During the 40-plus years of my association with public employee retirement, I have witnessed a number of initiatives targeted at achieving collateral (non-financial) objectives through the investments made, or avoided, by public employee retirement systems.
For purposes of this discussion, I'll focus on what has in the past few years become known as the use of environmental, social and governance criteria to determine the long-term investment worthiness of a company. (I'll leave attempts by state and local governments to engage in U.S. foreign policy through pension investments for another day.) ESG proponents argue that this is more than seeking collateral objectives because related policies will have a direct bearing on the sustainability of a corporation and thus its long-term financial wellbeing.
To take one thing off the table, let me acknowledge that polluting our environment is a bad thing. Protecting our air, water and soil quality is very important regardless of whether or not global warming is a byproduct of neglect (another subject for another day). Environmental issues have been deemed to be sufficiently important to warrant governmental intervention and regulation at the federal and state government levels with the sole purpose of protecting our environment.
Given all of the attention that has been and is being directed at our physical environment, it is astounding to me that so little attention is being paid to our financial environment, other than the abundance of lip service suggesting that someone somewhere needs to do something. (The governor in “The Best Little Whore House in Texas” called this inattention “doing the sidestep.”)
Regardless of whose numbers you believe, there is little doubt that over the next few years our corporations will be dumping millions of elderly workers on the economy who will not have the financial wherewithal to maintain anything close to their pre-retirement standard of living. While the retirees might not appreciate being characterized as such, they will constitute private-sector financial pollution and, in many cases, will need additional governmental safety net distributions (aka, taxpayer-supported entitlement programs) to simply survive.
Who is responsible for this regrettable turn of events? Pointing fingers is easy because there are clearly outside forces at work that have contributed significantly to this predictable outcome. However, before playing the blame game, I think it is high time for those in the public sector to take a long hard look in the mirror, concentrating on two of the things that have been done.
First, short-termism on the part of corporate management has been rewarded. Corporate managements are expected to deliver on ever-increasing earnings per share, which is facilitated by the elimination of potentially volatile expenses associated with defined benefit pension plans. Second, rather than treat them like partners in a mutually beneficial enterprise, pension plans have treated corporations like enemies whose activities need to be micromanaged by activist shareholders who know as little about corporate operations as corporations know about what is involved in the management of a public employee retirement system. It's not rocket science to figure out that if public-sector defined benefit plans could be replaced by individual account 401(k)-type plans, a big thorn in the side of corporate management would go away as large pools of proxy voting assets go away. That does not mean public plans should completely avoid acrimony by rolling over and accepting all corporate behavior. However, focus on aligning the interests of all players may be a better application of time and talent than repeatedly going on proxy war attacks.
In terms of doing away with their defined benefit plans, corporations have been strongly encouraged to do so by the way in which federal private-sector pension plan regulations and tax policies have evolved. Through collective efforts, public plans should be able to help corporations revert to defined benefit plans by advocating regulations and tax policies that are more employer friendly. Here it would be necessary to convince Congress and the administration that by directly making it difficult for corporations to maintain defined benefit plans they are creating a future demand for increased tax-supported subsidies to replace what could have been responsibly funded retirement income security for private-sector workers.
While public plans need to take some responsibility for private-sector efforts to undermine public-sector defined benefit plans, there are other groups that deserve special recognition. They are fairly easy to identify think tanks and interest groups that typically have words like institute, foundation, council, chamber or roundtable in the names of their organizations. One of their recent fearmongering ploys has been to pit private-sector have-nots against public-sector haves in the retirement-income security area. The line of reasoning goes something like this — George has a cow and Bob does not have one — the solution is to level the playing field by killing George's cow — problem solved. I've actually allowed for the possibility that public-sector defined benefit plans are not seen as being the direct problem. Elimination of such plans would simply be seen as collateral damage in the quest to weaken government by making it a less attractive employer. After all, a good deal of government activity involves either regulation or education, which either becomes weaker or easier to privatize if government can't attract and retain a quality workforce. This tactic is known as starving the beast. It's worth noting that public funds have sufficiently irritated the companies in which they invest that companies are making contributions with corporate money to support the efforts of those naysaying organizations.
There is a boatload of irony in that considering that public plans are corporate owners. I don't have a solution to this problem other than to be vigilant and responsive to the volumes of misleading information they generate. One thing that might be helpful, however, would be for federal tax law to require so called non-profit organizations to disclose the sources of their revenue so it would be clear for whom they are shilling. Those organizations continually call for greater transparency on the part of public pension plans that are already extremely transparent. Those organizations' patrons get to treat their contributions as business expenses, thus reducing taxable income. The messages from these organizations would probably not change as the result of required disclosure but at least the hidden agendas of their financial supporters would become clearer if these tax expenditures were transparent.
There are other self-interested groups that are also focused on the elimination of public-sector defined benefit plans but I'll leave them for attention at a future date. In the meantime, I encourage those plans with an ESG focus in their investment programs to pay attention to emerging financial pollution as they address environmental concerns.
Finally, it should also be noted that governments that fail to properly fund their retirement plans are as guilty of producing financial pollution as are the corporations that have abandoned their retirement plans. However, it should further be noted that such failures on the part of governments are not the common condition as is incessantly suggested by the critics of public-sector plans.
Gary Findlay retired in January as executive director of the Missouri State Employees' Retirement System, Jefferson City.