A secure retirement built on a strong pension has always been the ultimate reward and “thank you” for a lifetime of service by our public servants. Unfortunately, massive unfunded liabilities in pension systems across the country threaten that security. This is not only because of chronic underfunding, but also because of politically driven calculations.
Now, if we let them, Mayor de Blasio and City Controller Scott Stringer will inject a whole new level of politics into the management of New York City’s public pension funds by making arbitrary and political decisions regarding what the funds should or should not invest in.
In the latest movement to force political agendas into the management of public pension funds, de Blasio and Stringer proposed in January 2018 to divest $5 billion in energy stocks from the city’s pension funds. Notwithstanding that natural gas, gasoline and diesel keep the city running and the economy moving, the elected officials want their personal political agendas to replace “the highest standard of care” that their fiduciary duty requires them to provide to the pension beneficiaries.
Using the optimistic, and politically advantageous, 7% protected rate of return, New York City faces at least $60 billion in unfunded pension liabilities. If the rate of return is reduced by just 1%, the unfunded liability jumps to over $90 billion, which would increase contribution requirements for the city.
For context, $10 billion of NYC’s annual budget now goes towards pension costs, which is more than seven times the average total budget of America’s 100 largest cities. This leaves the city with the difficult choice of deciding how to sustain this funding, and the pension board with the duty of deciding how to manage the unfunded liabilities.
It’s against this backdrop that de Blasio and Stringer now propose putting politics over fiduciary duty.
In order to advance their costly energy divestment plan, de Blasio and Stringer issued a “request for information” to inform their plans, even at a time when not all five pension funds support the divestment scheme. In response to the request, the Institute for Pension Fund Integrity, which I lead, highlighted that New York City stands to lose $25 million immediately in frictional costs, and up to $1.5 billion over the next 50 years if it goes ahead with this plan.
The energy divestment scheme continues a long history of divestment campaigns, which experts have assessed have never resulted in increased value for pension plans. Divestment movements have included everything from tobacco (like when I was Connecticut treasurer) to divesting from companies that boycott Israel (like in Illinois). These divestment movements are actually contrary to IRS guidelines that require diverse plan investments.