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Commentary By James R. Copland

The Pension Divestment Ripoff

Cities, Governance New York City, Pensions

Public employee unions wield considerable power in New York politics, but “progressive” politicians continue to show their willingness to sell out government workers — and city citizens and taxpayers — to signal their fealty to the left’s litmus-test issues du jour. Such was the case last month, when Mayor de Blasio announced he would be waging “the fight against climate change” on two new fronts.

The mayor’s first silly idea is to sue big oil companies. His lawsuit is destined to fail, much like its predecessors. But it will generate lots of headlines for the ambitious politician, which is of course its object.

The mayor’s second idea — announced jointly with City Controller Scott Stringer — is to divest the city’s pension funds from fossil fuel-focused energy companies by 2022.

That’s a much bigger deal: Though the mayor’s lawsuit theater is a waste of city resources (and a nuisance to the companies involved), the de Blasio-Stringer divestment scheme threatens to compromise city finances to a significant degree.

“The de Blasio-Stringer divestment scheme will do nothing to affect corporate behavior.”

The city runs five big pension funds for its public employees, and these funds are woefully underfunded. The pension systems are in debt $65 billion — meaning, their promised payouts are currently $65 billion greater than what they’re worth using the city’s own rate-of-return assumptions.

But Stringer and his team cook the books. The city assumes annual pension returns of 7% annually, roughly three percentage points higher than the yield assumptions preferred by real investors like Warren Buffett.

A report last summer, authored by my colleagues E.J. McMahon and Josh McGee, applied appropriate actuarial assumptions developed by Buffett and found the city’s real pension debt is more than $142 billion. Put differently, the city’s existing pension obligations are only 47% funded; more than half of the funds already promised to city workers’ retirements simply don’t exist.

In the last year, the city’s pension funds have more than hit their targets, as they have ridden the wave of the bull market. Inevitably, though, that luck will run out, and the market will turn south. And at that point, the city’s ever-riskier investment strategy will yield an even bigger pension-funding hole.

The politicians will of course claim that their oil-company divestment scheme is financially sound — that the market is systematically overvaluing energy investments.

But that’s bunk. Does anyone really think that Bill de Blasio and Scott Stringer know more about corporate stock valuation than investment professionals who make big bucks doing this for a living?

The answer is no, and that’s why the de Blasio-Stringer divestment scheme will do nothing to affect corporate behavior. Smart hedge fund guys will happily buy up the stock the city funds are selling. The pension funds are huge, but hardly big enough to move the share price, or affect the behavior, of ExxonMobil.

We’ve seen this story before. In 2001, the politicians running the pension fund for California public retirees, the California Public Employees Retirement System, decided to divest their funds of tobacco stocks. In 2016, the California fund released a report by an outside consultant that calculated that this boneheaded divestment plan had cost the pension system more than $3 billion in lost investment gains.

If divesting from tobacco companies is dumb, divesting from oil companies is dumber. For one, oil stocks constitute a much larger share of the market. And because energy price shocks tend to send overall markets reeling, energy company stocks are often an effective hedge against market downturns.

It’s likely the case that de Blasio understands this, which is why he’s scheduled the divestment for 2022, long after he’s out of office.

But while we wait for that date to arrive, the tab for the city’s pension hole will continue to squeeze out current workers’ pay and benefits, as well as necessary public services and investments. Pension contributions already consume 17% of New York City tax dollars and 35% of its payroll. By 2021 — a year before the de Blasio-Stringer divestment scheme hits the books — pension costs are projected to hit a staggering $10 billion annually.

For far too long, New York politicians have been treating city workers’ pension funds as political playthings rather than investment vehicles, hurting investment returns in the process. It’s time for that to stop.

This piece originally appeared in the New York Daily News


James R. Copland is a senior fellow and director of legal policy at the Manhattan Institute.

This piece originally appeared in New York Daily News