Gavin Newsom wants to use pension and road funds to fight climate change. How will that work?
On his way to an international climate forum two months ago, Gov. Gavin Newsom handed down an executive order meant to sharpen the state’s focus – and its spending – on global warming.
Government agencies have been struggling to explain it ever since.
Newsom’s order directs the state’s Transportation Agency, pension funds and the department that manages government contracts to reconsider how they spend the public’s money with an eye toward investing in projects that could help Californians prepare for climate change.
It touts the state’s “$700 billion investment portfolio,” and instructs the government to use it to “advance California’s climate leadership.”
The executive order “is the governor saying ‘I am prioritizing this in a mainstream way across the government. The state as a major investor and asset owner needs to take climate change really seriously,’” said Kate Gordon, director of the governor’s Office of Planning and Research.
The order references funds that taxpayers typically think of as restricted, such as money earmarked for road improvements and for pension systems that have a financial obligation to earn as much as cash as possible to provide retirement security for millions government employees.
Newsom’s order happened to follow Caltrans’ release of a report describing decisions to adjust funding for highway projects that had been pledged to the Central Valley. The timing created an impression that the Newsom administration was tinkering with taxpayer-approved transportation plans.
Newsom in an interview with The Fresno Bee editorial board earlier this month acknowledged the confusion the executive order created and said he was working to resolve questions about the documents.
The change in highway plans “was a staff level draft and it was ambiguous in how it coincided with an executive order – one from my office, one from Caltrans,” he said. “We have provided clarity. ... I think we have facts to calm the nerves.”
The departments affected by Newsom’s order are in the early stages of planning for it. Here’s what they know about it:
Will Newsom take money from highways and roads?
Newsom’s executive order won’t change the restrictions lawmakers placed in the 2017 law that levied new taxes and fees on fuel and vehicle registrations to pay for road repairs, according to the state transportation agency. That law is projected to raise about $5 billion a year for roadwork.
But, the executive order could lead the California agency to adjust its plans for other funds, steering money to public transportation and other projects in dense communities near jobs to “reduce vehicle miles traveled.”
Newsom’s administration estimates the state has about $5 billion a year in transportation funds that could be redirected to reduce greenhouse gas emissions.
The transportation agency plans to hold public meetings on the plans. Agency spokesman Garin Casaleggio declined to say more.
Russ Snyder, executive director of the California Asphalt Pavement Association, said contractors initially were concerned about Newsom’s order, fearing it would take money from road and highway work.
Since then, Snyder said, “we have been assured by the California State Transportation Agency that transportation dollars, including (the gas tax) are protected by the state constitution and will be used for their intended purposes to improve California’s transportation system.”
Assemblyman Jim Patterson, R-Fresno, was among the first to cry foul in October when Caltrans announced it would withhold some funds that been promised for Highways 99 and 46.
He suspected the decision stemmed from Newsom’s executive order, although Caltrans and Newsom said that was not the case. He’s been pressing the Transportation Commission to restore the money.
“I’m willing to give the governor a bit of the benefit of the doubt that Caltrans overreacted and did more than what was expressed explicitly in the order,” Patterson said. “But I got to tell you that’s our region’s big concern, that he says one thing when he’s in Fresno but the bureaucracy in Sacramento does something different.”
How will it affect public pensions?
California’s three state public pension systems are among the biggest in the world, and each has investment strategies that account for climate change.
The California Public Employees’ Retirement System and the California State Teachers’ Retirement System, with a combined portfolio worth more than $634 billion, prefer to use their clout to press corporations to account for climate risk.
CalSTRS in October launched a climate review to account for risks, spokeswoman Karen Doron said in an email.
“Engaging companies and policy makers is an effective strategy to reduce greenhouse gas emissions. Further analysis will reveal what companies to invest in based upon future profitability,” she said.
The University of California Retirement Plan, with about $80 billion, in September announced that it would go further by pulling its money out of fossil fuel companies.
Each retirement plan is underfunded, meaning the pension systems owe more money in benefits to workers and retirees than they have on hand today.
That’s a big reason that a governor appearing to wade into their investment strategies caused some concern when Newsom released the executive order.
“Unless the governor is willing to take even more $$ from over-taxed California citizens, Newsom should step back,” CalPERS Board of Administration member Margaret Brown wrote on social media accounts after the governor published the order.
Newsom’s executive order directs the pension plans to work with his Finance Department to develop a new investment framework “that reflects the increased risks to the economy and physical environment due to climate change.”
Gordon, from Newsom’s Office of Planning and Research, said the order is not a directive calling for CalPERS and CalSTRS to divest from oil companies.
Rather, she said, it’s intended help the pension funds spot opportunities and avoid mistakes as the economy turns to low-carbon or no-carbon alternatives for energy.
“Climate is a material risk to companies, both in terms of physical liability, like PG&E and wildfires and also when you talk about the transition to a carbon neutral economy because some assets will no longer be as valuable,” she said.
For instance, “electric vehicles are a solution and a player in the market,” she said. “We should be thinking of investing in electric vehicles. You want to avoid stranded assets as an investor and you want to avoid physical risk. There’s a growing understanding that climate change is a material risk to investors and companies just like cyber-terrorism or inflation.”
So far, the pension plans have had one meeting with Newsom’s Finance Department to talk about the order.
CalPERS Chief Investment Office Yu Ben Meng at a board meeting this month called climate change “an investment issue for us” because the pension fund must pay out billions of dollars in benefits “for generations to come.”
He said CalPERS would “continue to lead on climate change initiatives” while paying close attention to its investment targets.
Will it drive up costs for state buildings and cars?
The most tangible change to California government from Newsom’s climate changer order so far was an announcement that state government would stop purchasing gas-power cars immediately.
In January, the state also plans to stop buying vehicles from carmakers that are fighting California’s long-recognized authority to set clean air and vehicle emission standards that are more rigorous than the federal government’s.
As of today, that means the state would not buy vehicles from General Motors, Toyota and FiatChrysler. The state would continue purchasing from Ford, Honda, BMW and Volkswagen.
The state has 36,692 passenger vehicles, according to the Department of General Services. About 14,000 of them were made by Ford, but General Motors and Fiat Chrysler also are well-represented in the fleet.
Department of General Services spokeswoman Monica Hassan said “it’s too early to tell” whether the new plan would significantly drive up the cost of new vehicles.
This story was originally published November 29, 2019 at 5:30 AM with the headline "Gavin Newsom wants to use pension and road funds to fight climate change. How will that work?."