CalPERS’ Private Debt Secrecy Bill: AB 386
CalPERS is sponsoring a subtle but dangerous bill to exempt its private lending from public scrutiny. AB 386, which pertains only to CalPERS, calls for details of private debt transactions to be exempt from reporting under the California Public Records Act.
Celebrated journalist Dan Walters points out in a widely circulated opinion piece from May 3 that AB 386 “would allow the financially shaky California Public Employees Retirement System (CalPERS) to semi-secretly lend out untold billions of dollars by exempting details from the state’s Public Records Act.”
CalPERS’ bid for secrecy in private lending is at odds with its professed support of transparency. For years, CalPERS has endorsed transparent reporting of climate-related financial risks, becoming the first US signatory of the Montreal Pledge and promptly complying with the disclosure requirements of 2018’s SB 964.
CalPERS’ justifications for a bill to hide details on private loan transactions are that this level of privacy will stimulate more debt acquisition opportunities and perhaps secure more favorable repayment terms for CalPERS once it has acquired the debt. In our view, no theoretical return on investment is worth compromising public access to information. As a government agency investing with public money, CalPERS should make all of its investments open to public scrutiny.
These private-label loans could even increase climate-related financial risk for CalPERS. Although the Task Force on Climate-Related Financial Disclosures (TCFD) relies on voluntary compliance, the UN’s Principles for Responsible Investment agency (UN PRI) has been exerting considerable political persuasion to get public companies to comply with TCFD guidelines and to increase transparency in their reporting. UN PRI has mounted similar efforts for private equity by publishing guidance for PE managers on how to comply with TCFD reporting standards.
The public needs access to the details on the identity of the borrower and the nature of the business in order to measure the climate impacts of these private loans. CalPERS could be lending to worthy renewable energy projects or to projects and technologies that could have devastating climate impacts. CalPERS’ previous loans have had substantial climate impacts: for example, in 2019 CalPERS made $85 million of interest-free loans to Enbridge, Inc., the builders of the controversial Line 3 pipeline.
The climate-related disclosures that CalPERS has virtuously espoused are intended to enable institutional investors to avoid catastrophic outcomes for their portfolios and for the planet. This legislation increases the likelihood of unintended consequences, increased climate risk, and potentially disastrous defaults. It’s understandable that chronically underfunded CalPERS would seek higher returns, but it should not be gambling with the retirement funds of its members and beneficiaries.
Despite strenuous objections by the Retired Public Employees Association and a thorough analysis by the Judiciary Committee, AB 386 has been passed by the Assembly, with only minor opposition. Given CalPERS’ track record of corruption and conflicts of interest by its trusted officers and board members, this private debt secrecy bill should be firmly opposed in the Senate.