California Proposition 1, Public Retirement Funds (1966)

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California Proposition 1 was on the November 8, 1966 ballot in California as a legislatively-referred constitutional amendment, where it was approved.

Until the enactment of Proposition 1 in 1966, California's public pension funds were only allowed to invest in bonds. Proposition 1, according to pensions expert Ed Mendel, "took the first step away from bonds"[1]

Election results

Proposition 1
Approveda Yes 3,279,258 59.6%

Ballot summary

The ballot summary said:

"Provides Legislature may authorize investment of moneys of any public pension or retirement fund, except Teachers' Retirement Fund, in stock or shares of any corporation or a diversified management investment company; provided that not to exceed 25% of the assets of the fund may be so invested and there is compliance with specified requirements as to registration of the stock in an exchange, financial condition of the corporation, and the percentage of stock which may be acquired in any one corporation."


The California State Legislature voted to put Proposition 1 on the ballot. There were no "no" votes in the legislature. The argument made by supporters was that Proposition 1 was needed in order to remove a 94-year-old prohibition on stock investments. In 1966, the argument went, retirements funds in 30 other states were using stock investments to grow their portfolios and California needed to do the same thing.


Opponents of Proposition 1 who signed the official ballot argument against it were professional engineers Parke L. Boneysteele and John R. Gillanders. They urged voters to "stay off of this common stock bandwagon."[1]

Their full argument against Proposition 1 in the state's official ballot pamphlet said:

"Inflation nibbles; the stockmarket bites!" is a trite but true Wall Street clich. The proponents of Proposition 1, however, would have you believe that they have found a system to beat the stockmarket. By the use of this system, called "dollar averaging", they claim that they will be able to obtain higher pensions for state employees at a lower cost to you, the taxpayer.

"Dollar averaging" consists of investing a fixed dollar amount of money in common stock at regular intervals. In this way the investor supposedly buys more shares of stock at low prices than at high prices and thus obtains the stock at a lower average cost per share than the average of the market prices. For this system to be successful, a doubtful assumption at best, the managers of the state employees' pension fund would need to have the cash to purchase stock at the bottom of a depression and they would also require the courage to do so. Human events and frailties being what they are, they probably would lack both and the system would then fail!

The state employees' pension fund most be prepared to meet two distinct obligations. It must pay earned pensions to employees when and after they retire, and it must be prepared to refund, in cash, the money contributed by employees whose employment is terminated for any reason prior to retirement. A major depression would result in reductions in force and forced early retirements when the stock market would be at a very low level. If the pension fund's investments should depreciate to the extent that it could not meet the demands for cash being made upon it, either the taxpayers would make up the difference, when they could least afford to, or the fund would default on its obligations.

A fundamental investment principle is that when investing other people's money for their and their families' security in their old age, safety should not be sacrificed for an increased return. This measure, proposed when stock prices are near an all time high and when gilt-edged bonds are paying the best interest rates in over forty years, would sacrifice both safety and a liberal return for the dubious prospect of speculative profits.

It is true that many other pension funds invest in common stocks and that investment dealers are recommending this proposal. With luck, taxpayers and state employees perhaps might benefit from it, but the only assured benefit is to the investment community which is actively supporting this measure.

Californians, examine this Proposition 1 very carefully. Do not be influenced by what other states and other pension funds are doing. If, after considering both sides, you doubt the wisdom of speculating with your tax money and with the security of your public servants in their old age, stay off of this common stock bandwagon and vote NO!

External links


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