City Pension Plans: Can They Do Good and Do Well?

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New York City’s pension funds, the 15th largest in the world, recently expressed concern about the human rights record and national security threat of Iran by selling their $11 million of stock in Oil and Natural Gas Limited and PetroChina, companies that do business there. But the funds still hold hundreds of millions of dollars of stock linked to another human rights pariah, Sudan. The pension funds have asked many of the companies they invest in to reduce their carbon footprint – yet their largest single investment, worth more than half a billion dollars, is in the fossil fuel giant Exxon Mobil. And the funds have demanded the right to exit real estate deals deemed harmful to low-income tenants, but are still a part owner of Wal-Mart, a company widely assailed for its treatment of low-income workers.
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These are a few of the choices made by the city’s five retirement accounts since 2002 under Comptroller William Thompson, whose stewardship of the pension funds’ $86 billion in assets is in the spotlight as he runs for mayor.

The chief function of the five funds—the New York City Employees’ Retirement System (NYCERS), the Teachers’ Retirement System for the City of New York (TRS), the New York City Police Pension Fund, the New York City Fire Department Fund and the New York City Board of Education Retirement System (BERS)—is to turn a profit in order to pay benefits to city retirees without dipping into tax revenues.

But for at least two decades, the pension funds also have played a second role, that of a powerful tool for getting the marketplace to pay attention to the city’s social agenda.

Striking the right balance between those two goals is one of the jobs Thompson has faced since taking office in 2002, and a high-profile task awaiting whoever wins the race to succeed him.

Effecting change, vote by vote

Buying stock isn’t just about turning a profit for some investors. In the 1980s, as interest in investment expanded to less-affluent Americans, several “socially responsible investment” mutual funds began offering people a way to invest only in stocks that met certain moral and ethical criteria. For example, one of the funds offered today by Domini Social Investments avoids companies that specialize in “tobacco products, alcoholic beverages, or gambling equipment” and steers away from firms that “have a significant direct ownership share in, or operate, nuclear power plants, or are major military weapons manufacturers.”

Those funds often appeal to individuals trying to find a place to park their 401(k) or Individual Retirement Account. But public pension funds like New York’s retirement accounts have a lot more money to invest than an individual investor, and therefore more power to wield. Beginning with the movement to end apartheid in South Africa, the city’s pension funds—and other pension powers, like the California Public Employees Retirement System, CalPERS—have used their financial heft to try to change behavior in foreign countries, in the companies where they hold stock, and in the local marketplace.

In New York, that muscle-flexing has taken many forms. When the target was South Africa, it meant divestment—the city’s pension funds actually selling their stock in companies that operated in that country. In the case of tobacco stocks, the city continued to hold shares, but beginning in 1998, limited its holdings. But for the most part the city’s funds, which claim some 693,000 active and retired members, have sought change not by selling or limiting stock but by holding it, and using that ownership stake to lobby companies to change. The funds have submitted hundreds of shareholder resolutions to dozens of corporations, asking boards of directors to approve – or other stockholders to endorse – changes in the firms’ labor, environmental and other policies.

In 2008, for example, the pension funds proposed to 25 companies—including ExxonMobil and the Dish Network—that they ban sexual orientation and gender identity discrimination in their workplaces. They also asked firms like weapons-maker Raytheon and Campbell Soup to report on sustainability practices, petitioned agribusiness giant Archer Daniels Midland to adopt human rights standards drafted by the International Labor Organization, and requested that Arch Coal report on how it plans to respond to climate change. Halliburton and nine other firms were asked to divulge their strategy on corporate campaign contributions. Proposals to Google and Yahoo! called for a commitment to resist Internet censorship. A resolution introduced to Walt Disney called for a report on steps the company is taking “to avoid the use of negative and discriminatory racial, ethnic and gender stereotypes.”

The funds also asked several firms to change their corporate governance practices—like the way their boards are elected and how their executive pay is linked to company performance. In some instances the pension funds signed on to resolutions put forward by other institutional investors, like the Christian Brothers’ call for a sustainability report from Dillards, Inc., a department store chain. In most cases, all five city pension funds put forward the request, but since each fund has a different portfolio and different board, sometimes only one or two of the funds was involved. The city’s shareholder resolutions are proposed by Thompson’s staff to subcommittees of the pension funds’ board of trustees, who vote whether to approve the resolutions.

