State politicians have returned to the slippery slopes of social investing and pension divestment. In the 1980s, South Africa was the target. Last year, it was Sudan, followed quickly by Iran, and now "all terrorist nations" are on blacklists in some states.

Policy makers should be skeptical about the effectiveness of using pension portfolios to make political or social statements--as well- intended as these may be. Too often, the policies lead directly to diminished returns on investment.

To minimize these fiscal impacts, we need model state pension divestment legislation language. For example:

  • Reimburse these unfunded mandates. Let's require the legislature to appropriate sufficient funds from the state treasury to repay the pension funds for their costs of selling off securities and buying them back once the divestment ends. Also, require pension plans to report back to the legislature annually if these laws have done other damages to their portfolios.
  • Automatic sunset. One of the lessons learned in the last century's South Africa divestiture movement was that the investment sanctions impaired investment returns. Making matters worse, legislatures took their sweet time repealing those laws, so even more money was lost after South Africa had itself repealed apartheid.
  • Empower pension plans to divest smartly. First, all diversified index fund investments should be exempt from these laws. The pension funds are not selecting specific companies or favoring specific countries when they buy an index portfolio. They are simply buying an asset class--a share of the overall global financial market.

Second, pension funds should be allowed to short-sell and use derivatives that effectively accomplish the same economic result as selling specific stocks from their portfolios. These "synthetic global divestment" strategies would save taxpayers' money and allow the various mainstream active portfolio managers to do the job they were hired to perform.

These ground rules would eliminate many negatives, provide appropriate tools to pension managers and put a price tag on these bills as they roll through legislatures.