by Mitch Kokai
Senior Political Analyst, John Locke Foundation
While the U.S. stock market has produced one of the longest and strongest bull runs in its history over the past nine years, the financial condition of many of the country’s 6,000 or so state and municipal pension funds has deteriorated. Some are in bad shape.
Yet, even as these pension funds grapple with a huge deficit, $1.4 trillion as of 2016, the drumbeat for exiting investments in certain industries—oil, coal, arms, even car companies—goes on. Should pensions, particularly underfunded ones, make investment decisions based on political litmus tests rather than follow the standard fiduciary duty to make the best returns possible with the least risk?
There’s a strong argument to ignore the calls for divestment, which limit a fund’s diversification. …
… How bad are things at state pensions? An April 12 report from Pew Charitable Trusts on the funding gap in 2016, the latest year for which comprehensive 50-state data is available, put the deficit at $1.4 trillion, up nearly $300 billion from 2015.
Blame the politicians. They have a habit of increasing state employee benefits just before elections. When benefits rise faster than the region’s economy can support, there’s trouble. Illinois is the poster child for underfunding among the states, with a funded ratio of 36% in 2016. What’s happened there is instructive: Benefits have grown over 1,000% over the past three decades, six times faster than the state revenue growth and eight times faster than the median household-income growth. …
… Chicago-based Ted Dabrowski, president of Wirepoints, a public policy research, news, and data organization, has had a ringside seat in the Land of Lincoln. Calls for divestment for social goals is “a dangerous policy change,” he says. “The minute you stop investing for maximum returns it isn’t clear what you are investing for. When you start subordinating returns to social goals it gets vague.”