STUMP » Articles » Public Pension and Public Assets: Governments Shouldn't Be Activist Investors

Public Pension and Public Assets: Governments Shouldn't Be Activist Investors

by meep

13 November 2017, 12:26

I am getting a bit tired of these shenanigans.

I have multiple examples, almost all of which involve various politicians throwing their weight around using the large amount of pension funds they control.

Note: pension funds they control, but supposedly for the benefit of pension plan participants… who are never asked if they like this. But we will come back to that later.

WHAT WOULD YOU SAY YOU DO HERE, EXACTLY, FRERICHS?

Mike Frerichs is the Illinois State Treasurer, and he seems to have forgotten what his job is.

State treasurer has a Facebook obsession:

llinois State Treasurer Mike Frerichs is pressuring Facebook to own up to its role in allowing Russia to meddle in the 2016 U.S. Presidential election.

As treasurer, Frerichs oversees state investments that include a stake in Facebook. He began fighting in April to get the social-media company to put an end to bogus news reports.

“Facebook’s accountability for the spread of fake news cannot be outsourced,” Frerichs wrote in a letter to the company founded by billionaire Mark Zuckerberg.

Okay, why does Illinois hold any Facebook stock? I am talking about funds the state owns, which is different from pension funds. But back to that in a bit.

[And this fake news crap… I have no idea what these people are talking about. I see people who get confused about clearly satirical stories, people who will believe whatever conspiracy-mongering, etc.

But mostly what I see are pics and videos of otters.

Because I really enjoying watching otter videos.]

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Back to the piece:

The state treasurer doesn’t have a personal Facebook page, but he does have a treasurer’s account.

Since his first letter to Facebook, Frerichs has pushed a shareholder proposal that would force the company to be more transparent. Last week, he wrote another angry letter — his third since April — to the company.

“The measures Facebook has taken to address this issue are insufficient,” Frerichs wrote. “The continued proliferation of fake news on Facebook is deeply troubling.”

Facebook, for its part, has been trying to placate Frerichs and other shareholders. Deborah Crawford, vice president of investor relations at Facebook, wrote back in an email, saying, “We take this very seriously.”

Okay, this comes across to me as the usual grandstanding of a politician trying to reach the next political rung. It seems to me the time-honored way of becoming Illinois governor is to get the incumbent yanked for federal crimes, but I doubt Rauner will oblige in that respect.

In New York, we’re used to the state comptroller, state attorney general, and even the state head of the department of financial services try to grab media by blowing some minor issue into something that requires ACTION! NOW!

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I remember Eliot Spitzer doing it..poor fellow with his very expensive hobby.

Anyway, it seems the Treasurer is sitting on about $13 billion in investments:

Background

It’s called the State Investment Portfolio and it’s not cyclical or temporary. It’s aside from other monies administered by the Treasurer, including the college savings program and funds owned by municipalities invested on their behalf.

As of the date of the last monthly report – September 30 —the portfolio was $13.2 billion. It has stayed between $11.5 billion and $14 billion every month for as long as I found records — at least since January 2014.

What’s the sense in holding that much in near cash when the state is paying 9% to 12% late payment interest on billions in unpaid bills? It’s earning less than 1.3% annualized because it’s invested very short term – the weighted average maturity is less than a year. I first wrote about this last Spring and have still found nobody with anything close to an explanation for it.

The historical explanation for this arrangement isn’t a convincing rationale. Over past decades the state created over 750 separate “funds,” each for restricted expenditures, and the portfolio is money in those funds. There’s a Thoroughbred Breeders’ Fund, a Master Masons Fund and a “Sorry Works!” Fund, though most are more serious. A list is linked here.

…..
The current Treasurer, Michael Frerichs, isn’t to blame for how these circumstances arose. The funds were created by statute and the huge balances preceded his tenure.

I asked his office last Spring what sense it all makes. “The simple answer to your question,” they answered, is that “the investment portfolio balance is unusually high because the state does not have a budget.”

But that just wasn’t true. The large balances were there long before the recent budget impasse and have survived it. Since then I’ve asked many others in and out of government why this makes any sense and none has an answer.

…..
Another consequence of investing so much money short term is the extraordinary churn that’s required. A CNBC host seemed surprised last October when Frerichs said his office had $30 billion of annual investment activity just with Wells Fargo Bank. Total investment activity, he said, exceeds $1 trillion per year, a staggering number (though that may include investment in activity the Treasurer also handles for separate municipal funds of about $4 to 6 billion and some other smaller accounts). Is that, and whatever cost it entails, really necessary?

So Frerichs, I humbly propose that you stop worrying about one stock in your $13 billion of funds you’re supposed to be managing, and actually look at how those funds are being managed. That’s your actual job.

Just a thought.

The official letter from the Treasurer, in which he mentions $25 billion he manages ($13B for the state, $7B for college savings, and $5B for municipalities)….but doesn’t mention exactly how much facebook stock the state holds.

DIVESTMENT FOR EVERYBODY!

I’ve done several divestment posts before, and noted it would be a theme for this year.

Here are new ones since last I posted about this phenomenon in August:

HOW EFFECTIVE IS THIS?

A lot of this is pure political posturing.

