California Proposition 21, Retirement and Pension Fund Investments (1984)
Proposition 21 deleted constitutional restrictions and limitations on the purchase of corporate stock by public retirement systems. In place of the deleted restrictions, it allows the California State Legislature to authorize any investment of a public retirement system's funds, subject to specified standards of fiduciary responsibility. Proposition 21 also specified that the assets of public pension and retirement systems are trust funds and requires that these assets be held for specified purposes.
Prior to the enactment of Proposition 21, public pension and retirement funds in California could invest up to (but no more than) 25% of their portfolio in stocks, and those stocks had to be so-called "blue chip" stocks.
In 2010, pensions expert Ed Mendel argued that Proposition 21 might be to blame for at least some of the pension funds crisis California encountered. He wrote:
- "A little-known ballot measure a quarter century ago, Proposition 21 in 1984, opened the door for much of the current controversy over California's public employee pensions.
- Pension funds had been required to put most of their money into bonds. The measure lifted the lid and pension funds, seeking higher yields, began shifting most of their money to stocks and other riskier investments.
- Now it's possible to look at the big problems facing public pensions and suspect that the difficulty would be smaller and more manageable, perhaps even avoided in some cases, if the funds had stayed with a conservative investment strategy based on bonds."
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Proposition 21's official ballot summary said, "Deletes constitutional provisions specifying percentage and type of stocks and corporations in which public pension funds may invest. Substitutes provisions empowering Legislature to authorize investment of public pension funds by fiduciary who must discharge duties solely in interest and for exclusive purposes of providing benefits to participants and their beneficiaries, minimizing employer contributions, and defraying reasonable administrative expenses; discharge duties pursuant to specified prudent person standard; and diversify investments pursuant to specified standard. Declares public pension funds assets are trust funds held for exclusive purpose of providing benefits and defraying reasonable administrative expenses."
The fiscal estimate provided by the California Legislative Analyst's Office said:
- This measure would have no direct fiscal effect on the state or local governments. The indirect fiscal effect of this measure would depend on the extent to which the rate of return on the investments of public retirement funds is higher or lower than what it would have been in the absence of the additional flexibility authorized by this measure.
Path to the ballot
The California State Legislature voted to put Proposition 21 on the ballot via Assembly Constitutional Amendment 16 (Statutes of 1983, Resolution Chapter 105).