A recent New York Post article about the appearance of corruption (or cronyism, you decide) in the state’s pension fund included a funny little nugget. The story, about Vicki Fuller, who was the funds chief investment officer and who landed a $275K per year part-time job at a natural gas company after using pension funds to buy up that company’s debt, quoted “Richard Brooks, an activist with the Brooklyn-based environmental group 350.org.”
There’s clearly a perceived conflict of interest here… We need to get fossil fuels out of our politics and our pension funds.
Does anyone else see the problem?
It wouldn’t surprise me that Mr. Brooks, being an activist, is clueless as to the inherent contradiction in his statement. By calling for the exclusion of fossil fuels from pension funds, he is actively declaring in favor of politicizing those funds.
He’s not alone.
There was a time, not all that long ago as such things are measured, where public pension funds (the vast stores of wealth intended to fulfill the retirement commitments governments made to public workers) were managed by money professionals. Maximizing the performance of these funds is of great benefit to taxpayers, because the better they do, the less taxpayers have to buck up from their own pockets to fund pension obligations.
More recently, however, and in a classic example of the incredible allure of OPM (other people’s money), “socially responsible investing (SRI)” has become the norm. Whether it be sin companies/industries, fossil fuel investments, or the BDS movement, politicians now see public pension funds as policy playgrounds, where they can score points by directing or influencing how the trillions those funds manage are invested.
Some will argue that politicians are elected just for such things, that voters want them to behave in a fashion that mirrors their own values. The problem, however, lies in simple economics. If the spectrum of available investments is artificially restricted, fund performance is likely to take a hit. If a laundry list of companies is off-limits, fund managers may miss out on gains. If a different laundry list of companies is favored or mandated, then performance becomes secondary.
When trillions are at play, even a single basis point of lost gain becomes a huge deal. And, given the long time horizons involved (monies invested today are to fund pension payments decades hence), the reality of compound interest magnifies that lost performance. This ensures that taxpayers will pay the price for SRI.
Again, some will argue that this is simply how the world works, that “to the victor go the spoils,” that SRI is something that voters demand and support. These folks are very likely the same who believe in unlimited government, who think that an electoral winner should not be restricted by structural limits such as those that are the very fabric of our nation.
Oh, wait… change that to “their” winner. Support for unfettered power coincides with party ascendancy. When it’s the other team who wins, they’re among the first to scream about abuses of power.
There is an obvious goose-gander warning therein. If you support politicizing pension funds, don’t be surprised when things happen in those funds that you disapprove of when the other party comes to power. Sure, you may expect that your party stays in power forever (in some states, that’s probably true), or you may have a short time horizon, but herein lies the path of corruption, and your good intentions are virtually guaranteed to be subverted for personal gain by the politicians you empower thus. While it can be hard to prove a tit-for-tat in such matters, the aforementioned Vicki Fuller story reeks of it. Give the government a tool, and odds are very good it’ll be used in a fashion you don’t intend.
SRI may appeal to you, as a policy tool or as the moral thing to do, but it comes at a price. Two of them, actually. First, performance suffers, meaning that taxpayers will eventually pay for it. Second, it incentivizes corrupt behavior, and while the cynical may be OK with shady stuff if it advances their agenda, the moral folks who see SRI as the right thing to do should be appalled by corruption.
Public pension investing is a big deal, since there are trillions of dollars at stake. The funds’ managers should be non-partisan and non-political, with fiscal responsibility the prime directive (legality and fidelity to international policy dicta, which rise above their pay grade, also apply). Demanding state and local politicians apply those trillions as policy tools is both wrong-headed and dangerous.
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