Of the 132 total proposals made last year, 55 (42 percent) were either adopted by company boards or approved by shareholders in a majority vote. Another 15 (11 percent) were withdrawn because the company informally agreed to abide by the new policy. For example, while the ban on gay discrimination garnered slim support at the Dish Network, Fidelity Investments adopted that proposal. Duke Energy agreed to disclose its political contributions, while Halliburton voted down the same provision.

From 2003 (the first year Thompson’s staff had the opportunity to put forward a year’s worth of proposals) through 2008, the pension funds made 603 proposals, about two-thirds of them concerning social or environmental issues, with the rest dealing with corporate governance. In 277 cases the pension funds achieved shareholder approval or some level of company agreement. The funds have weighed in on human rights in Columbia, discrimination in Northern Ireland, nations that sponsor terrorism, the importation of prescription drugs and the aftermath of the 1984 pesticide disaster in Bhopal, India. (For complete reports on shareholder activism by the pension funds, click on a year: 2003, 2004, 2005, 2006, 2007 or 2008).

Even when proposals fail to gain a majority of shareholders’ votes, a strong enough showing can earn that initiative the right to appear on a company’s proxy ballot the following year. Indeed, some of the comptroller’s proposals are perennial affairs. The bid in 2008 to get ExxonMobil to ban sexual orientation and gender identity discrimination was at least the sixth year in a row that the city submitted such a proposal to Exxon since 2003. The bid is inching toward victory, its vote growing from 27 percent in 2003 to 40 percent last year.

A leader in activism

The pension funds have played a leadership role in activist investing. New York’s retirement accounts are members of the Enhanced Analytics Initiative—a group of institutional investors who want non-financial factors like environmental impact included in the assessment of their investments—and the Investor Network on Climate Risk.

Thompson, a heavy favorite over Queens Councilman Tony Avella in the Democratic primary, has seen his pension management scrutinized in recent months. Many investment firms that earned lucrative fees also donated to Thompson’s campaign. The overall performance of the pension funds has been criticized as lackluster, and Thompson’s decision to move pension money into the risky world of private equity has been questioned. The comptroller has defended his oversight of the funds, which operate independently with their own board of directors, but all rely on Thompson and his staff as their investment advisers. Thompson is also a trustee of four of the funds.

The city funds’ social mission involves more than the stock market. Since 1982, the pension funds have managed a class of “economically targeted investments” aimed at supplying under-capitalized city neighborhoods with funds, mainly through housing finance. The comptroller’s office claims the fund has outperformed the relevant market index over the past three, five and 10 years. Indeed, one of the funds the city uses for these investments is ranked among the top 10 in its investment class by Morningstar, a financial analysis firm. Under Thompson, the amount of money in this locally targeted fund has more than tripled to $703 million. It has invested in affordable housing mortgages and a revolving fund for housing construction. The comptroller’s office says that the investments represent 25,000 units of affordable housing.

Thompson also introduced a program to route more of the city’s pension investments through minority and women-owned brokerage houses, an initiative that he says, “opens doors and removes barriers to qualified firms that haven’t always had the chance to work with the Pension Systems.”

But the high-minded goals of socially motivated investment policies have not exempted them from criticism.

For one thing, it’s not always clear what the impact of morally driven investment has been. Though divestment in South Africa triggered inflation and weakened the currency there, to take one example, it was but one of many contributing forces behind the eventual dismantlement of apartheid. And even shareholder resolutions – a much more widely used tool than divestment – are merely advisory even if they win a majority vote among stockholders. “The company can ignore it anytime they want,” says John Murphy, a former director of NYCERS.

What’s more, even among those who support an activist approach, there are disagreements about when to influence companies as a stockholder, and when to protest by selling out. Domini funds still invest in Coca-Cola despite concerns about its labor record in South America and health impact, and Domini says it is talking to the company about improving its record. But at least one social investment fund at the pension giant TIAA-CREF this year stopped holding Coke stock. The same debate extends to whether it helps or harms oppressed people when investors pull money out of their country: During the debate over South African divestment in New York, a “Corporate Committee for Change in South Africa” resisted the move. Their argument, in one Exxon spokesman’s words at the time, was, ‘We feel we can do more good by staying in South Africa.’

