Politically-Driven Investment Decisions Cost Taxpayers Billions

A recent report highlights the financial repercussions of politically motivated investment decisions on public finances, indicating that such actions often result in significant losses for taxpayers. The study, conducted by the Virginia-based Institute for Pension Fund Integrity, suggests that politically charged divestments, like pension fund managers withdrawing investments from certain industries, can lead to billions of dollars in lost value for public retirement pensions.

According to the report, the trend toward politicizing public pension funds is both irresponsible and financially unsound. The findings reveal that when elected or appointed officials prioritize political agendas over sound investment strategies, the consequences are detrimental. The report emphasizes, “You’re essentially saying, ‘We don’t care about these funds going forward. We care about placing politics before people,’” stated Christopher Burnham, president of the institute and former Connecticut State Treasurer from 1995 to 1997.

One notable example cited in the report is the decision by the California Public Employees’ Retirement System to divest from tobacco companies, which reportedly cost the fund approximately $3 billion over a 14-year span. As of February 2018, the fund only had 68 percent of the assets needed to cover retirement benefits.

Impacts of Divestment Decisions

The report’s authors argue that immediate divestment can often lead to financial losses, as assets are frequently sold at a discount. Paul Rose, associate dean for Academic Affairs at Ohio State University’s Moritz College of Law, supports this view, stating that divestment driven by political concerns typically results in unfavorable financial outcomes.

Nonetheless, Rose also points out that certain divestments could have long-term benefits. For instance, withdrawing investments from the coal industry might be prudent given its declining market share and heavy regulatory burdens. He noted, “There’s sometimes a knee-jerk reaction where you think any kind of divestment for, say, fossil fuels, is just about politics. In reality, it might be because they are looking long term and see things are changing.”

Burnham, however, contends that the justification for socially responsible investing often violates fiduciary duties owed to beneficiaries of public pension funds. The report calls for a reevaluation of how investment decisions are made in the context of political pressures.

Calls for Accountability in Corporate Governance

In a related development, Illinois Treasurer Michael Frerichs gained national attention last fall when he joined fellow treasurers in urging Facebook to compel founder Mark Zuckerberg to step down as chairman of the board while retaining his CEO role. Frerichs has threatened to divest the funds he oversees if the company does not comply with this demand. His proposal is set to be presented to Facebook’s board in May 2023.

Frerichs was sworn in for a second term on March 6, 2023, in Springfield, Illinois, and his actions underscore a growing trend of political influence in corporate governance. As public officials increasingly engage in corporate matters, the implications for public investment strategies must be carefully considered to protect taxpayer interests.

The overarching message of the report is clear: when political considerations take precedence over sound financial judgment, the burden of lost value ultimately falls on the public.