The Cost of Divestment

A report prepared by the Suffolk County Association of Municipal Employees and Foster & Foster Actuaries and Consultants About the Authors

Commissioned by Suffolk County Association of Municipal Employees

About Suffolk County AME President Daniel C. Levler Daniel C. Levler was elected president of Suffolk AME in 2018, after previously serving as acting president and as Executive Vice President. With over 6,000 active and over 4,000 retired Suffolk County workers, The Suffolk County Association of Municipal Employees (AME) is the largest independent union in the State of New York. AME represents a large majority of Suffolk County Government workers in areas such as the Child Support Enforcement Bureau, Consumer Affairs, Civil Service, Crossing Guards, District Attorney, Finance & Technology, Family Services, Fire Rescue Emergency Services, Health Services, Labor Dept, Medicaid, Medical Examiners, Parks Dept, Patient Care, Police Civilian, Public Works, Sheriff/ Probation Civilians, Social Services, Suffolk County Community College, Vector Control and more.

Independent actuarial analysis and research conducted by Brad Heinrichs, President and CEO of Foster & Foster Actuaries and Consultants. Foster & Foster is an independent national actuarial consulting firm that specializes in providing innovative retirement and health & welfare consulting services to sponsors of public, private, and multi- employer benefit plans.

Founded by Ward and Eileen Foster in 1979, Foster & Foster has steadily grown to become the market leader for public pension actuarial services in the State of Florida. Foster & Foster has also broadened its footprint outside of Florida and now serve over 300 public retirement plans nationwide. Brad Heinrichs has been the President/CEO since 2005, and has spearheaded the growth of the company by adding over 40 credentialed actuaries/consultants and over 250 new public pension funds as clients during this time. Brad is a Fellow of the Society of Actuaries, which is the highest designation that an actuary can obtain, an Enrolled Actuary per ERISA, and a Member of the American Academy of Actuaries. He is a consultant to plans with as many as 200,000 members, and often is a key resource for State lawmakers when evaluating proposed legislation that may impact public pension plans. His role in the development of this paper has been strictly to provide calculations that illustrate the estimated financial impact on New York’s pension plans of divesting from an asset class that will yield higher returns into an asset class yielding lower returns. Table of Contents

Suffolk County AME Press Release . . . . . 3 Introduction ...... 5 Market Performance ...... 6 Portfolio Performance ...... 8 Findings ...... 10 Local Impact ...... 14 Conclusion ...... 19

2 EMBARGOED UNTIL APRIL 29, 2019 AT 9:00AM MEDIA CONTACT: Michael Skelly 917-364-8142 [email protected]

DIVESTING IN FOSSIL FUELS COULD COST NEW YORK STATE PENSION SYSTEM AND TAXPAYERS MORE THAN $33.4 BILLION OVER 30 YEARS AND LEAD TO STEEP TAX HIKES, SERVICE CUTS, OR SLASHED PENSION BENEFITS

A new report commissioned by the Suffolk County Association of Municipal Employees also shows fossil fuel divestment could cost New York City Retirement Systems over $18.9 billion after 30 years

BOHEMIA, N.Y. (April 29, 2019) -- On the eve of hearings on a New York State Senate bill, which would force State Comptroller Thomas DiNapoli to fully divest its pension system from as much as $13 billion in fossil fuel assets within five years, an alarming new report commissioned by New York State’s largest independent union, the Suffolk County Association of Municipal Employees (Suffolk AME) shows that “green energy” stocks would substantially underperform fossil fuels and result in state pension shortfalls that would require an additional contribution of up to $33.4 billion over 30 years.

The report, “The Cost of Divestment,” also analyzed Mayor de Blasio’s plan to divest the New York City’s pension funds from $5 billion in fossil fuels assets and found that it would cost the New York City Retirement System $18.9 billion dollars over a 30-year period. Taken together, these shortfalls would require up to $33.4 billion in additional contributions to the state fund and up to $18.9 billion in extra contributions for the city’s pension system. That would mean slashing pension benefits or massive cuts to vital government services or large tax hikes to make up for the shortfalls.

“The findings from this report should serve as a loud wake up call to New York’s taxpayers, which includes the men and women who perform the essential government services that New Yorkers rely upon every day,” said Daniel C. Levler, president of Suffolk AME. “If New Yorkers were upset about billions of dollars in tax breaks for Amazon, then they should be even more concerned with a projected state shortfall loss equaling more than ten Amazon deals.”

The report does not dispute the need to find ways to fight climate change, but instead uses 10 years of data to show that selected fossil fuel funds outperformed comparable green energy stocks in that period, as well as future projections of decreased pension fund returns and heavy shortfalls.

Bradley Heinrichs, President and CEO of Foster and Foster, whose firm conducted an independent actuarial analysis for the report said, “We took a deep dive into the numbers in this paper and quantified the financial impact of divestment on the City and State’s pension plans, as well as to the individual taxpayers. If the future mirrors the last ten years, divestment will be extremely expensive to all parties.”

