A new study claims that state pension funds are being used to advance political agendas, not provide secure retirements for state workers.
Experts at the American Legislative Exchange Council want pension fund managers to set politics aside and get back to focusing on people’s retirements.
Their study, “Keeping the Promise: Getting Politics Out of Pensions,” identifies three forms of pension fund cronyism: Economically Targeted Investments (ETIs), political kickbacks and political crusades.
“Pension fund cronyism is pretty rampant if you look through public pensions funds across the country at the state and municipal levels,” Theodore Lafferty, one of the study’s authors, said during a Wednesday conference call with media.
Vermont is no stranger to pension fund politics. Gov. Peter Shumlin spent the early part of the year trying to get the Vermont Pension Investment Committee to divest the state’s pension fund of Exxon Mobil and 200 other energy stocks. The effort was opposed by both the state treasurer and the chair of VPIC.
The financial consequences of politicizing state investment portfolios can be substantial. The study cites research by University of Chicago Law School professor Daniel Fischel, who found that, over a 50-year period, investment portfolios that included energy-related stocks outperformed portfolios divested from energy investments by 23 percent.
“When you translate that to the kinds of pensions that we are talking about here, that’s billions upon billions of dollars that states and municipalities will have to make up,” Lafferty said.
Lost gains are not the only costs associated with divestment, according to Lafferty. Managing funds for political ends requires extra broker fees, as well as extra time and effort on the part of managers.
Some pension fund politics involve the targeting of individuals. The report cites an example in which the American Federation of Teachers promoted a divestment campaign targeting hedge-fund managers who held opposing views on school choice and defined-contribution public pension systems. AFT created “a blacklist” and then had union pension funds divest from hedge-funds managed by those individuals.
“A pension should be run in an unbiased way to get the best return,” Lafferty said. He added it should not be run to target “certain individuals who you have political disagreements with while hurting your own workers’ retirement in the process.”
Kati Siconolfi, another author of the study, explained that economically targeted investments are ones that aim to support home-state businesses even when the financial returns are worse than investing in non-local alternatives.
“ETIs are cronyist in nature because they seek to serve government-defined economic and social goals at the expense of pension fund performance,” she said.
The study’s look at Alabama’s pension fund system showed that the state’s ETIs returned 1.21 percent gains for fiscal year 2013 even though its non-ETIs returned 3.24 percent.
Political kickbacks are yet another way pension funds can be manipulated and mismanaged. Elliot Young, a research analyst for ALEC’s Center for State Fiscal Reform, said these usually come in the form of pension investments that go to politically connected businesses and individuals.
Young cited a situation with the California Public Employees Retirement System (CalPERS) that resulted in the state suing its former state pension fund managers.
“Billions of dollars of the pension fund were steered into politically connected businesses,” he said.
Young said low or even negative returns from kickback-driven investments can compound over time and snowball into the huge losses.
Lafferty said that when you hurt pension fund returns you are basically “compromising the promise that you’ve made to employees for a secure retirement.”
He added that investment decisions need to be “based on sound financial reasoning and who’s going to get the best returns for our workers’ retirement funds.”
Read the full study online.