annual Economic Impact of Venture Capital Study, Coopers &
Lybrand and Venture Economics, Conducted for the National Venture Capital
Association, p.7 .
13. Bill Campbell, President of California Manufacturing Association,
Presentation before the California Board of Equalization, August 3,
1994, Public hearing for Regulation 1725.5.)
14. Survey of U.S. public pension funds conducted for Goldman/Sachs.
15. Governor's Office of Trade & Commerce.
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