Politically Motivated Investment Guidelines Making Bad Public Pension Programs Worse

Even as funds lose money, leaders call for decisions based on politics, not success


Public sector unions don't need guns to rob people when they've got pension fund managers.
Credit: Horst Gossman at Dreamstime.com

Poor returns be damned, California's biggest public pension fund managers are taking a moral stand against the profitable world of gun manufacturing and selling off investments in Smith & Wesson Holding Corp. and Sturm, Ruger and Co.

Matt Welch noted in January similar politically motivated pension decisions in New York City and Chicago. Smith & Wesson's stock value dropped in mid-December, but that drop was from a record high and it's climbing its way back. The same holds true for Sturm, Ruger and Co. Looking at five-year charts shows them both go be good, solid investments.

California Public Employees Retirement System (CalPERS) reported a dismal 1 percent return for the fiscal year that ended last June, but has since rallied, getting the numbers back up to 13 percent by the end of 2012. For the first six months of this fiscal year, they're sitting at 7.1 percent, which is still below the 7.5 percent benchmark.

Steve Malanga at Public Sector Inc., a blog of the free-market non-profit think tank Manhattan Institute for Policy Research, took note of the many political guidelines that have hamstrung California's public employee pension funds:

One of the funds' earliest divestments was of tobacco stocks, just before they began their long upward march. A 2008 Calsters report estimated the fund missed out in $1 billion in appreciation of shares it previously owned in the sector, according to this story. The funds also refused to invest in shares of companies in countries whose labor practices the board of Calpers didn't approve of, including China and India, missing out in growth in these rapidly developing economies.

Socially responsible investing is not just about what you divest, but what you buy with the freed up dollars. According to the Bloomberg story I link to above, Calpers and Calsters redirected some of their funds into California real estate in an attempt to bolster the homeland economy. That investing ramped up between 2004 and 2006, just as the California real estate bubble was inflating. Over time Calpers real estate bets went from bad to absurd. When the whole thing fell apart, Calpers real estate portfolio declined by whopping 42 percent, according to a Feb. 11, 2011 story in the Los Angeles Times.

Of course, it's easy for government employee pension managers to moralize over where to invest the money. There's no consequence for pension members if the funds lose money. States and municipalities (by which I mean taxpayers) are obligated to make up the difference. For those who manage their own retirement funds, there are a host of socially responsible 401(k)s. For those who wish to potentially reduce their potential gains in favor of avoiding certain industries, that's their own call, not a pension board's.

The Illinois Policy Institute reports that the Chicago Teachers' Pension Fund lost more than $38 million last fiscal year, ultimately adding more than $800 million to the city's unfunded liabilities. Chicago Mayor Rahm Emanuel is one of the politicians urging pension funds to divest from gun companies. That's something to keep in mind when he talks about his city's budget crisis and how to fix it.