Betty Yee, California’s 32nd state controller and chief financial officer, will this week deliver the Breakfast Welcome Address at Markets Group’s 6th Annual California Institutional Forum in Sonoma. Yee is a board member of the $346.8 billion California Public Employees’ Retirement System (CalPERS) and the $219.2 billion California State Teachers’ Retirement System (CalSTRS), the two largest pension systems in the country. Leading up to the Forum, Yee spoke with Institutional Allocator’s Managing Editor, Leslie Kramer, about how her unique upbringing led her to a career in the public realm, her views on CalSTERS’ decision to divest from private prisons, the controversy surrounding the hiring of CalPERS CEO Marcie Frost, her growing concern about how climate change is impacting companies and communities, and her thoughts on applying environmental, social & governance (ESG) criteria to investing.
Opening the conversation, Yee addressed the question of the viability of public pension funds, overall, and the seriousness with which she takes her role as a fiduciary of California’s public retirement systems.
Yee: The funding status of CalSTRS is currently 64 % and CalPERS is 71%. I want to focus on that, because there has been a lot written about how sustainable public pension funds are, in general. We are not the only defined benefit pension plan that is underfunded, but we are the largest. I take my fiduciary responsibility seriously about honoring the retirement benefits that have been earned by our public workforce and educators, and I think that the best way to do that it is be sure that we continue to provide good direction to the investment staff.
To really understand the conditions under which our pension assets are being invested means looking at global and geopolitical events, looking at the future of our economy, and working to be always informed. It also means staying on top of things that are evolving that could affect our ability to see how companies can create long-term value that then affects the returns that we get.
Since becoming the controller, I’ve been very focused on California as a global economy, and what we can do to be sure we continue to lead—with regard to creating the future of our economy—and making sure we have a workforce that can support the future of our economy; it’s about the resolve and the ability of the state to sustain itself in terms of our financial obligations.
IA: How are you working to improve the funded status of the pension funds? Will it be through investment returns or from more infusion of funds from the state?
Yee: At this point, I don’t believe the state will be giving more money to the fund [CalPERS]. The [SB 84] money that the state gave to CalPERS [a $6 billion supplemental payment, paid through a loan from the Surplus Money Investment Fund in FY 2017-2018] came at good time. It helped when we were beginning to implement the reduction in the discount rate. It was also warmly received. We have continued to see good returns and the timing of it helped us get to 71% by the end of the calendar year 2017 [it was previously at 68.3% at the end of FY 2015-16], so we were grateful for the assistance.
IA: Is there an experience that inspired you to want to become a public servant and ultimately state controller.
Yee: My background is in state and local finance and tax policy. I’ve been doing that work for 35 years now. Finance has been part of my life from a very young age. I grew up as a daughter of immigrants. I’m the second oldest of six kids, born to immigrant parents from China, so I’m first generation American. My parents owned and operated a laundry and dry cleaning business in San Francisco for 30 years—for any family business like that the children are the best employees—not that we got paid handsomely for it. (chuckles)
My parents didn’t speak English fluently, so I served as a translator along with several of my siblings. I really took to the business side and the financial side and to all of their banking needs. I negotiated with venders and customers, filing tax returns for various public agencies, so it gave me an inside look and perspective on what it takes to run a business. But I think it was really my interface with the vendors. I mean, I grew up poor—there were six of us that my parents were raising. To not negotiate a good price on whatever supplies we needed could have meant we weren’t going to have that carton of milk in the fridge that week.
So money became a very important concept to me, and how it had to be valued—really understanding the value of a dollar—that became so much of what drove my orientation to life: where money goes, who gets it, who makes decisions about who gets it.
At the age of 13, I actually stood up for my parents, along with many other families, that were opposed to a school busing program in San Francisco that was going to involve my younger sister. I remember standing up at a town hall school meeting to say on behalf of several of the families in my neighborhood, who didn’t speak English very speak well, ‘look, we don’t oppose the goals of the school busing system, but if an emergency were to arise with any of our children, we don’t drive, we have businesses to run; we would have to shut down the business, it would take us well over two hours on public transportation to pick up our child and take them home. So, how about instead of spending the money on the busing system, spending it on programs to improve the quality of the schools throughout the city?’
