CalSTRS to Divest of Private Prisons?

Chief Investment Officer reports, CalSTRS to Divest of Private Prison Companies:

The investment committee of the California State Teachers’ Retirement System (CalSTRS) has approved divesting its holdings in CoreCivic and GEO Group, the two US publicly held companies running private correctional facilities.

The action by the committee on Nov. 7 makes CalSTRS the third major US public pension fund to divest from the private prison companies. In July, the New York State Common Pension Fund divested from the two correctional companies upon orders from its sole trustee, New York State Controller Thomas DiNapoli.

In 2017, the New York City Pension Funds also divested its holdings in CoreCivic and GEO Group.

While CalSTRS’s global equities and fixed income portfolio holdings in the two companies were worth only around $12 million as of November 6, the divestment by such a large pension plan is expected to shine more light on the companies and their practices. Advocates against private prisons and the federal governments policy of using the private facilities to house immigrant detainees have been pressuring other institutional investors to divest.

CalSTRS is the second-largest pension system in the US with almost $230 billion in assets under management. Combined, CalSTRS and the New York State and New York City plans have almost $600 billion in assets under management, a powerful trio of institutional investors that have said no to private prison companies.

The vote by the CalSTRS Investment Committee comes after CIO Chris Ailman ordered CalSTRS investment staff to conduct a divestment review in July. This came after the Trump administration’s zero tolerance border crossing policy highlighted children being separated from their parents and the housing of detainees, both adults and children, in facilities run by the two private corrections companies.

Several dozen protesters calling on CalSTRS to divest from the two companies had appeared at the July 20 investment committee meeting. It was the same meeting at which Ailman made his decision to conduct the review.

“The board conducted a review of the staff research; we agreed that the engagement efforts were thorough and listened to our expert investment consultants,” said Investment Committee Chair Harry Keiley in a press release issued after the vote on Wednesday. “Based on all the information and advice we were provided, the board decided to divest according to the policy criteria.”

The divestment is scheduled to be completed within six months.

Keiley wasn’t more specific, but the committee wasn’t acting on a recommendation from the investment staff. The CalSTRS investment staff review released Nov. 7 did not take a position either way as to whether the pension system should divest from the private prison companies. The review looked at whether CalSTRS’s investments in the two companies violated its environmental, social, and governance (ESG) policy, which includes respect for human rights and whether the investments in the companies would be jeopardized.

“Staff does not take a position on whether or not private prisons violate the ESG policy to the point of justifying implementation of the CalSTRS Divestment Policy,” the review said. “Staff realizes the operation of prisons (public or private) pose noteworthy risks under the CalSTRS ESG policy. However, in several cases it is the contracting agency, such as the US Government, that creates and carries the risk.”

On the human rights issues, the investment staff report split down the middle pro and con on arguments that the companies were violating detainees’ human rights.

“While staff has been informed by both companies that they were not directly involved in the separation of the family, they did provide capacity for the detention of the parents,” the CalSTRS review noted.

The review said while neither GEO Group nor CoreCivic have facilities to house unaccompanied minors, both have a facility to house detained families. It said the two facilities operate outside San Antonio, Texas, and are designed to keep children with one of their parents.

CalSTRS officials said they toured the facilities and noted detainees were able to roam the grounds, the living units were not locked, and there was no razor wire or weapons carried by staff.

“While staff was not able to obtain evidence that these companies violate the respect for human rights, private prisons do add capacity, and help facilitate a system, that may be viewed as violating the Risk Factor,” the review said.

In an emailed comment to CIO, a GEO Group spokesman defended the company’s practices.

“We believe [CalSTRS’s] decision was based on a deliberate and politically motivated mischaracterization of our role as a long-standing service provider to the government,” the statement said. “Our company has never played a role in policies related to the separation of families, and we have never provided any services for that purpose. We are disappointed that misguided, partisan politics were able to jeopardize the retirement security of California’s educators.”

Officials of CoreCivic could not be immediately reached for comment.

The CalSTRS review disputes GEO Group’s contention that California educators’ retirement security would be affected by divestment. The review said removing the private prison companies from the CalSTRS portfolio does “not pose a significant risk or benefit to the portfolio because they are so small relative to the US equity and fixed income allocations.” CalSTRS’s combined allocations to the asset classes total more than $150 billion compared to its approximate $12 million in holdings of the two prison companies.

The truth is these investments are peanuts for CalSTRS and pose no significant risk to long-term returns but I too wonder whether these divestments were politcally motivated.

Prisons are big business in the US where the prison industrial complex is thriving, especially under a Republican led Senate and a president who wants to be viewed as tough on crime.

The problem with the US prison industrial complex is the criticism that it's a new form of slavery and those enormous profits come from violating basic human rights.

