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May 2, 2019

NYS Comptroller’s Office Pushes Back Against Divestment Bill, Calling it ‘Unconstitutional’

The New York State Comptroller’s office laid out a multitude of reasons for why they view mandated divestment as a bad idea during a marathon Finance Committee hearing on Tuesday.  Up for debate was SB 2126, a pro-divestment bill sponsored by State Senator Liz Krueger who also chairs the Finance Committee. The bill would require the $200 billion New York State Common Retirement Fund to sell off any holdings in the Carbon 200 and freeze any new investments in those companies. Though similar iterations of the bill have been introduced in the state legislature every year since 2015 – only to go nowhere – this was the first hearing devoted to the issue.

Speaking on behalf of the Comptroller’s Office, Interim Chief Investment Officer (CIO) of the New York State Common Retirement Fund, Anastasia Titarchuk, rebuked divestment as ineffective, unconstitutional, costly, and in violation of the Comptroller’s fiduciary duty. In her words:

“All attempts by the legislature to mandate specific investment decisions have been struck down for violating the Comptroller’s independent discretion. Because this legislation, in requiring divestment from 200 specific companies, mandates very specific investment decisions, it would be vulnerable to legal challenges and likely found unconstitutional.”

She also described some of the unintended consequences of imposing such a drastic change on how the Fund executes its investment strategy:

“The bill is likely to transfer hundreds of millions of dollars from the beneficiaries into Wall Street’s hands by forcing the Fund to customize everything it does and straying away from low cost passive strategies. There will also be trading costs in millions of dollars incurred as a result of both selling these companies and also buying stock to replace them.”

Moreover, Titarchuk emphasized that the pension exists to deliver benefit to pensioners – framing anything beyond the scope of that goal as unacceptable. What’s more, even the goal of addressing climate change isn’t met by divesting, as Titarchuk told lawmakers:

“(…) Divestment is certainly not universally accepted as an effective means of mitigating climate change in the academic literature or among investment professionals… Divestment from fossil fuels is a blunt instrument that does not actually address the greatest risks for the Fund. “

Withstanding hyperbole from lawmakers and jeers from activists in the crowd, Titarchuk also pushed back on the notion that divestment is the Fund’s only avenue of pursuit when addressing climate change. Titarchuk argued that it’s better to be at the table and be heard than not be there at all:

“The fund is not a policy tool in terms of making a divestment decision. Our primary concern and our only concern is ensuring the benefit payments for citizens.(…) It’s better to be at the table and heard than to not be there. By divesting, you might make a statement, but it does not affect the true climate risk present in the portfolio.”

The CIO’s comments echo what Comptroller DiNapoli has been saying for years.  In a short interview last month, DiNapoli told Axios that it’s better to be engaged than to cede influence:

“We [consider divesting] rarely and not without very significant deliberation … Having a voice at the table, trying to press them to do the right thing, that in the short run I still think is a smarter strategy.”

Despite Titarchuk’s ardent defense of the Comptroller’s stance, testimony was by invite-only and, unsurprisingly, imbalanced. Other witnesses included 350.org, the activist group responsible for birthing the divestment movement, Food and Water Watch, an activist group known for its divestment support and anti-oil and gas posture, and Corporate Knights, an organization who publishes pro-divestment economic reports that Divestment Facts has previously debunked as biased and misguided.

In fact, the hearing was so lopsided that Executive Director of the Retired Public Employees Association, Edward Farrell, had to remind lawmakers of the Fund’s actual purpose: the $200 billion Fund is not a tool for political posturing or virtue signaling, but a vehicle to deliver benefits to public employees who contribute to the system with every paycheck.  From his remarks:

“I want to say one word that’s not been mentioned yet — and that’s retirees. People talk about pension funding as if it’s this amorphous thing out there. The Comptroller is the sole trustee of the pension fund and he administers the fund solely for the benefit of current and future retirees. That point has not been raised by other panelists thus far.”

Farrell labeled the legislation, “a slippery slope upon which we do not want to embark.”

Speaking of retirees, just a day before the hearing, the Suffolk County Association of Municipal Employees (SCAME) released a study that found that fossil fuel divestment could lower state pension assets by between $11.6 billion and $28.6 billion over 30 years. Even worse, the report found that, to make up for the shortfalls, workers and state and county governments could have to contribute up to $33.4 billion more to the fund, meaning that taxpayers would ultimately pay the price for divestment in tax hikes and cuts in benefits and public services.

The idea that divestment would be incredibly costly for New York is not new.  A 2018 study by Prof. Daniel Fischel of the University of Chicago Law School found that divestment could lead to annual losses of $136 – 198 million and $1.1 – 1.5 trillion over 50 years.

Bottom Line

There is a lot at stake in New York when it comes to divestment. As pointed out by several witnesses – and poignantly so by the Comptroller’s office – the empty gesture could mean huge financial losses for the Fund and open the state up to court challenges, all the while doing nothing to mitigate climate change.

Perhaps lawmakers will listen to Comptroller DiNapoli—whose responsibility it is to ensure the Fund is able to pay benefits to pensioners—instead of activists who are pushing this empty political gesture.

What More New York Commentators Are Saying About The Fossil Fuel Divestment Act

Civil Service Employees Association (2019): “The Fund is one of the best funded and best managed pension funds in the country. Opening the Fund’s investment decisions to the political trade winds will jeopardize the financial security of over one million current and future retirees.”

AFL-CIO president Mario Cliento (2019): “We oppose this bill. The State Comptroller is the sole trustee of the state’s pension fund and has the legal and fiduciary responsibility to make investment decisions solely for the purpose of ensuring the benefits of our retirees are secure now and into the future.”

Suffolk County AME President, Daniel Leveler (2019):  “For my members, the average pension received is $35,000, and they’re very protective of that. That’s probably about half a living wage in Suffolk County. I’m opposed to the concept of taking a portion of investments that has solid returns and pushing it to something that is volatile. To a certain extent, I believe its political…the governor I believe is of the opinion that we should do things to be as progressive as possible. The world still revolves around them [fossil fuels] and as the world changes, so will the investment strategy and the Comptroller will make those decisions. The market will adjust and so will the common retirement fund.”