WSJ re. State Pension Systems' Divestment ...... an article that Jon Husted and Josh Mandel might profit from reading!

From John Curry, April 19, 2008

Pension Funds Gain Leeway On Terror Laws

Lawmakers Ease Stance On Divestment Push As Credit Crisis Pinches

By CRAIG KARMIN
April 15, 2008
Wall Street Journal (WSJ.com)
[Click on images to enlarge]

In the $3 trillion public-pension-fund world, strict divestment laws could be the latest victim of the credit crisis.

A year ago, legislators rushed to sponsor bills compelling their state pension funds to sell off companies doing business with Sudan, Iran or other states deemed sponsors of terror. Governors could hardly wait to sign the measures into law.

"These bills limit a pension fund's scope for investing and adds to their administrative costs," says Mark Ruloff, a Watson Wyatt consultant. "That isn't necessarily what beneficiaries want to hear at a time when markets are down and their fund's liabilities are poised to rise."

In the first quarter, the average public-pension fund lost about 5%, while its funding liabilities rose about 2%, according to Watson Wyatt.

The recent turnabout suggests a possible change in the continuing debate over what role, if any, taxpayer-supported funds should play in world affairs. Many lawmakers have argued that public money shouldn't be used in a way that could threaten national security. Funds counter that legislative efforts, while well-meaning, conflict with a fund's fiduciary duty to get the best returns for beneficiaries.

Although U.S. companies are banned from doing business in countries suspected of aiding terrorists, many foreign companies still operate there. More than 20 states have passed laws that could compel public pensions to divest from companies doing business in one or more of the offending countries, including New Jersey's Iran divestment bill signed into law in January. Several other bills are pending and may still pass.

"Fighting the war on terror is still on people's minds," says Jeff Klein, a Democratic state senator in New York whose Iran-divestment bill has passed the state Senate but is stalled in the Assembly.

New York Comptroller Thomas P. DiNapoli announced in November a plan that would examine the state's $155 billion pension fund for offending companies in the energy and defense sectors that could lead to eventual divestment. But he has said the fund won't act in a way that would compromise his fiduciary duty.

The past few weeks also have seen an unexpected softening in efforts to force pension-fund hands. In Tennessee, for instance, a council of Senate and House members rejected the "Terror Free Investment Act" and the "No Investment in Iran Act" and instead recommended a bipartisan bill that would merely require the $32 billion pension fund to identify certain overseas investments.

Arizona Gov. Janet Napolitano signed a bill that sounds tough, forcing the state retirement system to divest within 18 months holdings in companies doing business with Sudan. But according to the fine print, any of the pension fund's managers are exempt from the new law if dumping securities costs them the equivalent of a quarter-percentage point.

The Maine House of Representatives was more direct: It voted down a bill that would have forced pension funds to divest from companies doing business with Iran. An Idaho Senate committee recently rejected a bill that could have forced the state's retirement fund to withdraw money from companies doing business with Sudan. That came after one of the bill's initial sponsors -- saying he didn't want to encourage other bills that might limit investment options -- reversed himself to vote against the measure.

Others sound worried about the public outcry if retirement checks start to shrink. "We have to be very careful about getting out on a slippery slope when we're dealing with people's retirement money," says Rep. Craig Fitzhugh, a Tennessee Democrat who co-sponsored the more moderate bill.

Funds that must comply with new laws also are eagerly publicizing what they say are the costs. New Jersey's Division of Investment says the state's Sudan- and Iran-divestment laws will force the roughly $78 billion pension fund to sell off more than $2.5 billion in holdings and reduce its investible universe by more than 10%. And the California Public Employees' Retirement System says California's Iran-divestment law could force the fund to sell about $2 billion in shares.

Separately, a California assemblyman, Democrat Alberto Torrico, withdrew a bill Wednesday that would have prevented Calpers and the California State Teachers' Retirement System -- the nation's two biggest pension funds -- from investing in private-equity firms that are owned by so-called sovereign-wealth funds. The bill's supporters maintain that some of the governments running these investment funds have poor records on human rights.

But Republican Gov. Arnold Schwarzenegger, who signed bills related to divestment from companies doing business with Sudan or Iran, publicly opposed this bill. He said it would place too big a burden on the funds to monitor myriad human-rights issues.

The two pension funds also criticized the measure. Calpers estimates that this legislation could have cost it $12 billion in future returns over the next decade. Calstrs says it would have had to forgo $5 billion over five years in potential returns, though the bill's sponsor has questioned the figures.

Write to Craig Karmin at craig.karmin@wsj.com