The Week in Public Finance: CalPERS' Rethinks Tobacco Divestment, Fact-Checking Illinois' Exodus and Income Recoveries

A roundup of money (and other) news governments can use.
by | April 22, 2016

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Smoking or Non-Smoking?

The California Public Employees’ Retirement System (CalPERS) struck a controversial note this week when its board announced it would study whether to get back into the tobacco industry. The nation’s largest pension fund divested from tobacco companies in 2001 on the premise that making money off a product known to cause cancer was in conflict with the fund’s social responsibility.

But a study by a consulting firm showed that CalPERS forfeited an estimated $3 billion in investment profits since 2001 because of that decision. The board will take its time -- two years -- reconsidering its decision, citing its fiduciary duty to make the best investment choices possible for retirees.

The announcement has already drawn fire from those who say CalPERS would violate its role as a health insurer by getting back into tobacco. State Treasurer John Chiang, who sits on the board and voted against the majority, said in a statement that investing in tobacco companies is harmful to public health and to the fund’s fiscal bottom line. "Smoking causes addiction, disease and death,” said Chiang. “No public pension fund should associate itself with an industry that is a magnet for costly litigation, reputational disdain, and government regulators around the globe.”

Data on the Illinois Exodus

As Illinois lawmakers continue to work toward a budget and spending plan for this fiscal year, they might want to consider this: A study by KDM Consulting, "Who is Leaving Illinois and Why," is “an invaluable addition to the general discussion of Illinois budgetary stability, competitiveness and related topics,” said analyst Chris Mier of Loop Capital, an investment firm.

The report looked at state migration patterns and found that Illinois has been experiencing net out-migration since 1925. Until recently, the continual outflow has been offset by considerable inflow from international migration. In addition, there is substantial migration between the Midwest states, meaning no single state is beating others at attracting residents. For instance, Illinois’ largest out-migration is to Indiana, which Illinois lawmakers often cite as a lower-tax competitor. But Indiana's largest out-migration is to none other than Illinois.

All this, points out Mier, “offers a refutation of the oft-cited timeline of out-migration increasing coincident with the increase in the personal income tax in January 2011.” Lawmakers, partly in reaction to out-migration fears, let that tax increase expire in 2015. That move contributed to the state’s current structural budget problems.

Lopsided Recoveries

Speaking of personal income, new data is out that shows the nation continues to have an uneven income recovery across the 50 states. According to The Pew Charitable Trusts, growth in personal income since the end of 2007 has grown by as much as 5 percent each year in North Dakota and as little as less than a half-percent annually in Nevada.

The past year has been equally lopsided. While 2015 was good to most states, 12 saw income slowdowns. Six of those states -- Iowa, Nebraska, North Dakota, Oklahoma, South Dakota and Wyoming -- saw incomes shrink thanks to declines in the natural gas and oil industries. Still, Pew reported, personal income in all states is higher than before the Great Recession.

A separate report indicates 2016 might be a more mediocre year for most states. Due to slower economic growth overall in the first three months of the year, Standard & Poor’s credit rating agency said it has lowered its forecast of real U.S. GDP growth to 2.3 percent from the 2.7 percent it initially projected. “For U.S. state and local governments, the forecast anticipates a broadly stable economic backdrop,” S&P said, “albeit one that lacks the underlying vitality we would typically expect to see at this stage of the business cycle.”