Public Pension Funds Will Not Take Stand on Burger King Controversy

Dropped gun stocks in 2013

• September 2, 2014 1:38 pm


Struggling public pension funds are refusing to take a stand on the outsourcing controversies that have arisen due to America’s corporate tax rates.

The New York Times’ Aaron Ross Sorkin polled several leading government pension funds if they planned to shed Burger King stocks from their multi-trillion dollar portfolios to punish the company for relocating its headquarters to Canada to save millions in tax dollars. The fund managers said that they were duty bound to their retirees to maximize investment returns, rather than the political whims of politicians and BK critics.

The California Public Employees’ Retirement System, the nation’s largest public pension fund and typically one of the most vocal, has remained silent.

"We don’t have a view on this from an investor standpoint — we’re globally invested, as you know, and appreciate that tax reform is a government role," Anne Simpson, Calpers’s senior portfolio manager and director of global governance, told me. "We do expect companies to act with integrity, whatever the issue at hand — that goes without saying. We also want to see a focus on the long term." […]

"Our fiduciary duty to our members is to vote our economic interest — and that means making an individualized determination of whether a given transaction is in our best interests as long-term share owners," said Scott M. Stringer, the New York City comptroller. "As a result, we don’t merely look at the offer price on the day of closing but instead take into consideration everything from potential influence on shareholder rights to whether a merger places short-term gain over long-term growth."

The sudden apolitical nature of institutional investors tasked with paying for the retirement of hundreds of thousands of public servants and politicians is odd considering the great lengths Calpers and New York City went to get rid of gun stocks in 2013, despite the high investment returns of weapons manufacturers at that time. The Washington Free Beacon reported in February 2013 when the city of Chicago sold off lucrative gun stocks:

The boards of Chicago’s municipal employees’ and teachers’ retirement funds voted to withdraw hundreds of thousands of dollars in gun company holdings. Chicago has some of the most stringent gun control laws in the country, as well as the highest murder rate in the nation. It also has some of the most severely underfunded pension systems.

Andrew Biggs, a scholar at the American Enterprise Institute and former Social Security administrator, said that the board might have broken the law by withdrawing support from profitable, yet politically unpopular companies.

"I’m not convinced of the appropriateness nor the legality of these actions," he said. "Their commitment to the people in the plan is to maximize the value of investments to make sure benefits are paid for, so employees don’t end up having to pay the difference through contributions."

Gun stocks have skyrocketed in the past decade due to increased demand.

Smith & Wesson’s stock has quadrupled in price since 2003, including 65 percent growth in the last 12 months. Sturm & Ruger grew by nearly 30 percent in 2012, quintupling in price over the last 10 years. The Municipal Employees’ Annuity and Benefit Fund (MEABF) and the Chicago Teachers’ Pension Fund (CTPF) voted in January to drop more than $1 million in those companies, as well as smaller gun manufacturers.

American states are between $1 and $3 trillion—different studies have used different accounting measures of this debt—short of meeting their obligations to their public sector retirees. Investments play a large role in causing and solving this crisis as state and city lawmakers have underfunded pension systems for decades. A July report issued by the Competitive Enterprise Institute says that when politics take over investment discussions, taxpayers end up footing the bill.

Government entities have been able to mask enormous pension debt for decades thanks to lax accounting standards, most notably concerning assumed rates of return. While companies are forced by law to tie their growth to corporate bond rates, governments are able to choose investment rates that have little basis in reality, according to the report. High return rates allow the government to underfund pensions by making the debt appear smaller than it actually is. […]

Many state constitutions guarantee pension payments and states, unlike cities, are not permitted to enter into bankruptcy. The retirement money will have to come from either program cuts or higher taxes, both of which can hinder business development in an area.

"It is going to be the taxpayer who has to pony up. Businesses are going to be deterred from going into business climates where they’re paying more and getting worse public service in return," [CEI Senior Fellow Aloysius] Hogan said. "You can expect businesses to head to the more fiscally prudent state."

Published under: Pension