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Walling off assets is wrong

Public pension funds have adopted divestment policies to influence an array of issues, including U.S. foreign policy (for example, Sudan genocide), health policy (tobacco products), social policy (firearms manufacturers), and climate change policy (coal companies). They've also embraced economic development policies whose performance metrics have questionable benchmarks.

Now, two funds are being called on to address U.S. immigration policy.

A bill introduced March 20 in the California State Assembly would require the California Public Employees' Retirement System and the California State Teachers' Retirement System to divest of companies involved in the construction of a border wall between the United States and Mexico.

The CalPERS and CalSTRS boards “shall liquidate investments in any border wall construction company within 12 months of the company contracting or subcontracting to provide work or material for President Trump's border wall,” according to the text of Assembly Bill 946, co-sponsored by three legislators.

The bill, titled the Resist the Wall Act, is an unacceptable interference in the fiduciary investment duties that are the responsibilities of the retirement systems' trustees.

The only issue fiduciaries must address is investing assets in the sole interest of participants to secure their retirement income under terms of their pension plans administered by the systems. 

Pension fund trustees must build their own “wall” to resist legislative intervention into fiduciary investment issues. They must step up and voice their opposition to the bill and, if the bill is enacted, uphold their fiduciary responsibilities by filing a lawsuit to challenge it because of the possible financial consequences. Pension funds must demand they become sanctuaries free of such divestment legislation. They must draw a line in the sand. 

Legislators often carry out drive-by mandates, taking a shot, that is, by introducing a bill, hoping it resonates with both their constituents to win votes, and other legislators to win passage, and then moving on to their next issue without assuming responsibility in regard to consequences.

Initiatives like the wall divestment bill often infect legislators in other states who embrace the idea for their public funds. What is next? Divestment of soda-pop companies to align with activists and efforts of cities like Philadelphia and counties like Cook County in Illinois to impose retail taxes on sweetened beverages for purported health reasons as well as raising revenue?

The anti-wall bill would have severe financial ramifications.

The bill gives no mention of the costs of divestment to CalPERS and CalSTRS, including opportunity costs; trading execution costs to sell wall-building company stocks and to buy other equity and fixed-income securities; the costs of identifying potential target companies, including myriad suppliers; the costs of monitoring compliance; narrowing the opportunity set; higher fees to build compliant indexes for benchmarking and for passive investing; and higher pension contributions.

Divestment policies can cost real money: Just ask the Norwegian government, whose $870 billion sovereign wealth fund reported in March that it lost 1.1 percentage points of return over the past 11 years because of its divestiture rules. The California bill doesn't include any promise that the Legislature will reimburse the retirement funds for such costs through higher contributions by raising taxes. In effect, if the bill is passed, the legislators would be making a political statement with other people's money.

Pension funds should not be in the business of divestment.

CalPERS last year, for example, reconsidered its policy of divesting tobacco stocks only to reaffirm it, despite the opportunity costs of the decision and ineffective outcome in harming the companies, whose stocks have risen.

This current bill would do nothing to achieve its objective of deterring companies from involvement in the project, or stopping the administration from moving forward with construction of the wall, or an unstated but apparently hoped-for objective of harming the prices of the companies' securities held by the retirement systems. The project would attract other investors, who see potential for higher expected return. In fact, the companies might, without so stating, prefer not have to engage with activist shareholders trying to dictate business decisions.

Legislators have virtually no accountability for compelling trustees to follow bad pension policies, such as the anti-wall divestment bill.

Pension trustees should demand legislative sponsors show the ways divestment would bolster the pension funds, and improve outcomes for beneficiaries.

The job of fiduciaries is challenging and complicated enough without adding intrusion from having to deal with foreign policy, or social policy and now immigration policy.

The bill distracts those who oppose the wall from pursuing more effective ways to prevent construction.

Both CalPERS and CalSTRS have adopted divestment policies to address such initiatives in general. “Divestment as an investment strategy presents a challenging conflict for CalPERS, as it often pits social responsibility against our fiduciary duty as outlined in the California Constitution,” said Henry Jones, CalPERS board vice president and investment committee chairman, in a CalPERS statement April 18, 2016.

CalSTRS' two-page policy addresses initiatives whose “purposes of achieving certain goals that do not appear to be primarily investment-related.”

Legislators should focus attention on securing better outcomes for the retirement system, including improving the funding level of the $313.2 billion CalPERS, which was estimated at only 69% for the fiscal year ended June 30, 2016, according to its latest comprehensive annual report, or of the $202.1 billion CalSTRS, which was only 68.5% for the same fiscal year, according to its latest comprehensive annual report.

While there has been some legislation in recent years that has to address these funding shortcomings, it has not been enough to close the big gaps. These big unfunded levels should be the focus of legislators in the pension area, not distractions like the border wall.

Pension funds serve immense social purpose by securing retirement income, lessening financial stress on public welfare and other such programs. Fulfilling the objective is a challenging mission as demonstrated by the inability of many employers to do so. Pension fund trustees don't need divestment distractions. Legislators need a lesson in appreciation of pension funds' role.

This article originally appeared in the April 3, 2017 print issue as, "Walling off assets is wrong".