Divestment, seemingly a costless way to express outrage with a repressed group in this case in Sudan is now sweeping through state legislatures across the country.
But it has met some refreshing resistance from public pension fund fiduciaries, notably with the $90 billion State of Wisconsin Investment Board, Madison, and $36 billion Colorado Public Employees Retirement Association, Denver. Their straightforward, sensible arguments on divestment ideally should deter politicians from continuing to use public pension fund investments to serve political ends. But unfortunately, they havent. Divestiture is not, in fact, without cost.
The Wisconsin board, in a statement on its website, notes in part, The Wisconsin Retirement System trust funds are invested by SWIB. These funds belong not to the state or to SWIB. They are held in trust for the sole benefit of the more than 533,000 WRS members.
Whether a divestment requirement is broad or more targeted, it conflicts with SWIBs fiduciary responsibility to invest every dollar solely in the best interests of the trust funds. For that fundamental reason, SWIB has not supported proposals that have been offered over the years to require divestment from particular countries or companies. As truly reprehensible as the situation in Sudan is, humanitarian crises and conflict continue to break out in other parts of the world.
A fiscal estimate accompanying Wisconsins Sudan divestment bill, SB 57, states SWIB could incur losses of approximately $440 million. This projected loss significantly exceeds the actual value of SWIBs current investments with companies that have some operations in Sudan.
That loss would have resulted in an additional $45.2 million to be paid by public employers and employees to the WRS in 2007. Further, there would be a 1% reduction in a monthly annuity for the retirees lifetime.
Also, the statement notes, the bill could create an untenable situation, particularly in the international developed and emerging markets, as SWIB would not be able to hire sufficient investment professionals with the expertise to manage assets internally to comply with certain statutory limits.
The estimate warned of potential liability to trustees and the state from a divestment law. In several cases spanning more than 40 years, the Wisconsin Supreme Court has found that legislation that results in the use of pension funds of public employees for non-trust purposes constituted an unconstitutional taking of private property for a public purpose . For example, a 1997 decision ordered the state to repay the trusts $216 million in a case that involved an original $80 million taken from the trust funds.
Colorado PERA in a similar argument in a statement on its website notes money transferred to PERA is no longer public money. Thus any divestment directive affects money that is not the property of the state or any other employer, and in the case of the employees contribution, never was.
Second, ordering divestment comes with associated costs, including identifying companies with ties with Sudan; transaction costs; research and due diligence to replace securities; opportunity costs for a diminished investment universe.
Third , PERA trustees have a fiduciary duty .., to invest for the sole and exclusive benefit of members and beneficiaries. . Legislators should consider indemnifying PERA for the cost of mandated divestment. Such an approach would spread the cost to all Colorado taxpayers Moreover, the contribution would employ public funds, not simply those of public employees.
The Wisconsin bill is pending in a committee in the state Senate. But the Colorado bill, which already passed the state House, was passed by the state Senate March 27 and is expected to be signed by Gov. Bill Ritter. Misguided idealism so far is trumping logic, unless Wisconsin senators and the Colorado governor begin to make good judgments quickly.