Earlier this month, students at Harvard called the endowment to divest from the prison industry during the first public event held by the newly formed Harvard Prison Divestment Campaign:

The event, hosted at the Law School’s Wasserstein Hall, featured students speakers addressing a near-capacity crowd of roughly 100. Hakeem Angulu '20 and Jackie Wang, a graduate student in African and African American Studies and author of "Carceral Capitalism," began the event by speaking about the history of the American prison system as well as racial disparities in conviction and incarceration rates.

Soon afterwards, organizers projected the campaign’s organizing statement onto a screen.

“The Harvard Prison Divestment Campaign seeks to sever the university’s financial ties to the prison-industrial complex by advocating for Harvard’s total divestment from all corporations whose existence depends on the capture, caging, and control of human beings,” the statement reads.

During the event, organizers also shared an audio tape recorded by Derrick Washington, an inmate at Souza-Baranowski Correctional Center, a maximum security prison in Lancaster, Mass. Washington, who said he had been convicted of murder, described his experiences in the state prison system as well as his later involvement with the Emancipation Initiative, a group that advocates for prisoners.

“Because prison is all of misery and hopelessness — and Harvard readily profits from it — in fact I see as Harvard endorsing every single prison suicide, murder, recidivist and fallen tear drop from the effects of 21st century slavery,” Washington said.

Jarrett M. Drake, a graduate student in Anthropology who co-founded the campaign, said the initiative originated last fall as part of a project for a class on incarceration. He said he developed the campaign with Design School student Samuel A. J. Matthew.

Initially, the two envisioned the project as a way to better inform school affiliates about Harvard’s investments in the “prison industrial complex.” But, after the course ended, he and Matthew decided they “wanted to do something more with the information project.” The duo eventually brought on several organizers to implement a broader initiative.

This October, Drake — along with Anneke F. Dunbar-Gronke, a third-year student at Harvard Law School, and Paul T. Clarke, a graduate student in African and African American Studies — penned a Crimson op-ed criticizing Harvard’s investments in companies associated with the prison industry.

The authors specifically pointed to Harvard’s investments in ETFs that contain stock in private prison operators CoreCivic and GEO Group; Tokio Marine Holdings Inc., an insurer in the bail bond industry; and Axon Enterprise, Inc., the manufacturer of Tasers.

Harvard’s SEC filings for the quarter ending June 30 of this year show holdings in these firms of approximately $67,000. The filings disclose a total $420 million in holdings.

Organizers said they have not directly contacted the Corporation about prison divestment.

Over the years, University administrators have consistently opposed student proposals to change Harvard’s investment strategy — especially when it comes to divesting from fossil fuels, a common undergraduate rallying cry in recent years.

Responding to a question on prison divestment in an itnerview Tuesday, University President Lawrence S. Bacow said that investment decisions should not be used as political tool.

“We’ve stated many times, my predecessors have stated this going back to Derek Bok’s days 40 years ago, that the University should not use the endowment to achieve political ends or particular policy ends," he said. "There are other ways the university tries to influence public policy through our scholarship, through our research, but we don’t think that the endowment is an appropriate way to do that.”

Bacow’s response parallels the position of previous Harvard presidents on divestment movements. In 2013, President Drew G. Faust wrote in a statement on fossil fuel divestment that Harvard’s endowment is “not an instrument to impel social or political change.”

In an interview during the event, Dunbar-Gronke said they believe the University’s investments in prisons are intrinsically political.

“We would like for a depoliticized endowment, and that would mean divesting from a system that is inherently politicized by the fact that it disproportionately affects black, brown, and poor people, and undocumented people, and we as students are in a unique position to hold the University accountable.”

Dunbar-Gronke also said they think Harvard's investments run contrary to the University’s efforts to address its ties to slavery.

“Harvard has expressed remorse for its institution in slavery, but that we are currently still investing in a legacy of slavery, so cannot be fully contrite until we stop investing in it," they said.

After presentations by speakers Thursday, participants broke off into smaller, off-the-record group discussions.

My thoughts? I'm on record stating it's silly to divest from fossil fuels and apart from tobacco where engagement is futile and divestment makes a lot of sense, I'm generally not comfortable with the rush to divest from investments.

Now, in the case of US prisons, there are serious concerns, I do believe there's institutional racism and slavery so corporations can profit, but even there, wouldn't you want a big pension engaging and forcing change from within?

The minute these big pension funds divest, someone else takes their place, a public or private equity fund that doesn't give a rat's ass about ESG, only big fat profits, and basically nothing gets done to change the condition of US prisons.

Again, these investments are peanuts for CalSTRS or Harvard, but I'm not sure divesting is doing the inmates any favors. In fact, I think they're going to be worse off if big pensions divest.

