New York pension systems sued for politicizing public pension investments

Members of three New York City public pension systems recently filed a lawsuit over the plans’ 2021 decisions to divest pension fund assets in fossil fuels. The New York City Employees’ Retirement System, the Teachers’ Retirement System, and the Board of Education Retirement System divested roughly $4 billion in fossil fuel investments that year to “reach net-zero greenhouse gas emissions across [their] investment portfolios by 2040, becoming one of the first cities to do so.” 

The lawsuit, filed by four members of the plans, claims the divestment decision inserted political beliefs into investment decisions and thus violated the pension plans’ core fiduciary responsibility to maximize investment returns at prudent levels of risk for the plan’s beneficiaries. The lawsuit says that putting net-zero emissions goals, which means removing an equal amount of CO2 from the atmosphere as released into it, ahead of investment goals breaks the fiduciary agreement in favor of political and social interests.

This lawsuit could be the first of a larger movement of public pension plan members responding to the significant expansion of public pension funds into the broader environmental, social, and governance (ESG) investment movement. For example, climate activists and policymakers in California routinely push for legislation to force the state’s pension plans, California Public Employees’ Retirement System (CalPERS) and California State Teachers’ Retirement System (CalSTRS), to divest from funds and companies involved with guns, fossil fuels, and other hot-button issues. 

The problems with CalPERS’ strategy received significant attention when a Wilshire Associates report found:

“The California Public Employees’ Retirement System (CalPERS) has lost $3.581 billion in investment gains by divesting from tobacco stocks, which amounts to about 1% of current assets, during a 17-plus-year period ending June 30, 2018, shows a new report by Wilshire Associates, the pension system’s general investment consultant.”

More recently, California Gov. Gavin Newsom signed Executive Order N-19-19, which describes his goal “to leverage the pension portfolio to advance climate leadership.” 

Inserting politics into public pensions is a bipartisan issue. For example, a 2021 Texas law prohibits investing with companies that “boycott” energy companies. As a result, “The Teacher Retirement System of Texas has divested part of its massive pension fund from 10 financial firms that the state comptroller singled out for ‘boycotting’ the oil and gas industry,” the Texas Tribune reported in February. 

As actuary Larry Pollack stated in a recent Reason policy brief, “Both actions and others like them attempt to use pension assets for purposes other than to provide pension benefits, violating the fundamental fiduciary principle of loyalty.”

The plaintiffs in the New York case—Wayne Wong v. NYCERS, TRS and BERS—say the “defendants have breached their fiduciary duties and abused their control over plan assets…in a misguided and ineffectual gesture to address climate change.” 

They also point to other New York pension funds, such as the system that administers benefits for New York state’s first responders, choosing not to divest from fossil fuels. Police and fire representatives stated during a 2021 divestment discussion that assets of their pension funds belong “to the active and retired police officers who have worked and sacrificed to earn their pensions” and that “[o]ur views on any social or political issue cannot enter into the equation.” 

If this lawsuit is successful, it could reinforce the understanding and limits of fiduciary duty in public pension funds, which has been rapidly eroding in recent decades due to various state and federal legislative actions. A decision for the plaintiffs would make clear that these public pension funds are “not to be used as a slush fund to advance goals unrelated to the providing of pension benefits.”