The report comes a day before the Standing Committee on Finance, chaired by Sen. Liz Krueger, holds invitation-only hearings on a proposed law requiring the state’s $207.8 billion Common Retirement Fund to divest from fossil fuels within five years. Citing recent returns and various studies, Krueger and environmental activists say clean energy stocks outperform fossil fuels.

3 The report took issue with that. “Rather than rely on just two or three years of data, we reviewed ten years of annual returns for five fossil fuel funds and five green energy funds,” the report states. “While green tech advocates may be able to cherry pick individual years when green energy has recently outperformed fossil fuels, the long view shows the opposite; over a ten-year period, observed fossil fuel funds together had an average return of 2.6%, while observed green energy funds had an average return of - 3.94%, or a difference of 6.54%.”

The report also noted that pension funds are required by law to pay out “formula-based” benefits regardless of how the investments perform – meaning higher taxes to fund additional contributions or cuts to vital services like public safety and education. State Comptroller Thomas DiNapoli, who oversees the pension fund, has resisted calls to totally divest from fossil fuels, and a state advisory panel on climate change did not recommend divesting from specific stocks.

"The possibility of the enormous tax hikes or severe budget cuts mentioned in this report will affect every hard- working public employee across the state -- and general public as a whole," said Patrick Cullen, president of the New York State Supreme Court Officers Association. "We all want to reverse the effects of climate change, but forcing the pension fund to divestment from fossil fuels is not the way to go about it."

The new report said the impact would be felt across the state and chose three localities, Erie County, New York City, and Suffolk County on Long Island, to showcase the types of cuts and changes divestment would force on local communities and their budgets.

In Suffolk County, the cost of divesting $13 billion in fossil fuel assets and moving those assets into green energy would amount to an annual 2.69% cut to Suffolk County Budget areas across the board. In FY 2019, that would mean cutting $19.45 million from public safety, $4.06 million from education, and $2.28 million from transportation.

In Erie County, the cost of divesting $13 billion in fossil fuel assets and moving them into green energy would amount to an annual 3.49% cut to Erie County Budget areas across the board. In FY 2019, that would mean cutting $1.08 million from the county police, $871,820 from mass transit, and $99,144 from homeland security and emergency services.

"If divesting means taking millions from law enforcement, we will be forced to make the difficult decision of reducing the number of police officers or depriving them of much-needed resources to fight crime and stamp out the scourge of drugs sweeping across our state," said Thomas Mungeer, president of the New York State Troopers PBA. "That is a misguided policy."

Divestment would have a particularly harsh impact on taxpayers in New York City, “where the state divests $13 billion from fossil fuels, the resulting cost to the public – $33.41 billion in additional contributions after 30 years – would dwarf the Amazon subsidies package by more than ten times.” Amazon’s move was predicted to create up to 40,000 jobs; divestment would create no jobs.

Michael Carrube, president of the Subway Surface Supervisors Association, which represents 4,000-plus Subway and Bus Supervisors, whose members are part of the New York City Employees Retirement System said, “Our pensions are and should be protected from ambitious politicians who would try to use them as policy experiments or as part of some broad political agenda that ultimately negatively affects our members and other working families.”

“If our public officials are making decisions that will require tax hikes or cuts to programs and benefits, that is something the public deserves to know beforehand, not years down the road,” the report concluded.

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4 Introduction

n recent years, environmental activists have increasingly pushed for major pension funds – including Ifunds for New York state and New York City employees – to divest from “fossil fuel” assets and reinvest in sustainable companies. While their goals are primarily environmental, these activists have argued that divestment is also the correct choice from a fiduciary standpoint. Citing recent returns and miscellaneous studies, advocates like NY Sen. Liz Krueger argue that fossil fuels are outperformed by clean energy and divestment of fossil fuels would have generated (and still could generate) billions of additional dollars. In this paper, we intend to disprove this recent conventional wisdom and demonstrate the deleterious effects that pushing fossil funds into green energy would have on both the pension funds and local communities who may be left holding the bill.

Since pension funds invest for the long term, we took a similar view when analyzing the data. Instead While green tech advocates may of relying on just two or three years of returns, we reviewed ten years of annual returns for five fossil be able to cherry pick individual fuel funds and five green energy funds. While green years when green energy has tech advocates may be able to cherry pick individual recently outperformed fossil fuels, years when green energy has recently outperformed the long view shows the opposite; fossil fuels, the long view shows the opposite; over a ten-year period, observed fossil fuel funds together over a ten-year period, observed had an average return of 2.6%, while observed green fossil fuel funds together had energy funds had an average return of -3.94%, or a an average return of 2.6 percent, difference of 6.54%. while observed green energy funds Using that ten-year difference in returns, we then had an average return of -3.94%, or projected how reinvesting fossil fuel interests in a difference of 6.54%. green energy would affect pension performance after 10, 20 and 30 years. We also estimated the additional contributions necessary to cover those shortfalls. In our projections, the divestment portfolio consistently underperformed the baseline portfolio. At the 30- year mark, state pension divestment could create shortfalls ranging from $11.6 billion (if $5 billion is shifted) to $28.6 billion (if $13 billion is shifted), requiring between $13.4 billion and $33.4 billion in additional contributions to make up for the lost value. At the city level, divesting $5 billion could similarly cost up to $13.4 billion after 30 years, requiring up to $18.9 billion in additional contributions.