The school board did implement the busing program, but speaking up in front of the school board at the town hall meeting made an impression on me. Since that time, I have always wanted to be a voice for someone. It’s not so much that I ever wanted to be in politics, but the idea that here we were, allowed to speak our mind about the allocation of [town] resources, that just seems to be the most important public policy decision-making in which you can be involved.
IA: As a Board member how much do you voice your opinion about the investment style of the CalPERS and CALSTRS funds?
Yee: The Board has a role, we have a primary role, with respect to the asset allocation and also to the asset/liability management. In terms of my take on whether we should be doing active or passive management, from my perspective, I think we are prudent to be in both. It’s actually not a debate we have very often, although it does come up from time to time. When I look at passive management, I think it makes perfect sense, when we are talking about global equities and global fixed income—from a cost consideration—those should be passively managed. But it’s also important to have active management where we can actually pursue new opportunities that may prove valuable, or have some long-term value for the fund. We are comfortable with the decision now, because things are changing so much. I wouldn’t say it’s settled, but it’s prudent in terms of where we want to be right now.
IA: How focused are the two systems on lowering management fees?
Yee: We do pay attention to fees. At CalSTRS we are looking at a more collaborative model (of investing) as a way to reduce fees. Where the fee issue came into question is with the private equity asset class. Those fees tend to be very high, but it’s also our best performing asset class, so I think it’s about having the diligence to find opportunities.
IA: Jason Perez, (a sergeant for the Corona Police Department and president of the department’s police officer association) was recently elected to serve as CalPERS’ new board president, unseating Priya Mathur, who had served as board president for 15 years. Perez has been critical of the System’s strong commitment to applying ESG principles to its investment policies. What is your view on the topic?
Yee: I can’t speak to Jason Perez’s comments because he is not a board member yet, and I don’t really understand his perspective about it fully, so I don’t want to comment on it. What I will say is that ESG considerations are becoming more and more accepted in the investment community, certainly globally, and even here in the U.S. There is more focus on how to integrate ESG into investment considerations to the point of where, being a fiduciary, it’s incumbent upon us to make these considerations. It’s hard to say if it [ESG] is going to drive the ultimate decision, but I think it has to be a factor on where we put our pension assets.
I have to say, over the last couple weeks, with all these reports coming out about climate change, [from the National Climate Assessment] the urgency and just the devastation that climate change effects could have, [highlight] that this is a business risk for anybody that the pension funds do business with. So, just based on that aspect of ESG considerations, I would hope that there really is a ready acceptance that we have to engage with these companies, and we have to work together on how we can do our part to reduce our climate risk.
I’m in Sacramento today, and the air quality is quite poor—although a bit better, due to the rains. The fire is now contained, and what we are learning is that even though we can see the blue skies today, there are other potential impacts to the air quality, in particular from the fires that contain their own kind of air pollution.
IA: There has been some controversy surrounding the hiring (in Oct. 2016) of CALPERS CEO Marcy Frost, due to what some say was a lack of disclosure about her educational background—resulting in a call for an examination of the hiring process. What is your take on the situation?
Yee: I am very sorry that this issue has gained such heightened attention, because from my perspective there is no issue. She fully disclosed her educational background, and there is nothing that we know today that we didn’t know then. Look, she became the CEO of this fund, and I don’t know if she even has any spare time to think about going back to school and actually taking classes. She has been 100 percent on the ground, and seeing what she has been able to accomplish in her short time here, I have full confidence in her abilities. During the hiring process, she was more than forthcoming about her background. So, I do not think this is an issue that warrants an investigation.
IA: What accomplishments of Frosts have impressed you most, to date?
Yee: She was very instrumental in the lead up to the board’s decision to reduce the discount rate [the rate is gradually being reduced from 7.5% in 2016 to 7.373% in FY 2018-19, 7.25% in FY 2019 to 2020 and 7.0% by FY 2020-21]. Also, her leadership and her ability to reach out to stakeholders and her workings with the administration—she has been very astute about all the pieces that needed to be in place for the board to have full information about how this [the reduction of the discount rate] could be done and implemented and to make sure we have the support to do it.
Also, looking at how we are able to reduce the amortization period for public employers to pay off their unfunded liabilities from 30 years to 20 years, and dealing with our pension obligations, so that we can have our local public agencies not sitting on such huge liabilities for long periods of time. And she continues to work with the local public agencies—they bear the brunt of a lot of the decisions made by the board. She is also very clear that we have an open-door policy; our actuary office is open and available to help any agency with managing their responsibilities in this regard, so I think she gets high marks for that.
