Should States, Cities Invest in Gun Manufacturers?

It might make sense financially, but some argue it isn't ethical.
March 28, 2013 AT 5:00 PM

After last year's mass shootings in Aurora, Colo., and Newtown, Conn., a number of state and local public pension plans, including California and New York announced plans to purge their portfolios of firearm companies.

It's called social investing -- or disinvesting -- and it's got a long history. When there was an outcry against apartheid in the '80s, a number of public pension plans dumped the stock of companies doing business in South Africa. Several cities divested from companies involved with the Sudan after reports of genocide in Darfur. More recently, a number of pension plans have refused to invest in companies that deal in tobacco or alcohol.

Social investing taps into highly emotional issues, but the question is whether government's moral responsiblity to society trumps its fiscal responsibility to shareholders? Alicia Munnell, director of the Center for Retirement Research at Boston College, is an outspoken critic of social investing. I recently caught up with Munnell to discuss this and other pension topics in the condensed and edited transcript below.

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Why is it a bad idea for public plans to disinvest?

I have two large concerns. One is that the people making the decision now are not -- should anything go wrong -- the people who will bear the burden. That is, the people making the decisions are politicians, and the people that bear the burden are future taxpayers and beneficiaries.

The other concern is the sophistication of public plan managers. Some are sophisticated, but many are not. The idea that you are going to introduce another dimension into the investment decision creates a risk that portfolio managers will take their eyes off the prize of maximum returns and undermine investment performance.

This initiative [to disinvest from firearm companies] initially came from Chicago. Chicago public plans are some of the worst-funded in the world. The fact that they are fooling around and trying to make political statements when their finances are such a mess is particularly annoying.

Rather than disinvest, is it better financially to have a social investment policy in place ahead of time? Philadelphia's Mayor Michael Nutter is setting out principles that companies must adopt in order to receive city pension money. They apply not only to gun manufacturers but also to companies, like Walmart and Sears, that sell firearms.

It's not better for me. My position is not a pleasant one. When plans disinvested from Darfur, I sounded as if I were pro-genocide. Now, I sound anti-gun control. I'm neither. I just don't think it's effective, and it's not appropriate. It can harm the performance of public plans. If rich people want to adjust their own portfolios for social investing, that is perfectly reasonable. But for public plans to do it is not. Private pension plans, by the way, are not permitted to do it under the Employee Retirement Income Security Act.

The question is: What are we trying to accomplish here? Do we want to not have any guns sold or made? Do we not want assault weapons made? I would very much like gun control legislation, but public pension plans are not the mechanism to accomplish that goal. This investment stuff has a lot of dimensions to it. Just asking these public managers to invest in things that will bring maximum returns is enough of a requirement. Adding something extra is not a good idea.

What other investment issues are portfolios facing today?

Their health going forward depends on returns, not on the interest rate they assume for discounting their benefit promises. There is a lot of pressure on returns. I worry that they are reaching for yield and might get themselves into products they don't understand. In Ontario, the teachers investment plan pays its investment people Wall Street-type salaries. They attract high caliber investors. Our public plans pay state salaries, which means you don't get people with quite the same level of skills.

A recent study by your group looked at 32 public pension plans in 15 states to see whether they were making adjustments in the wake of the recent financial crisis. What were your findings?

The study examined the long-term effects of pension reforms on employer costs and on state budgets pre-crisis and post-crisis. We found that plans had made a lot of significant changes. They had increased employee contributions, increased the age for retirement and targeted other changes primarily to new employees. We were surprised to the extent changes were made and how much they would be saving. For most plans, the reforms fully offset or more than offset the impact of the financial crisis on the sponsors' costs. As a whole, pension costs as a share of state, local budgets are projected to eventually fall below pre-crisis levels. The way I read it, they really did something. They have made changes. Now it's a question of how long they stick by them.