At both the city and state level, pensions are defined-benefit systems – and underfunded ones at that. If divestment creates shortfalls, those funds will need to be recouped from somewhere else. This could mean anything from pension benefit cuts to tax increases to diverting funding from existing programs and agencies. In the final section of our paper, we examine how divestment-related shortfalls would stack up against local budgets, including key services like public safety and transportation.

5 Market Performance

Observed Fossil Fuel Performance To evaluate fossil fuel market performance, we reviewed average annual returns at various intervals for five fossil fuel funds: Vanguard Energy ETF (VDE), Energy Select Sector SPDR ETF (XLE), iShares U.S. Oil & Gas Exploration & Production ETF (IEO), VanEck Vectors Oil Service ETF (OIH), and Invesco DWA Energy Momentum ETF (PXI).

Individual performance Each fund individually had negative returns over a 2-year and 5-year period, while most had positive returns on a 3-year and 10-year period. One fund, OIH, had negative returns for the entire observed period.

Sample Fossil Fuel Fund Returns, 2008 – 2018 Fund 2yr Average 3yr Average 5yr Average 10yr Average VDE -11.65% 0.27% -6.95% 3.55% XLE -9.97% 1.24% -5.74% 4.19% IEO -10.21% 0.25% -7.80% 3.94% OIH -33.54% -17.35% -20.10% -3.71% PXI -18.56% -4.64% -11.64% 5.01%

Average performance When averaged together, the fossil fuel funds had negative returns over 2-, 3-, and 5-year periods, but had a positive return over ten years.

Averaged Fossil Fuel Fund Returns, 2008 – 2018 2yr Average 3yr Average 5yr Average 10yr Average -16.79% -4.05% -10.45% 2.60%

Observed Green Energy Performance To evaluate green energy market performance, we reviewed average annual returns at various intervals for five green energy funds: Invesco Solar ETF (TAN), Invesco WilderHill Clean Energy ETF (PBW), First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN), VanEck Vectors Global Alt Energy ETF (GEX), and iShares Global Clean Energy ETF (ICLN).

Individual performance Each fund had positive returns over a two-year period, while most had negative returns over 3-, 5-, and 10- year periods.

Sample Green Energy Fund Returns, 2008 – 2018 Fund 2yr Average 3yr Average 5yr Average 10yr Average TAN 7.12% -13.32% -10.10% -11.85% PBW 10.02% -1.21% -5.75% -5.02% QCLN 7.59% 4.06% 0.46% 5.15% GEX 4.98% 1.21% 0.46% -1.30% ICLN 4.60% -3.12% -2.12% -6.69%

6 Average performance When averaged together, the green energy funds had positive returns over a two-year period, but negative returns over a 3-, 5-, and 10-year period.

Averaged Green Energy Fund Returns, 2008 – 2018 2yr Average 3yr Average 5yr Average 10yr Average 6.86% -2.48% -3.41% -3.94%

Comparative Fossil fuel funds, on average, outperformed green funds in 2009-2012, 2016 On average, the fossil funds reviewed had greater annual returns than the green funds reviewed in 2009, 2010, 2011, 2012, and 2016. Fossil vs. Green Returns by Year Average Index Return Year Ending Fossil Green Difference 12/31/2018 -26.04% -14.15% -11.89% 12/31/2017 -6.28% 33.87% -40.15% 12/31/2016 28.14% -17.81% 45.95% 12/31/2015 -23.54% -3.56% -19.98% 12/31/2014 -14.57% -5.59% -8.98% 12/31/2013 27.84% 80.42% -52.58% 12/31/2012 5.76% -11.79% 17.55% 12/31/2011 -2.40% -48.60% 46.20% 12/31/2010 24.29% -15.71% 40.00% 12/31/2009 38.94% 19.88% 19.06%

Putting divestment advocates’ claims in context One of the arguments put forth by divestment While our data shows that fossil fuel advocates is that divestment is financially wise underperformed green energy in “the because fossil fuel stocks underperform clean last year and a half,” this appears to us energy sector stocks. In the justification for her 2019 divestment bill, Sen. Liz Krueger wrote: like a classic case of cherry-picking. For example, in the year before Although there have been brief periods of that, the selected fossil fuel funds volatility when clean energy sector stocks outperformed the selected green have underperformed fossil fuel stocks, oil price spikes of as much as 40% over the energy funds by a margin of nearly last year and a half have caused demand 46 points. Hence, due to volatility, to shift to renewable energy sources. taking a long-term view is the most Clean energy sector stocks almost doubled in comparison to stocks in the fossil fuel appropriate approach to analyzing sector. Increased fossil fuel prices will differences in returns. continue to pave the way for increased demand for clean energy products and

7 services. In turn, this will fuel the new energy economy and ultimately drive market valuations higher.

While our data shows that fossil fuel underperformed green energy in “the last year and a half,” this appears to us like a classic case of cherry-picking. For example, in the year before that, the selected fossil fuel funds outperformed the selected green energy funds by a margin of nearly 46 points. Hence, due to volatility, taking a long-term view is the most appropriate approach to analyzing differences in returns.

