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January 30, 2018

New York City’s Divestment Plan in Disarray

New York City scored plenty of headlines earlier this month when Mayor Bill de Blasio along with Comptroller Scott Stringer announced that the city was “divesting” $5 billion from fossil fuels.  As Divestment Facts already pointed out, the announcement was nothing more than a promise to begin the process of examining divestment among New York’s five pensions.  Since then, things do not seem to be going well for Mayor de Blasio.

As Politico reports, the plan has yet to make real headway in the city, with only one of the five pensions even voted to “begin studying” the fiscal implications of divesting:

“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.”

You read that right.  The remaining four New York City public pension funds is either tabling the discussion of divestment for a later date or not taking it up at all.

This is a major setback for the Mayor and divestment advocates, since the resolution does not even mandate the sale of any investments, but rather reads that the board will “initiate a process for determining a prudent divestment and exclusion strategy for fossil fuel reserve owners that responsibly reduces our portfolio’s exposure to carbon risk and mitigates financial risks resulting from climate change, consistent with our fiduciary duty.”

The resolution also notes that the board will hire an investment consultant to “evaluat[e] the anticipated impacts on risk and return characteristics of the portfolio” and also to “seek legal opinion to determine whether any divestment plan and actions by the Board fulfills the Board’s fiduciary duty to beneficiaries.” This is a critical step for safeguarding New York City pensioners and taxpayers, who are ultimately left to foot the bill if and when divestment imposes new costs on the city’s already struggling pension system.

The fact that four of the five pension boards would not pass such a resolution does not bode well for divestment’s success in New York City.  It’s important to remember that the pension boards are ultimately in control of their own investments, and the Mayor and Comptroller can only make public suggestions on the matter.

So why is the city’s leadership pushing divestment so hard in the media?  In a recent interview on Sen. Bernie Sanders’ radio show, Mayor Bill de Blasio made his true intentions known:

“I’ll say this for New York City. We just acted, and I want to urge every city, every county, every state to do the same – divest. Divest from the fossil fuel industry. Let’s help bring the death knell to this industry that’s done so much harm…let’s prove that this is an economically unviable industry.”

So it’s not about the retirees or the solvency of the pension fund, but about bringing the “death knell” to an industry the world depends upon for transportation, heating and electricity.

Mayor de Blasio also seemed to remain confident in the move, despite the fact that the pensions themselves have already effectively rejected his plan:

“In the next five years, because it will take a wind down, $5 billion in New York City pension funds will be removed from fossil fuels companies, and we have set a specific deadline. We have a dollar goal, and we have said we’re doing this. We will find other good investments. We want to protect our retirees for sure, but not at the cost of investing in something that’s poisoning the Earth. And let’s use our economic power. I think this is one of the most important points. At the grassroots, there’s a lot of economic power.”

Again, de Blasio makes clear that he views the New York City pension system as a political tool to inflict his preferred policy, and not a pathway to secure retirement for the hundreds of thousands of beneficiaries it serves. Meanwhile, as the Financial Times editorial board recently noted, the Mayor has failed to follow through on many of his real sustainability initiatives in the city – leaving divestment as a final, costly lever for him to pull.

Indeed, it’s the city’s workers and retirees who stand to bear the brunt of the millions divestment would cost the city’s already struggling funds. In fact, an American Council for Capital Formation report puts NYC’s public pension funds at $56 billion in the red today, with “four out of every five taxpayer-dollars collected by New York City’s personal income tax spent paying down the city’s public pension fund system’s liabilities.”

This news from New York City is just the latest in pension funds sticking to process and plans over costly decisions to move forward with divestment. As an economic consultant to the San Francisco Employee Retirement System (SFERS) said in a meeting last week, New York City has a long way to go, and divesting has real costs to consider:

“There are 5 funds in NYC and each has a fiduciary duty and an investment advisor. Those boards have to do exactly what you are doing. They may decide to divest but they haven’t taken that action…The fact is that symbolically using the assets that are trusted to you to make a politically statement is not a good fiduciary duty. Your duty is to provide the highest level or return for your beneficiaries. We do not recommend a broad-based divestment.”

That meeting in San Francisco ended up in SFERS rejecting larger divestment, and instead moving forward to create plans for future potential divestments and shifting “a small portion of its holdings into an environmentally friendly portfolio” – a decision that helped protect pensions, but unsurprisingly frustrated activists.

New York City’s pensions are in a similar spot despite headlines to the contrary. Divestment is a long and costly process, and Comptroller Stringer is a fiduciary first and foremost. As the New York Post editorial board noted, “it’s going to be hard to divest while still meeting the plans’ fiduciary obligations — which de Blasio and Stringer say they’ll respect.”

Protecting pensions should be more important than playing politics. Hopefully New York City’s pension leaders don’t forget it as this lengthy process gets underway.