Politically Motivated Investment Choices May Burden Taxpayers

A recent report highlights the negative financial implications of politically motivated investment decisions on public finances, particularly affecting taxpayers. According to the Virginia-based Institute for Pension Fund Integrity, such politically charged investing strategies often lead to significant lost value, costing public retirement pensions billions of dollars over time.

The report argues that decisions made by pension fund managers—often influenced by political agendas, such as divesting from tobacco companies—are typically ineffective and financially detrimental. “The politicization of public pension funds, which are driven by elected or appointed officials, is irresponsible and financially unsound,” stated the report. It further emphasizes that prioritizing political concerns over the financial health of pension funds results in substantial long-term costs for taxpayers.

Christopher Burnham, president of the Institute and former Connecticut State Treasurer from 1995 to 1997, expressed strong criticism of the current trend. He stated, “You’re essentially saying, ‘We don’t care about these funds going forward. We care about placing politics before people.” This approach, he argues, ultimately leads to financial losses that taxpayers must cover.

The report specifically cites the controversial decision by the California Public Employees’ Retirement System to divest from tobacco corporations, which cost the fund approximately $3 billion over a span of 14 years. As of February 2018, the fund reported only 68 percent of the assets required to fully fund retirements.

In response to the findings, Paul Rose, the associate dean for Academic Affairs at Ohio State University’s Moritz College of Law, noted that immediate divestment often results in financial losses. He explained that assets are frequently sold at a discount, diminishing potential returns. However, he also acknowledged that not all divestment decisions are harmful. For instance, divesting from industries like coal, which are losing market share and facing heavy regulation, could prove beneficial in the long term.

“There’s sometimes a knee-jerk reaction where you think any kind of divestment for, say, fossil fuels, is just about politics,” Rose remarked. “In reality, it might be because they are looking long term and see things are changing, and they don’t want to be holding on to those assets.”

Burnham further criticized the rationale behind socially responsible investing, asserting that it constitutes a violation of fiduciary duties owed to pension fund members. This sentiment echoes a growing concern among financial experts regarding the balance between ethical investing and maintaining the financial integrity of public funds.

The conversation around political influences in investment strategies gained momentum when Illinois Treasurer Michael Frerichs recently called for a significant corporate change at Facebook. He joined other treasurers in urging founder Mark Zuckerberg to relinquish his dual role as board chairman and CEO, threatening to divest state-controlled funds if his proposal is not addressed. This matter is set to be presented to Facebook’s board in May.

As Frerichs was sworn in for a second term on Monday in Springfield, the implications of his actions highlight the ongoing dialogue around the intersection of politics and public finance. The report’s findings serve as a cautionary tale for policymakers and pension fund managers, emphasizing the need for a careful assessment of how political motivations can affect the fiscal health of public pensions and, ultimately, the financial well-being of taxpayers.