In other California news, Chief Investment Officer reports, CalPERS CIO Leaves Friday, but Replacement Delayed:

California Public Employees’ Retirement System (CalPERS) Chief Investment Officer Ted Eliopoulos is ending his 17-year tenure at the largest US public pension plan on Friday, but his replacement, Yu Ben Meng, remains stuck in China and will be unable to take over the investment reins of the $361.1 billion retirement plan until sometime in January.

Both Eliopoulos’ impending departure and the fact that Meng’s start date won’t be until sometime in January were announced at the pension plan’s investment committee meeting on November 13. CIO had reported before the meeting that Meng could not start sooner because he has a non-compete agreement with the Chinese government following his three-year tenure as deputy CIO at China’s State Administration of Foreign Exchange.

The agreement has prevented Meng, who was named CalPERS CIO in September, from joining the pension plan. Meng is also being prevented by the Chinese government from leaving the country until the non-compete expires, said former CalPERS board member and investment officer J.J. Jelincic. Jelincic has said he has had phone conversations with Meng from China. Several CalPERS sources confirmed Jelincic’s account to CIO.

Eliopoulos, in brief comment at the investment committee meeting, said that Eric Baggesen, a managing investment director who directs the pension plan’s asset allocation efforts, would take over as interim CIO until Meng starts in January. Meng had previously worked at CalPERS and had been one of the investment leaders of asset allocation efforts.

It is unclear exactly when Meng’s non-compete expires and CalPERS officials on Tuesday weren’t specific as to what date in January Meng would start at the pension plan.

Meng had a senior leadership role in investing more than $1 trillion in China’s foreign currency reserves, including US dollars that were invested in Treasuries and US-listed equities. He is a US citizen, but was born in China

That may be part of his problem in terms of leaving the country.

“China treats people born in China as if they were Chinese citizens, even if they have acquired citizenship elsewhere,” Nicholas Yardy, a senior fellow at the Peterson Institute for International Economics and an expert on the Chinese economy, told CIO in an email.

In a surprise announcement in May, Eliopoulos said he would be stepping aside by the end of the year because of health considerations of one of his daughters who is attending college in New York City. Eliopoulos said it is important that he is within “reasonable distance” of his daughter.

Eliopoulos joined CalPERS in January 2007, and served as senior investment officer for the pension plan’s real estate asset class. He oversaw the portfolio during the great financial crisis when it lost more than 48% of its value. He was tasked with rebuilding the portfolio, reducing speculative office and land deals in place of a new emphasis on core real estate assets. In 2014, he assumed the role of CIO following the death of Joseph Dear from prostate cancer.

CalPERS officials and board members had originally hoped that the new CIO could work aside Eliopoulos for several months before he left CalPERS.

It is a particularly critical time for the largest US public pension plan. CalPERS officials are hoping to launch CalPERS Direct, a private equity organization that would invest in later-stage companies in the venture capital cycle as well as buy and hold stakes in established companies, similar to Warren Buffett’s strategy.

Eliopoulos in his remarks on Tuesday thanked CalPERS staff for their support during his tenure but did not address the fact that he would not be working side-by-side with Meng.

It is unclear if the investment committee will vote on the $20 billion direct investment organization at its December meeting or wait until after Meng takes over as CIO.

If CalPERS Direct becomes a reality, Eliopoulos won’t be around to see his biggest idea implemented. Eliopoulos had formally proposed the private equity direct investment organization, the first of its kind for a public pension plan in the US, in July 2017.

CalPERS has one more investment committee meeting this year scheduled for Dec. 17, which is the last meeting for Priva Mathur, the president of the CalPERS board and a proponent of the direct private equity investment organization. Mathur was defeated in a bid for reelection. The investment committee is made up of all 13 CalPERS board members.

Sources say that Mathur has told fellow board members that she would like CalPERS Direct approved before she leaves her post in early January.

I doubt the Board will vote on CalPERS Direct prior to Meng taking over as CIO. It's an important and much-needed initiative but typically you wait for the new CIO to be in place before voting on something like that.

As for Ted Eliopoulos, I wish him all the best in his new endeavor whatever it is and I hope his daughter is healthy and enjoys her college years in New York City.

Below, CalSTRS Chief Investment Officer Christopher Ailman speaks with CNBC’s 'Squawk on the Street' about the pension fund’s push for the gun industry to implement more stringent safety principles. He also discusses the recent volatility and how CalSTRS is reducing risk but remains focused on the long run.

I also embedded an MSNBC documentary which reports on the brutal stark reality of US maximum security prisons (warning: some parts are disturbing).

Lastly, a clip on a new documentary film, American Jail, where Academy Award-winning filmmaker Roger Ross Williams investigates America's mass incarceration crisis. I saw this documentary over the summer, it was excellent and highlighted the many problems at American prisons.