New York City Mayor Bill de Blasio has announced that public pension funds for the city’s workers will soon divest $5 billion worth of equity in fossil fuel companies, citing concerns over global warming.
While this may be a popular move with the Upper East Side cocktail party crowd, it’s hard to see how it will help the workers who rely on those pensions for their basic needs. A retired policeman or firefighter is more concerned with being able to afford groceries than with global carbon emissions.
In a clumsy attempt to justify the divestment, New York City Comptroller Scott Stringer pontificated, “Safeguarding the retirement of our city’s police officers, teachers and firefighters is our top priority, and we believe that their financial future is linked to the sustainability of the planet.”
In reality, of course, this move is about politics, not about what’s best for workers. New York bureaucrats are using their position to use public money in ways that ease their own consciences and suit their own political priorities.
This is the danger of allowing politicians broad discretion over public pension investments. The myth of the unbiased public servant is just that — a myth — and it is inevitable that managers will allow their own opinions to seep through in the ways they use other people’s money.
The problem is compounded by the fact that, in the event of a bad investment decision, fund managers are not the ones who pay the price. It is not their own money they are gambling with, but rather that of the millions of public employees counting on retirement income to live.
That point is made all too clearly in a new report by the American Council for Capital Formation, which found that “today, four out of every five taxpayer dollars collected by New York City’s personal income tax are spent paying down the city’s public pension fund system’s liabilities, a 567 percent increase over the past 15 years.”
As the research shows, incentives are badly misaligned to allow fund managers to take politically-motivated risks which may earn the managers public accolades and good press, but which will have no impact on their own pocketbooks should things go south. In fact, New York state has a long and sordid history of choosing their investment managers based solely on politics.
History teaches us that this kind of active fund management rarely pays off. It is unrealistic to expect a single individual, however well trained, to beat a largely unpredictable market. When the health consequences of smoking became apparent, many investors thought that betting against the big tobacco companies would be a sure thing.
How could any company thrive when its products are a demonstrable poison? California’s public pension system made exactly this bet when it divested its tobacco holdings in 2000. In hindsight, however, it was the wrong bet to make, at least in terms of ensuring a good return for pension recipients. It’s now estimated that Calpers lost $3 billion due to its divestment of tobacco company stocks, as companies have continued to thrive against all expectations.
Will fossil fuel companies be successful in the near-term future? The point is that we don’t know, and anyone who says differently is deceitful. The unpredictability of the market means that those purely concerned with maximizing returns, as public pension managers should be, would do best to take a broad index strategy rather than picking individual stocks — or rejecting an entire industry of — in hopes of beating the odds or, more likely, virtue signaling to the media about social responsibility and concern for the health of the planet in anticipation of the next election.
The responsibilities of public pensions are not difficult to understand: Secure the greatest return for workers at the lowest risk. What’s more, we know that the best way to accomplish this is by holding a diverse portfolio that reflects the broader market. Straying from that in the pursuit of the political priorities of fund managers does workers a disservice, and illustrates why power over other people’s money shouldn’t be concentrated into the hands of a few government officials.