(The Center Square) – The budget of a little-known California agency ballooned to over 68 times its original size over the last decade, but few people have taken advantage of the ScholarShare Investment Board scholarships that the agency funds, an investigation by The Center Square found.
Since the 2015-2016 fiscal year, SIB’s budget grew from $2.9 million to $198 million as the state created a universal scholarship claimed by only 11% of eligible students, state data shows.
The analysis also reveals some of the Environmental, Social and Governance investment offerings for the state-overseen, $17 billion ScholarShare 529 education investment account program have significantly underperformed the broader market, highlighting the growing debate over whether pursuing underperforming ESG offerings constitutes a breach of fiduciary duty.
The agency’s growth in spending has largely come from creation of the CalKIDS program, authorized in 2019, but expanded in 2021 with $1.9 billion using the state’s $47 billion surplus. This newborn program provides a state-invested $100 seed deposit for all children born in California. The program has a budget of up to $45 million per year.
ScholarShare also provides up to an additional $1,500 to the accounts of qualifying California first graders, with a $500 deposit for low-income students, $500 for foster youth students, and $500 for homeless students. That program’s budget is as much as $140 million per year, though this spending has been lower than expected due to the state’s falling birth rate and sustained outmigration.
Republican leaders point out that the program’s COVID-era funding boost, and continued $185 million financial commitment direct limited resources from more effective means of helping lower-income students.
“The surplus is gone. Services people rely on are being cut. Yet the state is still pouring money into accounts most families have never claimed,” wrote State Assembly Republican Leader James Gallagher, R-East Nicolaus, in an email to The Center Square. “Helping vulnerable kids should be a priority. That takes real planning and results, not savings accounts that sit untouched while the rest of the budget falls apart.”
These children’s savings accounts are invested by SIB under the ScholarShare 529 program, which had 5.4 million accounts at the end 2024.
According to the California State Treasurer’s office, accounts not claimed by the time a beneficiary turns 26 years old are closed, with the funds automatically reallocated to other CalKIDS accounts.
CalKIDS accounts can be connected to but are not part of students’ ScholarShare 529 investment accounts in which invested funds grow tax-free and can be used for qualifying education expenses.
While both administered under ScholarShare and invested as such, the state deposits are separate from 529 accounts. Under the national 529 program, parents deposit money into 529 investment accounts that allow investments made for children’s education expenses to grow tax-free.
Though a variety of 529 providers exist, the state-managed ScholarShare 529 offers lower management fees than other options for some investments, and can be used by residents of any state. This means parents from across the nation are parking their children’s college funds in California-overseen accounts, which is reflected in the program’s 5.4 million accounts against a state population of about 40 million.
SIB has received $14.3 million in the prior two years to market the taxpayer-funded scholarship program in an attempt to grow its low 11% deposit claim rate. In addition to these state funds, the financial firm administering ScholarShare’s $17 billion in assets, TIAA-CREF, is spending $1 million per year marketing the program as part of its contract to remain ScholarShare’s administrator.
TIAA-CREF takes a 0.01% administrative fee on all of the program’s assets, and an additional 0.04% board fee on almost all investments, excluding its non-ESG passive investment portfolios. These non-ESG passive investments are where the CalKIDS investments are made, meaning TIAA-CREF takes only a 0.01% fee on those taxpayer funds, though the nominally third-party managers of the assets in these funds charge an additional 0.03% to 0.07% per year.
While 0.05% for TIAA-CREF as ScholarShare’s administrator doesn’t sound like a lot, that provides the company with up to $8.5 million per year in revenue based on $17 billion under management.
Managers of the funds allocated within ScholarShare take additional fees between 0.03% and 0.34%, or up to nearly seven times more than what TIAA-CREF takes in from administering the program.
This also includes TIAA-CREF, which owns Nuveen, a financial firm whose investment options are 33 out of 70 Scholarshare investment products, or 47%; the remainder are from leading financial firms such as T. Rowe Price, PIMCO, and Vanguard. As administrator, TIAA-CREF plays a key role in approving investment options, placing the company in a unique position to promote its financial products.
Nuveen’s ESG investment options make up the entirety, or all 13, of TIAA-CREF’s ESG offerings, which SIB says were adopted as part of TIAA-CREF’s proposal to be ScholarShare’s administrator.
“The proposal submitted by TIAA-CREF Tuition Financing, Inc. (TFI), which included the proposed ESG line-up, earned the highest score and was awarded the contract for program management services for the ScholarShare 529 Plan,” said SIB Deputy Executive Director Stan Zeto to The Center Square. “The ESG line-up, as proposed by TFI in their RFP proposal and approved by the Board, then launched in February 2022.”
The relative performance of some of the Nuveen ESG investments raises questions, said Marc Joffe, a public finance expert and Visiting Fellow at the California Policy Center, to The Center Square.
“While it’s not uncommon for a plan sponsor to limit fund offering to one or two fund families, it is concerning that no Nuveen ESG fund is among the top five ranked by Morningstar,” he said.
Joffe also noted that offering ESG investment products to California parents, despite possible underperformance, is in line with what California parents may value, and is one of many ScholarShare options.
Nuveen charges 0.26%, or more than five times more than what TIAA-CREF makes from administering the investment, for its Large Cap Responsible Equity Fund, ScholarShare’s ESG option for investing in U.S. stocks that makes up the plurality of ScholarShare ESG investments.
This fund is supposed to “achieve the return of the U.S. equity markets as represented by its benchmark, the S&P 500 Index,” but underperformed the S&P 500 by half over the last five years; LCREF appreciated 40.6% in the past five years, which is less than half of the 98% growth in the S&P 500 index overall.
This led SIB to vote to place the fund on negative “watch” status in July 2024 after LCREF failed “all four of the performance standards” and lost out on key 2023 gains from not owning key, high-performing stocks due to it “ESG mandate.”
Notably, TIAA-CREF warns in its 529 plan agreement that its ESG fund “invests in the securities included in, or representative of, its benchmark index regardless of their investment merit,” and that this “may cause a fund to underperform the stock market as a whole or other funds that do not use an ESG investment strategy.”
In January, a federal judge ruled that American Airlines had breached its fiduciary duty of loyalty to its employees through its ESG-focused investment manager, writing “The belief that ESG considerations confer a license to ignore pecuniary benefits is mistaken.”
The fund’s warning to parents makes parents responsible for the outcomes of the investment they selected, but a recent court decision and possible federal regulations could soon complicate the offering of ESG funds.
In January, 18 Republican state financial officials sent a letter to the U.S. Securities and Exchange Commission urging the promulgation of formal rules that include “prohibitions on the use of plan assets to advance political or social agendas” and “enhanced disclosure requirements for asset managers regarding the financial impacts and legal liability of ESG and DEI initiatives.”
“The notion that ESG pursuits introduce mixed motives which run headlong into fiduciary duties is nothing new” wrote the officials. “Myriad attorney general opinions, state legislation, and congressional committee hearings have affirmed this truth.”
The officials’ letter focused on retirement funds regulated by the Employee Retirement Income Security Act of 1974, which does not apply to SIB; SIB’s investment policy states has ”no statutory restrictions on the types of investments that can be made.
