New Hampshire retirement funds seek court ruling on Sudan divestment law
By Daniel Van Oudenaren
October 20, 2008 (WASHINGTON) – Two retirement fund systems in New Hampshire are asking a court to rule on whether the systems can comply with Sudan divestment legislation without violating the state constitution.
The divestment law, signed in July, requires New Hampshire state retirement funds to eventually divest holdings in “scrutinized companies,” which it defines as companies owned by the Sudanese government, companies that supply military equipment within Sudan or companies involved in certain government-commissioned consortiums.
Fueled by widespread public access to information about conflict in Darfur, 27 U.S. states have adopted similar policies designed to encourage investment firms not to hold stock in certain companies doing business in Sudan.
But now the judicial retirement system of New Hampshire and the larger New Hampshire Retirement System (NHRS), which manages roughly $5 billion in assets according to recent disclosures, are seeking clarification from a New Hampshire court.
The Judicial Retirement System filed a petition Sept. 30 in the Merrimack Superior Court.
At issue is a provision of the state constitution that calls for the retirement fund to act for the “exclusive purpose” of providing benefits to the retirees. The constitution forbids that payments to the retirement system be “encumbered for, or diverted to, any other purposes.”
NHRS Legal Director Timothy Crutchfield told Sudan Tribune, “what we’re seeing as a retirement system along with the Judicial Retirement Plan is, we’re asking the court to opine as to the constitutionality of the act in light of the pension plans’ directive to manage its investments for the exclusive purposes of its members, in order to gain the best return it can for its members and how—essentially, does social investing have a place within that apparent conflict between acting in the exclusive benefit of the membership versus the social investing directive of the Sudan divestment act. We’re following the law concurrently while we’re asking the court to tell us which one—or can they work in unison?”
Crutchfield stressed that the retirement system is currently in compliance with the divestment law, which has timelines to guide the divestment process. Within 90 days of the law’s passage, NHRS identified “scrutinized companies.” Thereafter, it is required to engage with the companies to encourage them to change their business practices, and finally, 90 days following the public fund’s first engagement with a company, the fund is required to divest holdings in that company.
“We are complying with the mandates of the law while we seek current judicial review on the constitutionality question,” said Crutchfield.
The divestment requirement does not apply to indirect holdings in actively managed investment funds, except that the public fund is still required to write letters to investment managers urging them to remove companies from the fund or create a similar investment index that does not include the scrutinized companies.
An organization that supported the divestment legislation, the Genocide Intervention Network (GI-NET), declined to make a formal statement about the pending litigation.
It noted, however, that “GI-NET’s published reports and analyses have found that the targeted Sudan divestment model (the basis for the New Hampshire statute), recently authorized by the U.S. federal government through the Sudan Accountability and Divestment Act of 2007, does not violate the fiduciary obligations of public pension funds. In May 2008, GI-NET published a quantitative analysis examining the historical and forecasted financial performance of companies targeted for divestment in Sudan. Among other findings, the analysis found that on average, the targeted companies underperformed their peer group average by 45.97% over one year, 22.23% over three years, and 7.22% over five years.
“We are not aware of any law in the New Hampshire Constitution or New Hampshire code that forbids the replacement of poorly performing investments with financially superior alternatives that are not tied up in one of the worst human rights abuses of our time,” argued the activist organization.
The point, if true, is relevant to more strictly legal issues that have been raised. Gregory Needles, a legal counsel for the New Hampshire Retirement System, suggested in September that complying with the divestment law could be inconsistent with federal tax law, but only if the trustees do not “satisfy their fiduciary responsibility to act as a prudent investor and do not blindly follow the Act.”
Needles advised the NHRS trustees that holdings in scrutinized companies must be sold and reinvested at a “fair return commensurate with the prevailing rate” in order for NHRS to maintain its federal tax-exempt status. The federal government itself has not suggested that the legislation is inconsistent with its requirements.
Regardless, the more fundamental issue is the constitutionality of the law and whether or not the funds may exercise a less literal reading of the constitution. The New Hampshire divestment law itself claims, “mandatory divestment of public funds from certain companies is a measure that should be employed sparingly and judiciously. A Congressional and Presidential declaration of genocide satisfies this high threshold.”
(ST)