And once investment managers start punishing bad behavior, they face the question of where to stop. When New York City began talk about divesting from South Africa in the 1980s, Mayor Ed Koch initially refused to consider it unless other “pariah nations” like the Soviet Union and Libya were also blacklisted. In 2004, the Center for Security Policy—a hawkish Washington think tank—claimed that public many pension funds had 15 to 23 percent of their investments in “companies that do business with terrorist-sponsoring states.” But they were Fortune 400 firms – the kind of companies that are public pension funds’ bread and butter.

Constitutional issues also arise. Two years ago, a federal court threw out an Illinois state law that called for divestment of public pension funds from firms linked to Sudan; a business lobbying group argued successfully that such state laws interfere with the federal government’s foreign policy powers.

For some observers, the personal aspirations of the people managing public pension money cast some social activism in a troubling light.

“When public funds get into socially responsible investing, all sorts of additional social and political dimensions are added to it,” says Edward Siedle, an analyst and expert on pension policy based in Florida. Politicians might be guided by electoral rather than financial considerations, he says, pointing to a recent move by West Palm Beach—a city with a large Jewish population—to start investing pension money in Government of Israel bonds. A 2006 report on CalPERS’s record of social investing found that its decision to abandon tobacco stocks in 2000 was financially unwise, since the value of those stocks rose 2.7 times more than the stock market average over the next six years.

Thompson’s office describes its work as a balancing act – and a largely successful one, at that. “Consistent with our fiduciary duty to protect the interests of the pension funds’ beneficiaries, we prudently pursue the adoption and implementation of sound environmental, social, and governance (ESG) policies at companies in which the funds are invested, through active engagement with company management and boards of directors, proxy initiatives, and collaborative efforts with other institutional investors,” Assistant Comptroller for Pension Policy Ken Sylvester said. “We are proud of the funds’ long history of effective leadership in advocating and advancing corporate environmental and social responsibility, and important governance reforms, and are strongly committed to furthering this legacy in order to protect the funds’ assets and the retirement benefits of their members over the long term.”

Founded in 1920, New York City’s pension funds are bound by law to provide the benefits they have promised to retirees. Right now, the system relies on its investment returns, contributions from current employees and payments on behalf of today’s workers by their employer, the city. Should investment returns ever fail to cover the funds’ payout, taxpayers would be on the hook to make up the difference. So if socially-motivated investments are good for the conscience but bad for the books, they could cost the city dearly.

Further divestment urged: Sudan and Iran

But other voices argue that Thompson has not been activist enough. In 2007, Queens City Councilman Eric Gioia, now running for public advocate, introduced a resolution at Council calling on the pension funds to “divest the city and state of any investments made in corporations doing business with Sudan until the genocide in Darfur ends.”

At the time, at least a dozen companies among the pension funds’ holdings—including Royal Dutch Shell and Bayer AG—were operating in Sudan; the city’s stake in those firms was worth $917 million. The resolution gained 24 co-sponsors but never received a hearing. However, that same year State Comptroller Thomas DiNapoli launched a process that recently led the state’s pension funds to begin divesting from firms active in Sudan or Iran. According to the Sudan Divestment Task Force, at least 23 cities including Chicago, Los Angeles and Philadelphia have adopted divestment policies. So have 26 states other than New York.

Thompson in 2007 called on companies in Sudan to “pressure the government of Sudan to end the atrocities in Darfur.” But he has resisted calls for divestment, arguing that it will not work and could attract legal challenges. “U.S. divestment will have little effect on foreign companies doing business in Sudan, and much less on the economy and government of Sudan,” he wrote in a 2007 op-ed in the corporate citizenship journal Compact Quarterly.

But this summer, Thompson did embrace divestment on a modest basis, when it comes to Iran.

Thompson and pension fund managers from other states wrote to several companies in 2007 asking them to spell out how their operation in Iran might affect their investors. “We are deeply concerned that Repsol SA’s involvement in Iran’s oil and natural gas sector poses significant risks to the company, and by extension, to our investments,” read one of Thompson’s letters, to a Spanish oil company.

