Public pension plans for state and local employees across the nation now hold an estimated $3.8 trillion in total assets. Unfortunately, some public officials view the billions of pension fund dollars they manage as an opportunity to advance their own agendas, threatening the retirement security of Americans in the process. This pension fund cronyism further harms the condition of state pensions, which already are underfunded by a staggering $5.6 trillion.
Rather than investing to earn the best returns for workers, some pension managers and politicians use pension funds in a misguided attempt to boost their local economies, rewarding industries they like, punishing those they don’t, providing kickbacks to their political supporters and bullying corporations into silence and behaving as they see fit.
As a result of playing politics with pension funds, unfunded liabilities increase, jeopardizing workers’ retirements and leaving taxpayers to pick up the tab. The reckless decision to place political agendas ahead of what’s best for workers is known as pension fund cronyism, and it infects pension funds every year across the country.
Keeping the Promise: Getting Politics Out of Pensions, a newly released study by the Center for State Fiscal Reform at the American Legislative Exchange Council (ALEC), exposes three common areas of pension fund cronyism: economically targeted investments (ETIs), political kickbacks and political crusades. In every case, pension cronyism threatens the retirement security of workers, retirees and taxpayers.
ETIs are investments made for their supposed local economic or social benefit. They are a type of pension cronyism because they seek to serve government-defined economic and social goals at the expense of pension fund performance. As any investor will tell you, bias toward local investments will lead to lower returns compared to considering the entire universe of investment opportunities impartially. In Alabama, for example, the state continues to invest billions of pension dollars in ETIs — including in-state office buildings, hotels and even golf courses—despite lackluster results. The insistence on so much local investment is one reason Alabama’s pension funding level has declined over the last several years.
Political crusades occur when officials or special interest groups use pension funds to advance their own agendas to the detriment of pension fund performance, such as divestment from certain companies or industries. According to a study conducted by University of Chicago Law School Professor Daniel Fischel, a hypothetical portfolio diversified across all industries outperforms a hypothetical portfolio divested from energy stocks over the past 50 years. In fact, the divested portfolio produced returns 0.7 percentage points lower on average per year, representing a massive 23 percent decline in investment returns over five decades. Perhaps this is why Christopher Ailman, Chief Investment Officer of the California State Retirement System (CalSTRS), Vermont State Treasurer Beth Pearce and others have expressed concerns on the high costs of pension divestment.
Another troubling example of a political crusade is Rhode Island, which recently targeted the fund’s best performing money manager. Pressure from the American Federation of Teachers (AFT)-which put the fund’s manager, Dan Loeb, on a so called “black list” for his personal support of school choice appears to be responsible for this otherwise puzzling move.
The misuse of public pension funds by pension trustees to promote local economic development and social goals, reward supporters or promote political agendas endangers investment returns and jeopardizes the future of pensioners. Workers deserve better. Policymakers can secure the promises made to pensioners and their families by keeping politics out of pension policymaking. Adopting strong fiduciary standards for pension trustees-including transparency rules that allow the public to see how pension funds are being managed and smart pension board reforms that hold trustees accountable-can enable governments to keep their promises to workers and retirees.
Jonathan Williams is the Chief Economist and Vice President for the Center for State Fiscal Reform at the American Legislative Exchange Council (ALEC). Thinking of submitting an op-ed to the Washington Examiner? Be sure to read our guidelines on submissions.