The most ridiculous one from above involves Florida and Republicans.

Rick Scott, Cabinet members OK Venezuela investment ban

With no discussion, Gov. Rick Scott and members of the Florida Cabinet Wednesday approved a policy to forbid any investments benefiting the Nicolás Maduro regime in Venezuela.

Scott, state Chief Financial Officer Jimmy Patronis and Attorney General Pam Bondi sit as Trustees of the State Board of Administration, which oversees state investments.

The state currently has no investments that involve Venezuela, Ash Williams, the SBA’s executive director & chief investment officer, told reporters.

That was a waste of time. Nobody is going to be dumping any money into Venezuela any time soon. Just check the news if you want to find out why.

It’s like saying: “No, we’re not investing in Ebola!”

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Sometimes, the investments involved are miniscule.

And then, sometimes, the pension funds are shooting themselves in the feet: California pension fund divests from coal as industry rebounds

Coal stocks are on the rebound, but California’s main public pension fund won’t see investment gains from that industry.

The California Public Employees’ Retirement System is almost entirely out of coal, according to a report it released Monday on its compliance with a 2015 law that compelled it and the California State Teachers’ Retirement System to divest from coal by July 1, 2017.

Coal stocks were a drag on CalPERS when the Legislature passed its divestment law.

According to CalPERS’ 2016 investment report, the pension fund’s coal stocks were worth about 10 to 50 percent of what it paid for them.
…..
Democratic lawmakers who voted for the coal divestment bill characterized it as a stand against fossil companies whose industries contribute to global warming as a well as a smart move for the pension fund because of the plummeting value of those stocks.

“Coal is a losing bet for California retirees and it’s also incredibly harmful to our health and the health of our environment,” Senate President Pro Tem Kevin de León, D-Los Angeles, said when Gov. Jerry Brown signed the law in October 2015.

President Trump’s election has somewhat changed the industry’s outlook.
…..
CalPERS in its report said it divested shares from 14 coal companies that were worth $14.7 million when the pension fund sold them. Stocks for 13 of the 14 companies are worth more than they were a year ago when the pension fund was divesting from the industry.

Buy high, sell low, I guess.

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Finally, does anybody other than the pension funds notice this divestment?

Can CalPERS Divestment Make A Difference In Controversial Projects?

California has seen a slew of calls for divestment this year, including against the [Dakota Access] pipeline, companies that could help build President Donald Trump’s border wall, and businesses with ties to Turkey.

This week, State Treasurer John Chiang has proposed CalPERS and CalSTRS divest from companies that sell firearms used in the Las Vegas mass shooting, and 12 Democratic members of Congress from California called on the funds to divest from Trump Organization properties.

But the most ardent opponent of these divestment efforts is often the funds themselves.

“Taking us out of a particular company has zero impact to that company,” said CalSTRS chief investment officer Chris Ailman. “Somebody else buys the shares. It’s literally like a boycott of two out of thousands.”

Maybe it will get the proponents re-elected. Even if the pension funds suffer.

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WHOSE MONEY IS THIS, ANYWAY?

So here’s the deal. If you click through most of the links, it’s various politicians in statehouses who are arguing for divestment. They’re the ones who pass those laws.

The actual people in charge of investing these funds invariably argue against it.

Because it’s not their money to play politics with. Their duty is to invest the money properly to pay for pension benefits. (Some play the game, but it’s usually because they want promotion to more important political roles…the professionals generally stick to their knitting.)

I could go through the fiduciary duty yadda yadda routine, but let’s make this even more practical politics:

Pensioners are going to be pissed off if their money is wasted on political projects and posturing.

Pensioners may think they’ll be made whole by taxpayers… but many of them are the taxpayers that would be paying for this crap.

On top of that, states are discovering that taxpayers have only so much patience for this shenanigans as well.

Many politicians may think they’ll get short-term political gain from these moves, and the damage will be only in the long-term….

….but for many public pensions, the long-term is up. And for those that are relatively well-funded, taxpayers see what is happening in Illinois, New Jersey, Kentucky, and California and would rather not have any piece of that action, either.

I’m just saying to keep your grubby paws off the pension funds, politicians. They have a hard enough time without you bozos trying to micromanage asset allocations.

OLD DIVESTMENT POSTS

Here are my prior divestment-related posts:

Jan 2017 – Setting the Stage for 2017: Questionable Pension Asset Management Practices
Nov 2015 – A Week of Bad Pension Ideas: Finally, Divestment
Oct 2015 – Public Pension Follies: Divestment! Divest from All the Dirty Things!
Mar 2017 – Stupid Public Pension Trends: Divestment Expands
May 2017 – Priorities for Pension Funds: Climate Change or Solvency?
Aug 2017 – Public Pension Assets: It’s Not Your Money to Play With, Pension Trustees
Aug 2017 – Public Pension Assets: Divestments for Everybody!

As noted in some of these, divestment is not a new issue in pension investing — South Africa during the apartheid years and tobacco in the 90s came under fire as well.

STUMP » Articles » Public Pension and Public Assets: Governments Shouldn't Be Activist Investors » 13 November 2017, 12:26

Public Pension and Public Assets: Governments Shouldn't Be Activist Investors