But the comptroller did not move toward divesting from the firms, resisting—according to The Jewish Week newspaper—“appeals from AIPAC, the pro-Israel lobby, and other proponents of divestment.” At least one concern of Thompson’s was that the pension boards could be sued if the funds experienced losses because of their Iran divestment. In May, the comptroller wrote to Congressional leaders asking that pending federal legislation on sanctions against the regime in Tehran explicitly indemnify local pension funds that divest. The legislation is still under consideration.

In July, Thompson—flanked by Rep. Anthony Weiner and Sen. Charles Schumer—announced that the city’s pension funds were divesting from PetroChina and Oil and Gas Limited because of their work in Iran. He also recommended that the trustees of the pension funds approve a phased divestment from eight other companies. Together, the city held more than $150 million in stock in the 10 firms. Thompson depicted the move as a bid to protect city money.

“Both [companies] have considerable ties to Iran, and have repeatedly failed to respond to our concerns about their operations,” he said. “Their refusal to engage with us as concerned investors over their business activities demonstrates a disdain for corporate responsibility and accountability and significantly limits our ability to carry out our fiduciary responsibility in assessing the risks to our investments.”

Also at the announcement was Rabbi Michael Miller, CEO of the Jewish Community Relations Council. “Iran has threatened our country, is developing nuclear weapons, is defying U.N. sanctions,” Miller told City Limits, explaining why his organization backed the move, which he says it advocated quietly by providing information on Iran to the comptroller’s office. Asked if he thought city politics played a role in the decision to go after an unpopular nation in an election year, Miller said: “There’s a movement across the country [to divest from Iran]. I’m not going to respond in a critical fashion on the decision-making of Bill Thompson. I think it was the correct decision, and we’ll leave it at that.”

The next comptroller says…

Proponents of Darfur divestment jumped at the news that Thompson was cutting some pension investments linked to Iran. PetroChina and Oil and Gas Limited are also on the list of major firms active in Sudan. A local Darfur activist listerv called on members to call Thompson, thank him for the first step, and “ask that his office further recommend divestment from all of the other “highest offenders,” whose financial support of the Sudanese regime directly supports the war in Darfur.”

But the decision of whether to extend divestment to Sudan-linked firms will likely fall to the next city comptroller. Four Democratic City Council members—Melinda Katz, John Liu and David Weprin from Queens and Brooklyn’s David Yassky—are vying for the comptroller nomination. A Republican, Joe Mendola, is also in the race.

“The number one responsibility should be the fiduciary responsibility for getting the best returns on our assets. That said, we have choices,” Weprin told City Limits. “If it’s a choice between a green company and another, I’d say choose that [green] company. I think there is a role for it.” Weprin has said he supports both Sudan and Iran divestment.

Liu said the goals of social activism and profit generation “are not mutually exclusive—they are one and the same goal.” Firms with terrible environmental records or antiquated personnel policies are bad investments, he said. “Improving the company’s practices improves the performance of the pension funds.” In July, Liu said in a statement that he supported the state pension plan’s divestments from Iran and Sudan, adding: “When I’m elected comptroller, I pledge to protect our pension funds and ensure that we do not conduct business with countries or companies that promote genocide and terrorism.”

Yassky pointed to Iran as a prime case of where moral and financial goals align. “Helping the Iranian government is directly contrary to the interests of the country and of New York City,” he says. “I think you do want to be an active shareholder, making sure companies are run well, that companies are ethical, because ultimately ethical corporate governance is good for business. Yassky supports Iran and Sudan divestment.

“The objective of the comptroller is to protect taxpayer dollars, including protecting the investments of the pension funds. That’s first and foremost,” said Katz. “But just because an investment is a ‘socially responsible investment’ doesn’t mean that they aren’t safe, practical investments for our city.” A spokesman for Katz says the candidate wants to consider divestment from Iran and Sudan, but cannot commit to it because of the difficulty in determining just how much city money is tied up in firms that work in either place. Katz plans an asset allocation study upon taking office.

But she has already weighed in with one new moral imperative for city investments, promising not to invest pension money in so-called “death bonds,” in which brokers pay people to sign over their life insurance and then sell to investors the rights to the full payouts. The sooner someone dies, the more you make. Wrote Katz in a recent blog posting: “I would never gamble that bad things will happen to New Yorkers.”

– Jarrett Murphy