Portfolio Performance

Methodology Scenario Design Comptrollers for both the state and city of New York are currently evaluating what divestment or decarbonization would mean, both economically and logistically. Neither has settled on screening criteria, financial projections, or timelines for divestment, making it more difficult to estimate the consequences of divestment. Divestment advocates, too, have made their own claims that do not align with government estimates and may have different outcomes.

Currently, the only public proposal to address these issues is S. 2126 (“the Krueger Bill”), the latest iteration of divestment legislation from state Sen. Liz Krueger. Under the Krueger Bill, NYSCRF would divest from the top 200 fossil fuel companies (as well as subsidiaries and affiliated entities) within five years. Though the law technically divests from just the vast majority of fossil fuel companies, Sen. Krueger’s bill justification states that the legislation mandates “Divesting the Fund from all investments in fossil fuels” and “provides a five-year horizon for completion of divestment from all fossil fuels.”1

Scenarios for different scales of “fossil fuel” Using the Krueger bill as a model, we evaluated the impact of divestment under multiple scenarios, each covering different asset estimates from public officials and advocates. In each scenario, the estimated portfolio of fossil fuels was evenly divested over a five-year period.

Given that the intent of the Krueger bill (and its supporters) is to fully divest from fossil fuels, we chose to simulate full divestment rather than accounting for any minor fossil fuel assets that may remain after screening out the top 200 companies and affiliates.

Scenario 1 (State): $5.12 billion in fossil fuel assets, divested over five years Sen. Liz Krueger stated in the justification for S. 2126 that “New York’s Fund, with an audited value of $207.4 billion in assets as of March 31, 2018, invests at least $5.12 billion in public pension money in companies that mine, drill and produce fossil fuels.”2

Scenario 2 (State): $7 billion in fossil fuel assets, divested over five years Comptroller Thomas DiNapoli has not provided a solid number for fossil fuel assets, but in contesting activists’ claims of $13 billion, “DiNapoli’s office says the total fossil fuel company investments are closer to $7 billion.”3 (Note, DiNapoli recently stated in a letter that “the Fund

1 http://fossilfreeindexes.com/research/the-carbon-underground/ 2 https://www.nysenate.gov/legislation/bills/2019/S2126 3 “LOVETT: DiNapoli facing heat over climate change,” Kenneth Lovett, New York Daily News, 12/17/2018

8 (cont.) holds less than half of [$13 billion] in what could reasonably be considered fossil fuel stocks,”4 suggesting an amount below $6.5 billion.)

Scenario 3 (State): $13 billion in fossil fuel assets, divested over five years Divestment advocates claim that NYSCRF currently has $13 billion in pension funds invested in fossil fuel companies.5 Scenario 3 simulates divestment of that magnitude.

Scenario 1 (City): $5 billion in fossil fuel assets, divested over five years In January 2018, NYC officials “announced a goal to divest City funds from fossil fuel reserve owners within five years.” The city’s “five pension funds [held] roughly $5 billion in the securities of over 190 fossil fuel companies.”6 Because city officials already indicated their expected scale of divestment, only one scenario is necessary.

Reinvestment in green energy As there are no concrete plans for divestment, there are no concrete plans for how fossil fuel investments should be redistributed. However, both state and city officials have expressed interest in increasing overall investment in the green energy sector, even to levels comparable with current fossil fuel holdings.

For example, in December 2017, NYC Comptroller Stringer announced his proposal to examine decarbon- ization, including “divesting current holdings in fossil fuel companies, and increasing investments in clean energy.”7 While divestment has not occurred, NYC officials announced in September 2018 that the city would “double the existing $2 billion investment across all asset classes to reach $4 billion of investment in renewable energy, energy efficiency, and other climate solutions.”8

Similarly, the Governor’s 2018 State of the State proposals included a call to cease “all new investments in entities with significant fossil fuel-related activities” and “dedicate a meaningful portion of the Fund’s portfolio to investments that directly promote clean energy.”9 While divestment has not occurred, Comp- troller DiNapoli announced in December 2018 that his office had dedicated a total of $10 billion to -NY SCRF’s Sustainable Investment Program, including $6 billion for “sustainable investments that address a variety of themes, including clean energy and green infrastructure.”10

While swapping fossil fuel investments for green investments would likely not end up being 1:1 in practice, officials clearly intend for that general transition to take place. Thus, our scenarios assume all fossil funds are reinvested in green energy to demonstrate the practical difference in returns.

