Report: Political investing decisions hurt public finances, lead to tax hikes

January 16, 2019

When politicians make decisions to shift public money in one direction or another, a new report says it’s rarely effective and usually means lost value, costing taxpayers in the long run.

The report from Virginia-based Institute for Pension Fund Integrity estimates politically-charged investing, such as pension fund managers pulling money from tobacco companies, for example, costs public retirement pensions billions of dollars.

“The politicization of public pension funds, which are driven by elected or appointed officials, is irresponsible and financially unsound,” the report said, adding that it’s largely ineffective as well.

“You’re essentially saying, ’We don’t care about these funds going forward. We care about placing politics before people,” said president Christopher Burnham, who served as Connecticut State Treasurer from 1995-1997. “When these funds inevitably lose money due to the shortsighted divesting, the taxpayer has to make up the vast majority of that difference.”

Cited in the report is the now-infamous decision of the California Public Employees’ Retirement System to divest from tobacco corporations costing the fund about $3 billion over a 14-year period. As of February 2018, the fund had 68 percent of what it would need to fund retirements.

Professor Paul Rose, associate dean for Academic Affairs from Ohio State University’s Moritz College of Law, said he agreed with the report in that immediate divestment often is a money-losing encounter because the sale often is bought up at a discount. However, other decisions could be beneficial, such as divesting from an industry such as coal, because it’s losing market share and burdened by heavy regulation.

“There’s sometimes a knee-jerk reaction where you think any kind of divestment for, say, fossil fuels, is just about politics,” he said. “In reality, it might be because they are looking long term and see things are changing, and they don’t want to be holding on to those assets.”

Burnham calls justification for socially-responsible investing a violation of fiduciary duties.

Illinois Treasurer Michael Frerichs found the national spotlight last fall when he joined other treasurers in calling for Facebook to force founder Mark Zuckerberg to relinquish his dual role as board chairman and CEO of the social media giant, threatening the company with the divestment of the funds he controlled.

Frerichs’ proposal for Facebook will be brought before the company’s board in May. Frerichs was sworn in for a second term on Monday in Springfield.

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