Tapping Pensions for Social Goals


Washington. -- Apparently slashing and burning federal social programs isn't enough for some congressional Republicans. Now they're pushing legislation creating legal peril for trustees of pension funds who let social concern creep into their investment decisions.

The issue is "economically targeted investments" -- so-called ETIs -- which tap into pension-fund assets to finance such projects as affordable housing, small business and environmental waste management.

As House Speaker Newt Gingrich views them, such investments are "another classic example of pro-big-government tax-and-spend liberals trying to find a back door to achieve what they can't achieve by coming in the front door."

This may come as something of a surprise to pension fund managers in the states, who are building up solid portfolios of social investments that diversify their holdings, provide competitive rates of return, often create new local jobs and incur no unusual risk.

On the labor side, the AFL-CIO Housing Investment Trust has been pooling union pensioners' funds for housing and jobs since 1965, with solid returns.

Economically targeted investments are still just $30 billion of the nearly $5 trillion held in private, state and local government pension funds. The Clinton administration thinks they could be used more broadly to strengthen the nation's economy in every area from start-up home mortgages to medical clinics to infrastructure.

The prevailing law -- ERISA, the Employee Retirement Income Security Act -- has left some pension managers confused about what they can invest in. So Labor Secretary Robert Reich last June issued guidelines saying it's OK to consider "collateral benefits" -- job generation and increased housing starts, for example -- providing the investments produce a competitive rate of return without undue risk.

The Labor Department went a step further by supporting a new clearing house to provide pension trustees with solid information on how ETIs, since they are a relatively new field of investment, are being put together and performing.

The Clinton administration's interest has been enough to make some Hill Republicans see red. The chief adversary is New Jersey Republican Jim Saxton, vice chairman of the Joint Economic Committee. He sees social investments ETIs as nothing more than an effort to "monkey around" with pensioners' savings by investing in sub-quality projects that will end up in a replay of the savings-and-loan disaster.

Mr. Saxton and other critics harp on a few well-publicized failures of the '80s, including foolish and failed investments by the Kansas and Connecticut state pension funds.

In fact, economically targeted investments have an increasingly solid record. It's been several years since a significant failure. Major investments in New York and California are actually outperforming the market. Typical of the effort to assure safety was the initiative of Republican Joseph Malone, Massachusetts' state treasurer, to produce strict guidelines so that social investments made by state government pension funds are fiducially sound and fill real "gaps" in capital markets.

When the Republicans' latest assault surfaced, a publication normally very skeptical about these investments -- Pensions & Investments -- called the Saxton bill "an unwarranted government intrusion into the investment management of pension assets -- an intervention Republicans and conservatives general normally would oppose."

The Saxton bill appears to tell pension trustees they can't consider collateral benefits of any kind in making investment decisions. The bill could even be read to ban pension-fund investment in a Fannie Mae-guaranteed mortgage pool and hold trustees legally liable if they did so. Why? Housing can be read as a social (collateral) benefit.

The bill also bans federal aid for the fact-finding clearing house. It even bars Labor Department officials from lecturing on the subject.

So much for a new, less controlling Congress!

The Saxton bill would throw a legal shadow over a decision to invest in a hometown or state, but wouldn't affect pension-fund investments in foreign securities. The funds already have $150 billion invested overseas.

The Saxton bill, says California Democrat Pete Stark, carries a perverse message to pension trustees:

"Don't let us catch you considering anything that may benefit your country or your fellow citizens. You can protect yourself by putting your funds in Wall Street but don't even think about putting them into your own community. You can invest in a foreign company that will compete with the U.S. but don't even think about using your funds to help an American company compete."

The GOP, by turning economically targeted investments into an ideological issue, is casting a chill over sensible pension investments that could strengthen the home-grown economies of the American states and cities and towns the pensioners grew in, and indeed depend on for their broader long-term security.

It's true ETIs are a relatively new form of investment, to be nurtured with care. But they are also a form of investment for new times, when a country facing global competition has to deploy all the assets it has to promote a cause named in the Preamble to the Constitution -- "the general welfare." (That is, if the new politics allows us to use the word "welfare.")

Neal R. Peirce writes a column on state and urban affairs.

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