4 https://gofossilfree.org/ny/wp-content/uploads/sites/53/2019/02/DiNapoli-divest-letter-.pdf 5 https://gofossilfree.org/ny/press-release/dinapoli-unprecedented-letter-divest-ny/ 6 “Climate Action: Mayor, Comptroller, Trustees Announce First-In-The-Nation Goal To Divest From Fossil Fuels,” Office of NYC Comptroller, 1/10/2018 7 “Statement from NYC Comptroller Scott M. Stringer on De-carbonizing the NYC Pension Funds,” Office of NYC Comptroller, 12/19/2017 8 “Mayor and Comptroller Announce Pension Fund Goal To Invest $4 Billion In Climate Change Solutions By 2021,” Office of NYC Comptroller, 9/13/2018 9 “Governor Cuomo Unveils 9th Proposal of 2018 State of the State: Calling on the NYS Common Fund to Cease All New Investments in Enti- ties with Significant Fossil Fuel-Related Activities and Develop a De-Carbonization Plan for Divesting from Fossil Fuel,” Office of the Governor Andrew Cuomo, 12/19/2017 10 “State Comptroller DiNapoli Adds $3 Billion to the State Pension Fund’s Sustainable Investment Program,” Office of Comptroller DiNapoli, 12/07/2018

9 Projections For each scenario, we projected the overall pension portfolio value at 10, 20, and 30 years under no divestment and then compared the portfolio as if divestment occurs in the manner described under each scenario. In each case we underscore the shortfall of assets due to divestment and then calculate the additional contributions that will come due as a result of inferior returns generated by green investments.

Performance assumptions Under each scenario, we assumed that green stocks would earn 6.54% per year worse than fossil fuels investments. This number was derived by taking the differences between 10-year average annual return for green indices (-3.94%) and the 10-year average annual return for fossil fuels indices (2.60%).

Calculation of additional contributions Once the projected shortfalls in the portfolio were calculated, we calculated the impact of the shortfall on required contributions. For this purpose, we used an amortization period of 15 years, which is a proxy for the average future working lifetime of the group, over which actuarial gains and losses are spread in accordance with the Aggregate Cost Method.

Additionally, we utilized the current asset smoothing technique employed by the pension plan to help provide a better timeframe over which the additional contributions will occur.

Findings

Pension underperformance: Up to $28.6 billion for NY, $13.4 billion for NYC after 30 years In each divestment scenario, the resulting portfolio lagged considerably behind the baseline plan at the 10, 20, and 30-year mark, with the greatest losses resulting from the largest amount of fossil-green replacement.

At the state level, divestment under the simulated conditions would result in between $11.6 billion and $28.6 billion in lower pension assets over 30 years. At the city level, divestment of $5 billion in fossil fuel assets would result in up to $13.4 billion in lower pension assets over 30 years.

Escalating contributions: Up to $33.4 billion for NY, $18.9 billion for NYC after 30 years In each divestment scenario, the resulting portfolio At the state level, divestment under needed greater and greater influxes of additional the simulated conditions would contributions to make up for losses. The cost of result in between $11.6 billion additional contributions grew at a much faster and $28.6 billion in lower pension rate than the gap between scenario and baseline portfolio value, particularly between years 10 and assets over 30 years. At the city 20. By year 30, the additional contributions required level, divestment of $5 billion in exceeded the portfolio gap by billions of dollars. fossil fuel assets would result in

At the state level, additional contributions under up to $13.4 billion in lower pension the simulated conditions could add up to between assets over 30 years. $13.4 billion and $33.4 billion over 30 years. At the city level, divestment of $5 billion in fossil fuel assets could require up to $18.9 billion in additional contributions.

10 New York State Common Retirement Fund

Scenario 1: $5.12 billion divested, ultimately $11.6 billion in lost assets Under Scenario 1, where $5.12 billion in fossil fuel assets is steadily replaced with green energy sector investments, the divestment portfolio consistently underperforms the baseline portfolio.

ØØ After ten years, the divestment portfolio is worth $2.8 billion less than the baseline portfolio. ØØ After twenty years, the divestment portfolio is worth $7 billion less than the baseline. ØØ After thirty years, the divestment portfolio is worth $11.6 billion less than the baseline.

Scenario 2: $7 billion divested, ultimately $15.7 billion in lost assets Under Scenario 2, where $7 billion in fossil fuel assets is steadily replaced Between $13.4 billion and $33.4 billion in with green energy sector investments, additional contributions after 30 years the divestment portfolio consistently underperforms the baseline portfolio.

ØØ After ten years, the divestment portfolio is worth $3.8 billion less than the baseline portfolio. ØØ After twenty years, the divestment portfolio is worth $9.5 billion less than the baseline. ØØ After thirty years, the divestment portfolio is worth $15.7 billion less than the baseline.

Scenario 3: $13 billion divested, ultimately $28.6 billion in lost assets Under Scenario 3, where $13 billion in fossil fuel assets is steadily replaced with green energy sector investments, the divestment portfolio consistently underperforms the baseline portfolio.

ØØ After ten years, the divestment portfolio is worth $7 billion less than the baseline portfolio. ØØ After twenty years, the divestment portfolio is worth $17.4 billion less than the baseline. ØØ After thirty years, the divestment portfolio is worth $28.6 billion less than the baseline.

Between $13.4 billion and $33.4 billion in additional contributions after 30 years In each divestment scenario, the additional contributions necessary to make up for the divestment portfolio’s underperformance increased sharply relative to the underperformance itself, and in year 30

11 exceeded the gap between divestment and baseline portfolio value.

ØØ After ten years, additional contributions necessary ranges from 0.7 billion to 1.7 billion. ØØ After twenty years, additional contributions necessary ranges from 4.9 billion to 12.4 billion. ØØ After thirty years, additional contributions necessary ranges from 13.4 billion to 33.4 billion.

