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Forced Investment in a Sinking Ship?

Leonard Gilroy
June 28, 2011, 1:51pm

From the "Does California need another bad policy?" file, Larry Gilbert at the Orange Juice blog reports on a proposed ballot measure filed with the Attorney General's office that would amend the state Constitution to force public pension funds to invest in California-based companies.

In essence, proponents are suggesting that pension managers dump a bunch of cash into California companies that may or may not be smart investments, simply because they happen to be located in California. This stands in stark contrast to the preeminent obligation that fund managers actually have, which is to serve their fiduciary responsibility of investing in whatever—and wherever—makes sense to maximize the funds' investment returns for the optimal benefit to both pension beneficiaries and the taxpayers who cover the costs. (See my 2008 blog post here for similar thoughts with regard to Texas infrastructure investment). 

For instance, as Gilbert suggests, if international markets are growing at a faster rate than ours in the U.S., as some definitely are, then why should pension fund managers be prevented from taking maximum advantage of it in order to advance some dubious, parochial economic concerns? It's not that different from the issue of "socially responsible investing," which Jon Entine shredded in an excellent February 2009 Reason article where he presciently wrote:

Funds worth trillions of dollars start to plummet in value. Political pressure to be “socially responsible” distorts the market decisions of government-related enterprises, leading to risky investments. Investors who once considered their retirements safely protectedwake up to a sinking feeling of uncertainty and gloom. [...]

Pensions are being dragged into treacherous waters by investors who consciously choose to direct their money in socially conscious ways. It's a questionable risk for cautious times. The use of political criteria may be fine for affluent investors and activists who gamble their own money and assume the extra risk, but pension funds should be held to a higher standard.

Whether you're talking about basing investment decisions on geography, business sector or PC sentimentality, public policy advancing forced pension investments in anything should be avoided. I couldn't agree more with Brian Calle's take over at the Orange County Register's Orange Punch blog:

The problem with state public employee pensions and unfortunate unemployment numbers in the state has little to do with where funds are invested and more to do with the overall regulatory and tax climates in the state. Moreover, if the state got out of the defined contribution pension benefits and placed the responsibility for retirement on state workers (like with 401K plans), the pension funds would not so much be the concern of taxpayers–and then public workers could decide whichever state (or country) they would like to invest their personal retirement dollars.

In short, make California a place people and business want to invest in—and not flee to avoid the tax and regulatory pain—and maybe then public pension fund managers in California (and even funds elsewhere) would have plenty of exciting, Golden State investment opportunities to choose from without being forced to do so. See here for some ideas on how to do that.


Leonard Gilroy is Director of Government Reform


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