Pensions are no place for politics

State elected officials are relearning an old, old rule: If you divert and distract from an investor’s primary objectives, then the investments will surely suffer.

The real-world results are pouring in. Laws blacklisting investment advisers and financial institutions accused of putting environmental, social, and governance (ESG) factors in front of financial considerations in public investments have turned out to be very expensive for taxpayers and pensioners alike.

This week in the Texas Legislature, senators are holding public hearings looking at potential revisions or even expansions to the state’s anti-ESG law in anticipation of next year’s regular legislative session. Here’s part of their assignment:

“Study the impact of environmental, social, and governance (ESG) factors on our state’s public pensions, with a focus on proxy voting services. Make recommendations to ensure our state’s pension systems vote and invest in accordance with their fiduciary responsibility to maximize profit. Additionally, monitor the implementation of Senate Bill 13, 87th Legislature, relating to state contracts with and investments in certain companies that boycott energy companies.”

See the problematic diversion? The state wants pensions to ensure their investment team’s goal is to “vote and invest in accordance with their fiduciary responsibility to maximize profit.” But then lawmakers jump in and add complex layers for them that require the state to avoid investments and contracts with firms alleged to boycott energy companies.

And we know those state-mandated boycotts can be quite expensive.

The Texas blacklist cost the state $668.7 million in lost economic activity, more than 3,000 jobs, and $37.1 million in state and local tax revenue, according to research done for the Texas Association of Business Chambers of Commerce Foundation.

Neighboring Oklahoma’s anti-ESG law was adding $11 million a month in increased borrowing costs, according to an analysis done for the Oklahoma Rural Association by the University of Central Oklahoma, until it was put on hold by a state judge. It had already cost taxpayers $185 million when the court put a stop to it, that report noted.

Proposed laws elsewhere had similarly enormous price tags.

Arkansas estimated one proposal would lose an estimated $30 to $40 million annually for the Arkansas Public Employees Retirement System. The Arkansas Teacher Retirement System estimated it would cost that pension $7 million per year.

Indiana’s Legislative Services Agency figured an early proposal would cut up to $6.7 billion from public pension returns over a decade.

The Kansas Division of the Budget said one piece of anti-ESG legislation would cut pension portfolio returns by $3.6 billion over ten years.

And the Louisiana Legislative Auditor estimated net public pension liabilities would rise by $6.7 billion if a proposed bill became law.

Elected officials’ intentions may sound good, but they attempt to inject political views into pensions and public finance.

Texas and other states spend millions on detailed expert advice from investment advisers and banks. It’s a shame they’re trying to ignore them.

Current and future retirees are counting on solid public pensions after their careers have ended. They aren’t a faceless mob: They are our police, firefighters, teachers, nurses, and others who’ve spent their careers in public service while looking forward to the promise of secure retirement.

If the investments don’t add up, taxpayers are on the hook for the difference. Those same elected officials hardly want to face voters asking how and why politics took precedence to returns, and why they’re paying higher taxes for the mistake of putting culture wars ahead of sound finance.

It’s difficult to keep complex financial systems working, but it’s possible. Texas is booming, keeping the dirt flying on public projects. The state’s pensions are in good shape. There’s always more to do, but the state, with the help of its pension and debt advisers, is doing a pretty good job.

Why would anybody want to mess with that?