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February 15, 2018

Mayor De Blasio’s “State of the City” Short on Facts about Divestment

In this week’s State of the City address, Mayor Bill de Blasio touted the city’s effort to divest, stating:

“We are not going to ignore this crisis; we are going to address it ourselves. And while we take positive steps to protect our Earth, we’re also going after the big corporations who caused this mess to begin with… New York City will divest five billion dollars in pension fund investments from fossil fuel companies. Five billion dollars tends to get people’s attention.”

And it’s attention is precisely what Blasio’s after. In fact, over the last few week’s Mayor de Blasio has touted the city’s “divestment” in press conferences, activist events and now- speeches to the city even though the city has yet to divest a single dollar and won’t necessarily divest at all.

That’s right, according to Politico, New York City’s divestment announcement wasn’t that the city actually divested but rather that the five funds will “begin studying” the fiscal implications of divesting, noting:

“Mayor Bill de Blasio’s much-touted plan to divest the city’s pension funds from fossil fuel reserves did not receive the glowing reception from city pension boards Thursday that it has from environmental advocates. Four of the five boards representing the city’s roughly $191 billion pension fund system met to vote on a resolution to begin studying the fiscal implications of divesting from companies that own fossil fuels. Only one board — the NYC Employees Retirement System — voted to pass the resolution.”

The reality is that when the legal responsibilities imposed by fiduciary duty are considered, things get much murkier. While using other people’s pension dollars to grandstand seems to be all well and good in the political arena, fund managers again and again note that they cannot intentionally pursue policies that would cause the pensioners to lose money—like divestment—no matter how worthy the cause.  As stated by New York State Comptroller, Tom DiNapoli:

“At the end of the day, my responsibility is … to make sure we keep the fund well-funded… I’m totally supportive of the Paris agreement, but the notion that we’re going to lead the fight on climate change by making the pension fund sell all their energy stocks to me seems like not the smartest strategy.”

And by a San Francisco Retirement System (SFERS) committee member upon their rejection of divestment last month:

“I think philosophically that we all agree we want to do the right thing for the earth and the environment, but as fiduciaries we walk a fine line of doing what is right for the system. That means minimizing how much employees need to pay, and if we get this wrong this will result in a pay cut to employees. If we get this wrong it will cost employees money. If we get this wrong it will cost retirees in the form of supplemental {Cost of Living Allowances}.”

Taxpayers should be thankful that most fund managers are so deeply committed to upholding their fiduciary responsibility, because when poor investment decisions are made it’s the taxpayers that end up footing the bill. In fact, a recent study from the American Council for Capital Formation (ACCF) found that by 2019 a staggering four-out-of-five taxpayer dollars collected from NYC’s personal income tax will go towards paying down NYC pension liabilities.

The twin realities of cost and fiduciary duty are two big reasons why the divestment movement is petering out. For example, did anyone even know that “global divestment day” was this week?  While it may have been a stand out event in the early days of the divestment movement, onlookers have come to see divestment for what it is—an empty gesture that confers real costs on students and taxpayers.

So while claiming to divest may win a few headlines, the pensioners and the taxpayers should be vocal in their opposition to costly and ineffective divestment schemes.