New York City Retirement Systems

Scenario: $5 billion divested, ultimately $13.4 billion in lost assets In the scenario where $5 billion in fossil fuel assets is steadily replaced with green energy sector investments, the divestment portfolio consistently underperforms the baseline portfolio.

ØØ After ten years, the divestment portfolio is worth $3 billion less than the baseline portfolio. ØØ After twenty years, the divestment portfolio is worth $8.1 billion less than the baseline. $5 billion divested, ultimately ØØ After thirty years, the divestment portfolio is $13.4 billion in lost assets worth $13.4 billion less than the baseline.

$18.9 billion in additional contributions after 30 years Under Scenario 1, the additional contributions necessary to make up for the divestment portfolio’s underperformance increased sharply relative to the underperformance itself, and in year 30 exceeded the gap between divestment and baseline portfolio value.

ØØ After ten years, up to 0.7 billion in additional contributions are necessary. ØØ After twenty years, up to 6.3 billion in additional contributions are necessary. ØØ After thirty years, up to 18.9 billion in additional contributions are necessary.

See additional charts — next page

12

Divestment Effects on NYSCRF Pension Value

13 Local Impact

ew York state and city pension plans are defined-benefit plans, meaning the state has an obligation Nto pay out formula-based benefits regardless of how pension investments perform. Additionally, neither the state nor city pensions are fully funded; investment shortfalls cannot be cushioned with existing surpluses. This leaves officials with several options to satisfy obligations, each of which may be unpalatable: cut benefits for pensioners, increase taxes to fund additional contribution, or divert funding from existing programs and agencies.

Diversion is already occurring in New York City. In 2017, a Manhattan Institute study found that the city was devoting twice as much of its tax revenue to pension contributions than it had in previous decades; more than half of its pension contributions were required just to pay down unfunded liabilities.11

In the sections below, we compare the costs of divestment to existing local budgets to demonstrate how fossil-fuel divestment may impact vital services like public safety and education.

Suffolk County If the state were to divest from $13 billion in fossil fuel assets as activists demand, the state pension system could lose as much as $28.6 billion in unrealized value over 30 years, requiring as much as $33.4 billion in additional contributions to make up for it.

As of July 2017, New York’s population was estimated at 19,849,399. As of July 2017, Suffolk County’s population Suffolk County’s adopted operating budget for was estimated at 1,492,953, or 7.52% of the state population. FY2019 is $3.113 billion, including $723 million for Under the $13 billion public safety, $151 million for education, and $137 divestment scenario, Suffolk million for transportation ... pushing $13 billion County’s share of the cost would be $2.51 billion after from fossil fuel assets into green energy would 30 years, which averages to amount to an annual 2.69% cut to Suffolk County roughly $83.7 million per year. budget areas across the board. In FY2019, that would mean cutting $19.45 million from public Visualizing the long-term cost of divestment safety, $4.06 million from education, and $2.28 Suffolk County’s adopted million from transportation. operating budget for FY2019 is $3.113 billion, including $723 million for public safety, $151 million for education, and $137 million for transportation.12 Under Scenario 3, the total loss for Suffolk County residents after 30 years would be more

11 “The Never-Ending Hangover,” Edmund J. McMahon and Josh B. McGee, Manhattan Institute, June 2017 12 https://suffolkcountyny.gov/Portals/0/formsdocs/countyexecutive/Budgets/2019adoptedoperatingBudgetNarrativevol1complete.pdf

14 than enough to fund the county’s public safety, education, transportation, health, and sanitation budgets for this year twice over.

Put another way, pushing $13 billion from fossil fuel assets into green energy would amount to an annual 2.69% cut to Suffolk County budget areas across the board. In FY2019, that would mean cutting $19.45 million from public safety, $4.06 million from education, and $2.28 million from transportation.

Cost to Law Enforcement Under current labor agreements, Suffolk County police officers receive a starting annual salary of $42,000.13 Between 2015 and 2018, the Suffolk County police department hired more than 400 recruits, with another class hiring planned for October 2019.14

When annualized, Suffolk County’s share of the cost of divestment under Scenario 3 would be equivalent to salary for 1,993 new recruits per year; the current police force is roughly 2,500 uniformed officers.15 Even if the cost of additional pension contributions were spread out across the county budget, that would still be equivalent to 463 recruits per year – enough to eliminate funding for all new hires AND lay off existing officers.

Cuts to Fire, Rescue, and Emergency Services Suffolk County’s FY2019 adopted budget When annualized, Suffolk County’s allocates $4,420,757 for 74 fire, rescue, share of the cost of divestment under and emergency medical services workers, Scenario 3 would be equivalent to the 16 for an average cost of $59,739.96. When total earnings for 1,415 Suffolk AME annualized, Suffolk County’s share of the cost of divestment under Scenario 3 would employees on average. Even if the cost of be equivalent to the annual salary for 1,400 additional pension contributions were emergency workers on average. Even if the spread out across the county budget, an cost of additional pension contributions were spread out across the county budget, that annual 2.69% cut would be equivalent to would still amount to $118,829, equivalent to cutting 149 union workers. cutting two employees on average.

