March 12, 2018

Divestment Puts Politics Over Returns for Struggling Illinois Funds

Chicago’s Treasurer is advocating for the city’s $7 billion portfolio to focus on Environmental, Social, and Governance initiatives and “phase out” investments in fossil fuels. In an interview with the Chicago Tribune, Treasurer Kurt Summers said he is hoping to overhaul the city’s investment strategy to make sure the portfolio invests in companies with ESG priorities.  He is also aiming to make the fund “carbon neutral” by 2020, meaning any investments that remain are balanced out with investments in green energy.

This may sound well and good, but it stands to be a costly move that comes as Chicago and Illinois are in dire financial straits.

According to the Chicago Tribune, Illinois’ “unfunded pension liability is growing faster than taxpayers’ ability to keep up. With about a quarter of general fund revenues going to the pension system, other priorities get crowded out.” In fact, Chicago’s city pension is one of the most underfunded in the United States—with more than $62 billion in unfunded liabilities, and a funding level of only 33 percent.

So what would giving up investments in fossil fuels mean for Illinois retirees and taxpayers?

Last year, 39 Alderman signed on to a non-binding resolution that would call for Chicago pension funds to divest from fossil fuels—despite all the financial risks associated with the move. According to research by Prof. Daniel Fischel of the University of Chicago Law School, limiting a portfolio with divestment has real negative impacts on financial performance.  He and his team analyzed Chicago’s four major pensions funds and found that they collectively would lose more than $73 billion over the long term if they were to fully divest.

Meanwhile, in June 2016, the Chicago Sun-Times laid out the numbers of what the paper’s Editorial Board calls, “Chicago’s pension albatross,” indicating just how bad things are for a city considering divestment, which will only make things financially worse.

According to the Chicago Sun-Times Editorial Board, “Chicago’s four public employee retirement funds are short nearly $20 billion. Each pension fund has just a fraction of the amount it needs to pay promised benefits,” with the Police and Fire pensions only 30 and 24 percent funded respectively. These are not funds that can afford the cost of further political investing decisions.

Despite all this, Chicago Treasurer Summers wants to move this costly strategy forward, giving up fossil fuels and adding in an ESG mandate into the city’s municipal code.

Instead, let’s hope that the facts eventually will prevail over politics.