She has also really done a lot with the organization internally. You do not see her going to a lot of global conferences or summits, because she really has wanted to be with the organization to ensure that it has a healthy culture. I think when you see so much support for her, even when she is under attack, that says a lot. She is very visible and hands on as a problem solver and is developing the leadership the organization is going to need going forward.
IA: CalPERS has seen a lot of executive turnover this past year, in particular in the role of Chief Financial Officer (CFO). Could you speak to why that may be?
We had one acting CFO, Marlene [Timberlake D’Adamo] who stepped up internally to be the interim CFO, so that we could do a broad search [after CFO Cheryl Eason exited CalPERS in 2016]. With respect to what happened with Charles [Asubonten] and that whole hiring process, steps have really been taken to find out what took place. [Asubonten was let go in May amid controversy surrounding the accuracy of credentials stated on his resume] I think we have implemented a more robust hiring process going forward, which then led to our now being able to recruit and hire Michael Cohen, the former director of the California Department of Finance [in August]. I’m thrilled that is he here; he is more than amply qualified and really comes with lots of credentials that will benefit the fund.
IA: CALSTRS, in November, decided to divest its holdings in private prison companies CoreCivic and GEO Group. What are your thoughts on the decision?
Yee: I voted against it. This is one among many issues that came before both pension funds. It really began to tug at the heart strings, and we needed to look at whether the funds should be involved with these entities or not. Our holdings were fairly small. On one hand, you could say that we should divest, and there would be no harm. But there is a cost to divest and most of these investments are in contractual relationships. I voted against it, because I thought the CalSTRS staff did a wonderfully robust risk analysis. They utilized the CalSTRS 21 ESG Risk Factors, which was the basis of our analysis and why they were put there in place.
To me it was an important step to take. Not because I support private prisons that are holding our immigrant or migrant families in their facilities—it could be private prisons or it could be any number of different types of business entities that do business with the pension funds. We have to be able to hold up our analyses and make the case for when we should and when we shouldn’t get out of this, and frankly, from the analysis, I didn’t believe we made the case that we should divest. First of all, none of the facilities that we are involved in are in the practice of detaining migrants, and secondly, the holdings [in these companies] are minimal and weren’t growing. I am confident that the investment staff understands the concerns of the board, and obviously it could have gone the other way, and it did; we are going to divest. It was just helpful to have the decision made in a public, transparent way, and it was more helpful that the staff undertook the robust analysis that it did.
IA: In March, CalPERS board voted against a proposal to move towards divesting its investments in assault rifle retailers and wholesalers, in favor of engagement. In May, CalSTRS announced it would also follow a plan of engagement and consider divestment only if engagement efforts were unsuccessful. In June, the System announced it would divest from firearms manufacturer, Remington Outdoor. What are your thoughts on these decisions?
Yee: This is an outgrowth of what a good engagement process gets us. We do have a strong corporate engagement program; when companies are approached by large institutional investors, like CalSTRS, they listen. Even before this initiative, some of the retailers that sell guns, by virtue of us even raising this as an issue of concern, on their own, decided not to sell gun stock. So, engagement did change the behavior on the part of the retailers. As for the manufacturers, this is truly their bread and butter, so they needed to see a divestment decision. It is really all a part of the engagement process. We did not do this as an attack on the manufactures; we did engage with the manufacturers, and we are still seeing results.
IA: Do you engage in any hobbies when you are away from work?
Yee: I love to cook. I grew up in a big family, so I like to cook for large groups of people. I cook all kinds of food; I have lots of cookbooks, but I never follow a recipe. I can tell you what was a hit during this Thanksgiving dinner: my shaved fennel salad! I also like to garden, but I don’t get much time to do that, so I’m in the process of putting in a new drip system in my garden. And I like to read historical nonfiction. One of my favorites was The Founding Gardeners, [by Andrea Wulf] which talks about the founding fathers and the role of gardening and botany and horticulture in their lives. It’s a fascinating account of the role the discipline of gardening played in how they led our country.
IA: Tell us about your family.
Yee: I’m married, and I have stepchildren, who are all grown up. I also have seven nieces and nephews all of whom I like to spoil.