Cuts to Suffolk County AME members Suffolk County payroll data shows that, in calendar year 2018, Suffolk County AME employees received $298,448,788 in salary or $327,955,121 in total earnings, for an average of $59,133 in total earnings. Note: The average earnings of $59,133 are pre-taxed and inclusive of all benefits.

When annualized, Suffolk County’s share of the cost of divestment under Scenario 3 would be equivalent to the total earnings for 1,415 Suffolk AME employees on average. Even if the cost of additional pension contributions were spread out across the county budget, an annual 2.69% cut would be equivalent to cutting 149 union workers.

13 https://suffolkpd.org/home/becomeapoliceofficer.aspx 14 https://suffolkcountyny.gov/Portals/0/formsdocs/countyexecutive/Budgets/2019adoptedoperatingBudgetNarrativevol1complete.pdf 15 “Struggling Suffolk boosts cops’ pay,” Leonard Greene, New York Post, 2/28/2014 16 https://suffolkcountyny.gov/Portals/0/formsdocs/countyexecutive/Budgets/2019adoptedoperatingBudgetNarrativevol1complete.pdf

15 Eerie County If the state were to divest from $13 billion in fossil fuel assets as activists demand, the state pension system could lose as much as $28.6 billion in unrealized value over 30 years, requiring as much as $33.4 billion in additional contributions to make up for it.

As of July 2017, New York’s population was estimated at 19,849,399. As of July 2017, Erie County’s population was Pushing $13 billion from fossil fuel assets into estimated at 925,528, or 4.66% of the state population. Under green energy would amount to an annual 3.49% the $13 billion divestment cut to Erie County budget areas across the board. scenario, Erie County’s share In FY2019, that would mean cutting $1.08 million of the cost would be $1.556 billion after 30 years, which from the county police, $871,820 from mass averages to roughly $51.88 transit, and $99,144 from homeland security and million per year. emergency services.

Visualizing the long-term cost of divestment Erie County’s adopted operating budget for FY2019 is $1.486 billion, including $31 million for the police department, $24.97 million for mass transit, and $2.84 million for Homeland Security and Emergency Services.17 Under Scenario 3, the total loss for Erie County residents after 30 years would be enough to cover the entire county budget for this year.

Put another way, pushing $13 billion from fossil fuel assets into green energy would amount to an annual 3.49% cut to Erie County budget areas across the board. In FY2019, that would mean cutting $1.08 million from the county police, $871,820 from mass transit, and $99,144 from homeland security and emergency services.

Cuts to Law Enforcement Erie County’s FY2019 adopted budget allocates $12,561,984 for 188 full-time positions in the Police Services Division, for an average cost of $66,819 per full-time employee. When annualized, Erie County’s share of the cost of divestment under Scenario 3 would be equivalent to 776 employees on average, more than quadruple the Police Services Division’s budget for full-time positions. Even if the cost of additional pension contributions were spread out across the county budget, that would still be equivalent to laying off 6-7 officers on average each year which would result in a loss of approximately 180 officers over 30 years.

Cuts to Fire/Rescue/Emergency Services Erie County’s FY2019 adopted budget allocates $1,163,695 for 26 full-time emergency services employees in the Homeland Security department, for an average cost of $44,757 per full-time employee. When

17 https://suffolkcountyny.gov/Portals/0/formsdocs/countyexecutive/Budgets/2019adoptedoperatingBudgetNarrativevol1complete.pdf

16 annualized, Erie County’s share of the cost of divestment under Scenario 3 would cover the full-time staff budget 44 times over. Even if the cost of additional pension contributions were spread out across the county budget, that would still be roughly equivalent to laying off one employee per year or 30 employees over the 30 years.

New York City Residents of New York City are in the unfortunate position of being exposed to divestment losses from both the state and city pension portfolios.

As of July 2017, New York’s population was estimated at 19,849,399. As of July 2017, New York City’s population was estimated at 8,622,698, or 43.44% of the state popu- lation. Under the $13 billion divestment scenario, New York City’s share of the cost would Under the $13 billion divestment scenario, New be $14.51 billion. Separately, York City’s share of the cost would be $14.51 we project that reinvesting billion. Separately, we project that reinvesting the NYC pension system’s the NYC pension system’s fossil fuels assets fossil fuels assets in green energy would cost $18.9 billion in green energy would cost $18.9 billion in in additional contributions. additional contributions. Altogether, divestment Altogether, divestment could could cost NYC residents upwards of $33.41 billion cost NYC residents upwards of $33.41 billion after 30 years, or after 30 years, or $1.11b per year. In FY2019, that $1.11b per year. would mean cutting $68.9 million from the Police Department, $24.8 million for the Fire Visualizing the long-term Department, $12.6 million from the Department cost of divestment New York City’s forecasted of Transportation, or $343 million overall from FY2019 budget is $94.17 billion, municipal salaries and wages each and every year including $5.83 billion for the for 30 years. Police Department, $2.1 billion for the Fire Department, $1.07 billion for the Department of Transportation, and $29 billion for salaries and wages across all departments.18 When combined, the total divestment loss for New York City residents after 30 years would be more than enough to cover salary and wages for the entire city workforce this fiscal year.

