Akin To Fraud.

The New Hampshire story.

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The following piece was written by Mary Williams Walsh, escapee from The New York Times and now managing editor of News Items. Mary’s reporting on public pension funds over the years has been second to none. This piece is yet another example why.

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Last June, we described efforts by banks, investment firms and insurers to reduce their dealings with high-carbon businesses, in accordance with the United Nations’ 2015 Paris Climate Agreement. We also described a resulting backlash by some two dozen American states, many of which are home to big oil, gas and coal operations. These states oppose “ESG investing,” ESG being “environmental, social and governance.” They accuse certain financial firms of giving undue consideration to ESG factors in their investment decisions, harming home-state industries. These states have been passing laws to keep their public pension funds from hiring investment firms that promote ESG investing.

Now there’s a new development, in New Hampshire:

Last year, New Hampshire Governor Chris Sununu signed an executive order barring that state’s pension system from placing money with investment firms that make their decisions “solely” on the basis of “environmental, social and governance criteria.” It’s hard to imagine anyone investing pension money solely that way—normally, return on investment rules. 

In fact, it was all a bit strange, since New Hampshire has no oil, gas or coal interests to protect from ESG investing. But it just got even stranger. This month, lawmakers introduced a bill to make ESG investing a felony. The bill seeks one to 20 years’ imprisonment for anyone who knowingly invests state money on the basis of ESG criteria.

The bill’s main sponsor, Rep. Mike Belcher, a Republican, said such a law was necessary because Gov. Sununu’s executive order was unenforceable. In an interview with “Business Insider,” he said ESG-led investment of state money was “akin to fraud.”

The state’s pension money has “to be invested to maximize gains,” he said. But when the money is used instead to achieve ESG goals, it’s “akin to fraud, as potential earnings are being stolen and leveraged for social and political activist purposes.”

On X, the former Twitter, Belcher cited a report from this year’s World Economic Forum in Davos. It told of a set of uniform metrics that three major accounting firms had developed, so that all companies could report their ESG achievements in a comparable way. The new metrics didn’t use the ESG acronym; they were called “Stakeholder Metrics.” Belcher saw that as a ploy to camouflage their real purpose: promoting fraudulent ESG investments.

“Hey, look,” he tweeted. “‘ESG’ is ‘rebranding.’ This is why you can’t just outlaw investing in funds that specifically use the ‘ESG’ language. The practice must be banned under any name. That’s why my bill works.”

The New Hampshire Retirement System could, in fact, use some help, but not the kind Belcher has in mind. It’s been hovering near the lower end of public-pension rankings for years. The Urban Institute graded it “F” for funding, one of four states to receive a failing grade. (It got higher grades for other qualities.)  In nine of the past ten years it’s had less than 70 cents for every dollar that it owes retirees. Last year it posted 67 cents on the dollar. It just can’t seem to get ahead.

It's a small pension fund, compared to the giants run by big states like California, New York and Texas. You never really hear much about it outside of New Hampshire, but it serves all the public workers there—employees of the state and any of its 455 cities, towns, counties, and other local governments. All told, it’s responsible for 48,589 active workers and 46,869 retirees.

And it didn’t get into its current condition through fraudulent ESG deals. It’s at 67 cents on the dollar for a much less eye-catching reason: It has nearly 47,000 retirees collecting exactly what the state and its localities promised them over the course of their careers—and nobody set aside enough money to cover the cost. The cost was mis-measured. No two pension funds are identical, but for all their diversity this mundane fact underlies virtually all of them: It costs a lot more to provide a fixed, lifetime-guaranteed pension than anyone wants to admit. That’s why decades of contributions and investment gains haven’t been enough to cover that cost in most cases, especially now that large numbers of people have been retiring.

Sure, you can find the occasional dud investment. It may even be an ESG investment. But that isn’t where most of America’s public pension woe has been rooted.

You can see this in the New Hampshire Retirement System. It’s been studied a lot by stakeholders trying to figure out what the problem is.

It was established in 1967, and at the outset it offered good benefits. In 1974, police and firefighters were given the right to retire at age 45, if they’d served for at least 20 years. You’d be surprised what a difficult promise this is to keep. If the average cop retires at 45 and lives to age 77 (the average life expectancy for males), his municipal employer has just 20 years to fund a stream of monthly payments that must continue for 32 years. There’s not enough time to do that. To make the numbers look plausible, the pension system assumed back then that it would earn average annual investment returns of 9.75 percent.

There was other wishful thinking, too. Traditional, defined-benefit pensions are calculated on the basis of a worker’s earnings and years of service—but back then, public workers in New Hampshire were told that when they retired, they could add in extraneous things to inflate their pensionable pay. Unused sick pay, severance, bonuses, and of course overtime were all added to each retiree’s pensionable pay. Maybe a retiree got a bonus or severance pay just once, but counting those as pensionable earnings increased that retiree’s pension every year for the rest of his or her life.

Everybody was also promised an annual cost of living adjustment. Those are hard to pre-fund, too. In the early years, the New Hampshire Retirement System skimmed off some of its own “excess” investment gains every year, and put them into a separate fund to cover the annual adjustment. The problem with this was that there weren’t really any “excess” investment gains. The investment income from bullish years was needed to offset the poor returns in bearish years. Skimming off a purported excess made it harder for the fund to hit its long-term investment target. And if it consistently missed its target, it wouldn’t have enough money to keep its promises.

