CommentsAN ONGOING SERIES-Immediately after my appointment as General Manager was confirmed by the City Council, several of the Councilmembers kindly congratulated me.
After congratulating me, one prominent Councilmember suggested that LACERS look into purchasing the parking lots that the City was selling – yes, the very same parking lots that had not attracted any interest from private sector investors.
That was not the only attempt to politicize LACERS investments. Former Mayor Villaraigosa was so frustrated that he couldn’t get what he wanted from the City pension funds that he stated at a meeting of City general managers that he would do whatever it takes to get control of the pension money – whether that required a vote of the State legislature or of the people. Fortunately, the State Constitution has protections against such efforts.
Many of the recent attempts to politicize LACERS investments have to do with divestment – that is, selling specific holdings – usually based on a request of a politically-connected board member or a politician. Divestment requests of public pensions have included things such as fossil fuels, guns, tobacco, and gambling; countries such as Sudan, Israel, and countries threatening Israel; and companies such as those that sell guns or provide goods or services to the Dakota Access Pipeline, or the Border Wall.
While it’s easy to say we should take action regarding some of these causes, as they may be sympathetic, there are a few issues to point out regarding these and all of the other past divestment attempts: First, it is not easy for a pension fund to divest from these things, countries, or companies.
The majority of LACERS investments are in index funds, as these funds are cost-effective. Trying to carve out the perceived undesirable investments from these funds would defeat the purpose of being in index funds. You would have to create and track a custom index. Investment expenses (which are important, and some politicians already complain about) would go up.
Second, the LACERS Board does not get to call all the shots on how its private equity funds are invested. The Board gives its private equity managers latitude to find the best investments within broad parameters. If a fund is invested in an asset that a board wants to divest from, the options basically are limited to selling the whole fund on the secondary market (usually for a discount and perhaps even a steep discount) or waiting for the term of the fund to run out (often many years).
Third, the California Public Employees’ Retirement System (CalPERS) missed out on approximately $3.6 billion due to its divestment from tobacco. The point here is that divesting can cost pension systems investment returns.
Regarding fossil fuel divestment, Ben Meng, the Chief Investment Officer of CalPERS, was quoted as saying “60 cents of every dollar to pay the retiree benefits comes from investment returns. . . We need those investment returns now and in the future,” he said. “If the market fails us, or we miss our targets, the hard-working people of California and the employers take on the financial burden.” (Chief Investment Officer publication.) In other words, the taxpayers have to pay for the divestment decisions, whether they agree with the decisions or not.
Chris Ailman, the Chief Investment Officer of the California State Teachers’ Retirement System (CalSTRS) was quoted in the Orange County Register regarding potential coal divestment, as follows, “I’ve been involved in five divestments for our fund. [On] all five of them we’ve lost money, and all five of them have not brought about social change.”
This brings up the strongest point against asking LACERS to divest from any investment where it thinks it can make good risk-adjusted returns – the City has made benefit promises to over 46,000 of active and retired City employees and LACERS currently only has 73% of the funds it will need to pay those benefits. This somewhat paltry funding ratio is after more than ten years of a bull market and, perhaps only a recession away from a death spiral for LACERS.
So, any discussion of allowing politics into LACERS investment process, whether in the form of investment “recommendations” or divestment “requests” should start – and probably end – with conversation regarding how the City is going to make good on the benefits promised to hard-working City employees. The politicians, who already complain about the amount of the contributions the City pays to LACERS, should not meddle in how LACERS invests its funds.
The investment decisions for LACERS should be exclusively for the LACERS staff and consultants to recommend and for LACERS Board to make. The California Constitution and the City Charter give the LACERS Board “sole and exclusive fiduciary responsibility over the assets of its system.” If the LACERS Board determines that an investment’s risk outweighs the potential returns, it should not make that investment. However, the Board should not simply be swayed by politicians who do not have a fiduciary duty to the LACERS members.
Even if LACERS were fully funded, it would be dangerous to go down the slippery slope of divestment. There likely are reasons someone could devise to divest from almost anything, country, or company. If these decisions are made in the political arena, who decides where it stops?
How about if the City Council takes the time it may have wanted to spend on its recent divestment idea to listen to experts on how to ensure LACERS’ ongoing viability, because as of now – at just 73% funded – that is not assured.
Previous series articles:
The Truth About LACERS – The Net Liabilities
The Truth About LACERS - The LACERS Board - Part 2
The Truth About LACERS – Necessary Conversations
The Truth About LACERS – The LACERS’ Board, What Happened?
This Recession Was Inevitable - LA’s Response Doesn’t Have to Be
(Tom Moutes served at LACERS for approximately sixteen years, the last seven of those years as the General Manager of the pension system. He retired in 2018. Tom can be reached at [email protected]. Prepped for City Watch by Linda Abrams.