Put another way, reinvesting fossil fuel assets in green energy would amount to an annual 1.18% cut to NYC’s budget areas across the board. In FY2019, that would mean cutting $68.9 million from the Police Department, $24.8 million for the Fire Department, $12.6 million from the Department of Transportation, or $343 million overall from municipal salaries and wages each and every year for 30 years.

18 https://www1.nyc.gov/assets/omb/downloads/pdf/feb19-fp.pdf

17 Cuts to Law Enforcement NYPD officers received a starting annual salary of 19 $42,500, or $85,292 after 5.5 years. When annu- Even if the cost of additional alized, NYC’s share of the cost of state and local pension divestment would be equivalent to salary pension contributions were spread for 21,696 new officers (or 13,053 officers who have out across the county budget, completed 5.5 years of service) each year. Even if that would still be equivalent to the cost of additional pension contributions were spread out across the county budget, that would eliminating 1,621 new officers (or still be equivalent to eliminating 1,621 new officers 807 officers who have completed (or 807 officers who have completed 5.5 years of 5.5 years of service), or 564 new service). firefighters (or 148 firefighters who Cuts to Firefighters have completed 5 years of service). New York Fire Department firefighters receive a starting annual salary of $43,904, or $85,292 after 5 years.20 When annualized, NYC’s share of the cost of state and local pension divestment would be equivalent to salary for 25,358 new firefighters (or 13,053 firefighters who have completed 5 years of service) each year. Even if the cost of additional pension contri- butions were spread out across the county budget, that would still be equivalent to eliminating 564 new firefighters (or 148 firefighters who have completed 5 years of service).

Amazon In recent weeks, Amazon both announced and cancelled plans to establish a second headquarters in Long Island City. To lure Amazon, New York leaders promised nearly $3 billion in incentives – ranging from capital grants to tax abatements and relocation assistance.21 The deal was roundly criticized by locals who thought that it was not in the public’s interest to hand over Shifting fossil assets into green energy would not $3 billion in corporate welfare only cost far more than the Amazon incentives to one of the world’s largest companies, essentially throwing but would not bring any of the jobs or revenue it away. that would soften the blow for local taxpayers.

For New York City residents, the cost of reinvesting fossil fuel assets in green energy – $33.4 billion in additional contributions after 30 years – would dwarf the Amazon subsidies package by more than ten times.

Amazon’s move was estimated to create up to 40,000 jobs and generate roughly $1 billion per year in new

19 https://www1.nyc.gov/site/nypd/careers/police-officers/po-benefits.page 20 https://www1.nyc.gov/site/fdny/jobs/career-paths/firefighter-salary-guide.page 21 “Amazon’s HQ2 deal with New York, explained,” Curbed, 2/14/2019

18 tax revenue.22 Shifting fossil assets into green energy would not only cost far more than the Amazon incentives but would not bring any of the jobs or revenue that would soften the blow for local taxpayers.

Conclusion

ur goal with this paper was not to refute Othe environmental impact of fossil fuels or the need to find sustainable solutions to We conducted this study because it climate change. We conducted this study had been taken as a given by some because it had been taken as a given by some advocates that divestment is a financial advocates that divestment is a financial boon boon and that the clean energy sector and that the clean energy sector consistently outperforms fossil fuels. Not only does that consistently outperforms fossil fuels. appear to be false, but the consequences could Not only does that appear to be be dramatic, to the tune of $33.4 billion. To false, but the consequences could be quote Sen. Krueger in her defense of a pro- divestment study, “Even if that number is dramatic, to the tune of $33.4 billion. off by half or more, the order of magnitude If our public officials are making should still be of great concern.”23 decisions that will require tax hikes or cuts to programs and benefits, that is It should also be of great concern that the divestment process is going forward without something the public deserves to know a clear plan for how to keep the pension beforehand, not years down the road. funded once divestment reduces returns.24 If Shifting the pension assets from one our public officials are making decisions that will require tax hikes or cuts to programs sector to another is a serious choice and benefits, that is something the public that may have serious consequences; deserves to know beforehand, not years down the least the public deserves is a the road. Shifting the pension assets from one transparent and forthright process. sector to another is a serious choice that may have serious consequences; the least the public deserves is a transparent and forthright process. We have already seen the public outcry in response to the secret Amazon deal, which would have cost taxpayers $3 billion. What will the outcry be if lawmakers force through a deal that could lose as much as 11 Amazon deals without acknowledging the true cost or how we will pay for it?

22 https://www.governor.ny.gov/news/op-ed-governor-andrew-m-cuomo 23 https://www.nysenate.gov/newsroom/articles/2019/liz-krueger/sen-krueger-and-assm-ortiz-respond-comptroller-divestment 24 While Sen. Krueger’s bill technically contains a “financial ‘safety valve’” to reverse divestment if the pension loss is too great, it is dubious that such a process can be reversed without loss – and Krueger’s bill is just one of several plans being floated.

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