None of this is unique to New Hampshire, by the way. 

The fund ran like that until 1991, when its funding was so inadequate that municipalities all over New Hampshire were told they would have to increase their annual contributions. There was an uproar. The local governments didn’t have the money. They wanted the state to pick up part of their load. The state said no—it had been told its contributions had to triple. Contributions for teachers’ pensions were supposed to quadruple. Public workers feared their benefits would be cut.

Lawmakers spent a year drafting legislation that cut back on some of the extras counted as pensionable pay. They also legislated a new actuarial method, which would spread out the contributions over a much longer timeframe. That made them seem cheaper. No one really knew how the new actuarial method worked, but people were told it was the same funding method that Social Security used. No one seems to have pointed out Social Security is unfunded–it runs on cash flow.

Unions packed the capitol for the debates and votes. Lawmakers who wanted to raise the police retirement age were intimidated and overwhelmed. One said that just the previous day a state trooper had pulled her over, told her she was doing 72 in a 65 mile-an-hour zone, “and the next question out of his mouth was, ‘Where do you stand on the retirement bill?’” Another lawmaker was so stressed she broke down in tears on the rostrum.

In the end, the lawmakers passed an amended bill that left the costly add-ons intact and used the new actuarial funding method to push taxpayer contributions far into the future.  Cheers erupted from the gallery when an electronic counter flashed the vote, 181 to 165. And grumbling erupted from lawmakers who didn’t think it would work.

It “could result in more severe problems years from now,” one warned.

And he was right. Fifteen years later, in 2007, the retirement system was back before the legislature, its problems worse than ever. Pushing contributions out into the future in 1992 had created a $2 billion shortfall—a huge amount for a small state. Lawmakers called for a review commission. The commission said New Hampshire had to get rid of its funding method. Not only did nobody understand it, but it turned out to be unauthorized. The commission also said New Hampshire should stop skimming “excess” money from the pension fund and using it to pay for cost-of-living adjustments. That practice was depleting the plan.

New Hampshire took the bitter medicine. But then, instead of watching the fund rebound, it saw hundreds of millions of dollars disappear from its investment portfolio in the financial meltdown of 2008. By 2009, the fund had just 58 cents for every dollar it owed the workers, making it the 19^th worst funded of the 170 biggest public pension funds tracked by the Center for Retirement Research at Boston College. 

More legislative changes were made in 2011. Public employees had to contribute more to the system. The state stopped helping municipalities contribute. Police were told they could no longer retire at 45; they had to wait until they were 50. Other workers, such as teachers, could no longer retire at 60; they had to work until they were 65. Extras like severance could no longer be used to inflate pensions. There were multiple lawsuits, but the changes were upheld by the courts. 

So the pensions were going to cost less, and the public workforce was going to pay more for them. That would strengthen the fund’s finances in the future. But there was still a whopping $10 billion shortfall left over from the past, when the benefits were richer and the smaller contributions failed to cover the cost. 

Something important to know about public pensions: Their shortfalls are treated as a debt, and the debt accrues interest at the plan’s assumed rate of investment return. For the New Hampshire Retirement System in 2011, that meant a $10 billion debt was accruing 7.75 percent interest–in a time when the ten-year Treasury rate was around 2.8 percent. 

New Hampshire’s far from the only public pension plan in this predicament. Plans all over the country have been coping with large debts from the distant past–debts that can snowball if not handled carefully, because the plan’s interest rates are so high. 

New Hampshire lawmakers gave the retirement system 30 years to pay off that debt. That’s longer than recommended. And to add to the risk, the state mandated a debt-payoff schedule that backloaded the payments. The state and its municipalities wouldn’t feel much pain in the early years, but over the next 30 years their required payments to the fund would rise. And rise. It wasn’t clear the local governments could swing it.

In 2018, New Hampshire engaged the Center for Retirement Research for another review. The Center found that despite the benefit cuts of 2011, the system wasn’t getting anywhere in terms of funding.

That makes three thorough reviews, in 1991, 2007, and 2018, plus a much-litigated restructuring in 2011. A lot of review, debate and reform. And in none of it did anyone come forward and say, “You know, we really ought to be looking into your ESG activity, because we think that’s what’s holding you back.”

The Center’s analysts never even mentioned a problem with the system’s investments, much less the possibility that precious money was being frittered away on bogus wind farms or corporations that put social justice ahead of profits. They were concerned with the backloaded debt-payment schedule. They recommended that New Hampshire change it, along with its assumed rate of return. New Hampshire hasn’t done either.

Suggestion to Mike Belcher: Stop looking for villains with ESG investment strategies. Stop looking for villains, period. That’s not what’s been plaguing the retirement system for 30-plus years. The problem isn’t that interesting. The fund is strapped because people keep retiring and collecting what they’ve been promised. They, and their public employers, didn’t contribute enough to cover the cost. They’re still not contributing enough.

You can’t make good election-year performance art out of that. But if you really care about your state’s taxpayers, drop the ESG issue. Make it a felony to understate your pension numbers and underfund the system every year. Make that punishable by 20 years in prison.

Get that through the legislature and you’re good for a Nobel Prize. But certainly not for peace.