Mayors Breaking Laws with Anti-Gun Jawboning

Published February 15, 2013

[NOTE: The author of this op-ed, Heartland Institute Senior Fellow for Legal Affairs Maureen Martin, died in a housefire on February 5, 2013. This was one of the last op-eds Martin wrote before the tragedy. — Jim Lakely, Director of Communications, The Heartland Institute.]

There oughta be a lawsuit or four.

Big-city mayors are rushing to ban investments by public employee pension funds in gun manufacturers, to demonstrate their opposition to law-abiding people having guns. Determining investment strategies by using such crass political purposes is blatantly illegal.

Public employees’ pensions are funded by contributions from employers, employees, taxpayers, and returns on investments. These funds are held “in trust” for the payment of pension obligations by public entities legally known as “fiduciaries,” from the Latin words for faith and trust. Fiduciaries owe beneficiaries the highest legal duty known in our legal system.

Unfunded pension liabilities in Chicago, for example, are between $20 and $40 billion. City agencies made risky investments, with paltry returns, and skimped on city contributions to the pension funds. Investments in a Mississippi fast food chain and a Los Angeles grocery store were projected to earn returns of up to 20 percent. Instead, half of the investments lost money. They earned $60 million on an investment of $1.3 billion, when investing in 30-year U.S. Treasury bonds would have earned $893 million.

Yet Chicago pension funds last week sold off their investments in gun companies such as Sturm Ruger and Co., Inc. Last year, driven by election year fears, that company reported an earnings rise of 80 percent for the previous two quarters, with stock hitting an all-time high of $50.59 per share. This week, (1-29), the stock hit $52 per share.

The city also sold off its shares of Smith and Wesson Holding Corporation, which reported record earnings late last year, a 17-fold increase over the prior year.

The city, as a fiduciary, has a duty to maximize the return on its pension fund investments and invest prudently to ensure sufficient funding to pay pension benefits. The city breached that duty by selling off productive investments.

In California, the California Public Employees’ Retirement System (CalPERS) reported earning 1 percent on its investments last year. The California State Teachers’ Retirement System earned 1.8 percent. Both entities need returns of 7.5 percent to pay their pension obligations. Taxpayers will be obliged to make up the shortfall. Both were planning to divest themselves of gun stocks.

The same thing is going on in Philadelphia, where there are more workers collecting benefits than workers paying in, where public contributions lag and investment returns are far below the required 8.1 percent. The funds have assets sufficient to cover only 45 percent of their obligations. Yet the city pension board last week adopted the Sandy Hook Principles, announced by Mayor Michael Nutter, to limit pension investments unless gun manufacturers and distributors agree to follow them. Nutter is president of the U.S. Conference of Mayors. He says many other mayors have expressed interest in the principles.

Lawsuits by beneficiaries of private 401(k) accounts are not unprecedented. A California federal court ruled in 2002 WorldCom employees could sue the company for breaching its fiduciary duty under the Employee Retirement Income Security Act (ERISA) of 1974 because plan assets were not invested prudently and the company failed to act solely in the best interests of the plan’s beneficiaries. All ERISA does is codify the common-law fiduciary duties, so public employee pension beneficiaries ought to have a similar cause of action.

Taxpayers ought to have a right to sue as well, though it’s unclear whether they are owed a fiduciary duty by politicians. In Illinois, however, former Gov. Rod Blagojevich was impeached by the Illinois House for his malfeasance in repeatedly violating Illinois law and the Illinois Constitution. That might be a possibility in the present case.

Unfunded state and local pension liabilities total an estimated $7 trillion. Using pension investments for political purposes is unconscionable, particularly when investment returns are shaky. There oughta be a lawsuit.

Maureen Martin, J.D., was senior fellow for legal affairs at The Heartland Institute.