Illinois pension funds slow to exit Russian assets

Despite strong rhetoric from Governor JB Pritzker and other senior state officials demanding that public pension funds divest more than $100 million in Russia-based assets, state lawmakers are now saying they will not act until the fall veto session.

A key legislative proposal to force withdrawal in the wake of Russia’s invasion of Ukraine has died in a Senate committee awaiting a vote.

Sen. Don Harmon, a Democrat from Oak Park, declined to be interviewed for this report, but his staff suggested the Senate had too little time before the close of session on April 9. The House bill — which passed 114-0 on April 5 — never made it back to the Senate chamber.

Liz Mitchell, spokeswoman for Harmon, said the plan was to review the measure and retake it when they return in the fall veto session.

Critics say it’s too little, too late.

“When you have a supermajority in both houses and a Democratic governor, it’s a massive failure,” said House Minority Leader Jim Durkin, a Republican from Western Springs. “It’s the right thing to do at the right time, and they didn’t do anything. It’s embarrassing. We could have been a leader in this.”

Durkin’s GOP divestment bill was never returned from committee.

In a written statement to the Better Government Association, Harmon vowed to act in retaliation for the Russian invasion that began Feb. 24. He did not address the delay.


        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        

“The atrocities committed in Ukraine under the leadership of Vladimir Putin are inhumane and inexcusable,” Harmon said in an email. “While there is little the Illinois Senate can do to respond, we believe we need to do what we can, including divesting ourselves financially from Russia and helping Ukrainian refugees.”

According to a review of pension audit reports from nine of the major public pension funds – including five in the City of Chicago and three state pension funds – a combined total of nearly $112 million has been invested in stocks, bonds and other Russian assets at the start of the invasion.

Of the approximately $155 billion in total investments represented by these funds, the Russian tranche represents only a fraction of 1%.

Yet that was enough to prompt Pritzker to write a letter to state pension funds and investment boards four days after the invasion began, calling on them to identify investments in Russian assets and companies in for a possible disinvestment.

On March 18, Pritzker and General Assembly leaders released a statement pledging to work together to “advance legislation to remove all Russian companies from Illinois pension assets.”

Illinois pension law requires fund managers to make decisions based on the best possible outcome for investments. General divestiture decisions are made by the General Assembly, the Illinois Investment Policy Board, and the Illinois State Board of Investments at the state level.

Divestment decisions can be complicated by the fact that many pension funds invest in larger mutual funds that may include prohibited investments, which means that pension fund managers would have to withdraw huge and sometimes profitable funds in because of a relatively small prohibited investment.

In other cases, the pension funds themselves make more specific investment decisions. Consider the Illinois Municipal Retirement Fund, which serves many state public employees outside of Chicago and Cook County.

A 2020 report from the IMRF showed about $34.6 million invested in the Russian Federation. Holdings included Lukoil, a huge Russian oil and gas company founded in the former Soviet Union with a long history of sanctions, and the Russian state development company, chaired by the Russian prime minister. Both were sanctioned after the invasion and declined in value during this time.

At its board meeting in March, an IMRF resolution showed that Russian assets fell to $23 million, or about 0.04% of the total portfolio.

The IMRF was one of two major pension funds examined already in the process of divestment, regardless of state legislative proposals. The other is the Chicago Teachers’ Pension Fund.

The CTPF identified $4.5 million in Russian-based securities and companies after the invasion. They voted March 10 to divest.

The fund manager said it takes time for the funds to untangle themselves from these investments.

“We are working with our investment managers who understand our directive to divest Russian assets as quickly as possible,” said Carlton W. Lenoir, Sr., executive director and acting CIO of CTPF. “To date, the Fund has approximately $159,000 of remaining exposure to Russian assets. Russian markets have not functioned normally, which has posed challenges for divestment.”

Most of the larger funds in Illinois reviewed their assets after the invasion. Most said they were still awaiting instructions. All Illinois state pension systems, and some of Chicago’s, say they haven’t moved those investments beyond an initial audit.

The Teachers’ Retirement System, the largest fund in Illinois that represents teachers outside of Chicago public schools, has identified nearly $59 million in assets in its portfolio.

TRS spokesman Dave Urbanek put the battle between tax responsibility and morality surrounding the issue into perspective.

“Letting go of an investment that makes money, there’s a risk to that,” Urbanek said. “But you don’t want to profit from a war.”

Urbanek described the fund as waiting for state direction to act.

“If the directive comes from above, we will act. The call will be made to our managers, and they will sell.”

At the Chicago Municipal Employees Annuity and Benefit Fund board meeting in March, a lawyer for the fund said it might be prudent to wait for advice from Springfield before making a decision.

The MEABF has identified $1.2 million of Russian holdings in its international equity portfolio. The Chicago Fire Department’s pension also identified its Russian assets, which declined in value from $3.6 million to $1.6 million between February and March.

The firefighters’ pension fund – the pension and benefits fund for firefighters – identified about $185,000 invested in Gazprom, a Russian gas company that recently halted shipments to countries refusing to pay with Russian currency. The President of the European Union described this decision as “yet another attempt by Russia to use gas as an instrument of blackmail”.

The State Universities Retirement System has identified $22.7 million in exposure, or about 0.1% of its portfolio.

Executive Director Johara Farhadieh of the Illinois State Board of Investments said the Russian exposure of state employee pension systems fell to $40,000 on April 28.

Condemnation of Russia’s actions in Ukraine has been swift and nearly universal. The United Nations voted in April to suspend Russia from the Human Rights Council due to “gross and systematic violations of human rights”. Organizations such as Amnesty International and Human Rights Watch have documented rapes and executions by Russian soldiers, and President Joe Biden and other world leaders have called for war crimes trials. The UN Human Rights Commission estimates around 3,153 civilian casualties since the start of the invasion.

A recent Washington Post/ABC News poll shows relatively broad support for increased economic sanctions on Russia and humanitarian and military support for Ukraine.

Major state and city pension funds across the country, including funds in Washington, New York, Connecticut and New Mexico, decided to divest from Russia after the invasion.

The use of pension investment decisions as a means to induce social change has been controversial. In the past, Illinois funds have divested from companies and funds tied to Sudan, Iran and companies that boycott Israel under the direction of lawmakers.

The Illinois State Board of Investments creates a prohibited list of companies for funds to consider. The most recent list does not contain any companies or funds linked to the invasion.

“How, as a society, should we think about the assets of our pension systems? Amanda Kass, associate director of the Government Finance Research Center at the University of Illinois at Chicago, asked. “I also see this kind of scrutiny of investing in Russian assets as part of this larger movement.”

Funds must decide whether the short-term return of a company that is a heavy polluter, for example, is worth the potential impact down the road.

An Illinois law requires state agencies, including the ISBI, to develop sustainable investing practices as part of their policies in 2020. These approaches can influence decisions across a wide range of industries and reframe how success is measured.

“By eliminating companies that make sugary drinks like Coca-Cola or junk food like McDonald’s, you’re potentially giving up some return by doing that,” said Kenneth Kriz, a distinguished professor of public administration at the University of Illinois. -Springfield.

Kriz, who served as a public pension fund trustee and board member for more than a decade, believes such decisions are critical in Illinois because of poorly funded pensions.

“I understand why politicians want to get involved. It’s a symbolic decision,” Kriz said. “But token moves don’t often make good investment decisions.”

•This story was written and reported by Jared Rutecki of the Better Government Association, who manages the BGA’s databases and creates stories on state and local government issues, including pensions, payroll and public safety. He can be contacted at [email protected]

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