The Empire State Puts Politics Ahead of Pension Promises
Earlier this year, the New York State Comptroller announced that the State’s pension funds would divest from 21 energy companies. As shown in Unaccountable and Unaffordable, New York is already buried in over $508 billion of unfunded pension liabilities. Residents of the Empire State are on the hook for over $25,000 per person in constitutionally guaranteed promises their state can’t keep. Instead of playing politics with pension funds, New York should be doing everything it can to safeguard taxpayers from undue tax burden increases.
The energy industry, specifically fossil fuels, are currently the best performing segment of the market. Nineteen of the twenty best performing stocks represent companies that are involved in the fossil fuel industry. The companies New York divested from include Hess Corporation and Pioneer Natural Resources, who provided 16.73% and 39.31% returns on investment over the past year, respectively. Both outperformed the market at large, which has experienced a loss of 10.86%.
Pension funds need to invest in a wide array of industries – including the energy sector – to effectively diversify their portfolios. Investing in multiple areas reduces risk for the fund, as industries returning losses will be canceled out by those producing gains. The S&P 500 Index, a highly diversified fund which includes companies involved in the fossil fuel industry, has experienced a loss of 13.5% since the start of the year. That may not seem great at first look; however, indexes that removed fossil fuel stocks experienced a loss of 15.1% – a full 1.6% lower than the fully diversified portfolio.
In addition to lower returns on investment than funds without divestment, recent research shows politically motivated divesting fails to meet their stated goals. Even when a pension fund with billions of dollars in assets divestments from any industry, there will always be other investors willing to buy up the divested assets. As a result, long-term asset prices are not affected by divestment.
The end of diversification in state pension funds is a big problem for New York. The Empire State has the fourth highest unfunded pension liabilities in the nation, sitting at over $508 billion. New York’s goal should be to prioritize the funding of its pension promises, not playing politics. As shown in Unaccountable and Unaffordable, New York is one of eight states that constitutionally guarantees pension benefits for retirees. In order to keep those constitutionally guaranteed promises, the state needs strong fiduciary rules that keep politics out of pensions. The ALEC Model Policy, State Government Employee Retirement Protection Act, requires pension fund managers to act in the best interests of their fund. This means managers cannot invest or divest their pension funds based on political, social or other external factors. Instead, all investment decisions must be based solely on pecuniary factors, such as expected returns and diversification.
New York can learn from the mistakes of California, which has the largest unfunded liabilities in the country at $1.5 trillion, over $38,000 per capita. Recently, legislators in the Golden State tried to pass a bill that would require public pensions to fully divest from all fossil fuel investments. Fortunately for public employees and taxpayers, that bill was stopped in the state assembly. As shown by ALEC in public comments submitted to the Department of Labor, investment returns in California are much more volatile than those of states such as Wisconsin and Tennessee, which do not have politically motivated constraints on pension investments.
Albany needs to focus on keeping the promises it made to retirees and taxpayers. Politically motivated investing jeopardizes pension fund solvency and costs taxpayers more money. Ensuring objective, diversified financial strategies are employed in pension investments will keep pension funds focused on pension promises, not politics.