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March 23, 2018

Despite Financial Struggles, Vermont’s State College System Exploring Partial Divestment

A committee of the Vermont State Colleges System (VSC) quietly voted last month to recommend partial divestment of its holdings from fossil fuels, flying in the face of numerous rejections from other Vermont institutions and the state’s treasurer.  All the more concerning, the system is facing imminent layoffs and budget cuts at several of the system’s colleges — financial concerns divestment would only exacerbate.

According to the VSC Board of Trustees Finance and Facilities Committee February meeting agenda, the board has been in contact with local Fossil Free VSC chapter which encouraged the topic.  In a memo to the board, Fossil Free VSC acknowledged the committee’s hesitance to move forward with divestment due to its fiduciary duty:

“…we recognize the need to address a concern that has arisen in our discussions with the Committee on a few occasions – namely, the possibility that taking the climate action proposed by FF VSC might run counter to the Board’s fiduciary responsibilities. Hence, we focused at the December meeting on the fear that, in effect, divestment from fossil fuels could prove too expensive.”

Yet despite the countless drawbacks to divesting—increased portfolio risk, probable losses, added management fees—the VSC committee voted by a 5-2 margin to recommend to the full board to make 20 percent of the portfolio fossil free.  According to meeting minutes:

“Trustee Diamond moved to recommend approval by the Board of Trustees a ‘Plan for reallocating 20% of Portfolio to Fossil Free Approach’ described by Morgan Stanley in today’s presentation to screen 50% of the market value of three of the Endowment’s passive index funds and one actively managed fund for fossil fuel related investments as follows: Russell 1000 Growth index fund Russell 1000 Value index fund TFSE Developed Markets index fund Thomas Partners.”

How these changes would be achieved is still up for debate, and the full Board of Trustees will have the ultimate say on whether or not to actually divest.  But the Vermont system must tread lightly given its current financial position. According to Inside Higher Ed:

“Vermont has traditionally struggled to keep students in state. At the same time, the Vermont State Colleges have experienced financial struggles. The five-institution system posted a net operating loss of $60.7 million in 2014 and $56.7 million in 2015. The budget line comes before some major revenue sources like state appropriations and federal grants. But even factoring in all other revenues and expenses, the system’s net position dropped by $9.4 million in 2014 and $10.3 million in 2015.”

But with financial difficulties, enrollment deficiencies and imminent layoffs looming, it’s surprising that VSC would be so focused on a money-losing strategy like divestment.

According to research by Prof. Daniel Fischel of the University of Chicago’s Law School, divestment of a portfolio could mean losses of up to 23 percent over a 50-year time frame. Those costs are exactly why many of Vermont’s top colleges—as well as the state’s pension system—have rejected divestment.  For instance, the University of Vermont unanimously rejected fossil fuel divestment back in 2013, with a member of the board stating:

“Given its fiduciary responsibilities, the board cannot look past the lack of proven alternative investment models, the difficulty and material cost of withdrawing from a complex portfolio of investments, and the uncertainties and risks that divestment would create. “

Even Middlebury College—where 350.org leader Bill McKibben teaches—has also refused to divest.  According to the college’s former president:

“Our primary responsibility is to protect the endowment and my continuing fear is that this proposal would have a significant impact on the ability to balance the risks and rewards within the endowment by cutting out a substantial portion of the economy.”

The Vermont Pension Investment Committee, headed by Democratic State Treasurer Beth Pearce, also studied divestment at length and ultimately rejected the move concluding it was a “slippery slope” that “has not been shown to be in the best interests of VPIC pension beneficiaries.” Why? As Treasurer Pearce stated, divestment would cost state pensioners about $9 million a year in lost financial returns. In addition, the state pension would pay $8.5 million in implementation fees according to the Vermont Pension Investment Committee.

These costs are no small matter for a college system already facing difficulty. Let’s hope the Vermont State Colleges System says no to this costly, ineffective gesture for the benefit of its students and programs alike.