A new divestment effort is challenged by timing, but bolstered by strong momentum.
The ongoing stalemate in the Pennsylvania General Assembly over the budget is gobbling time and energy in Harrisburg that might otherwise go toward an issue like legislation to purge state investment funds of companies with ties to Iran and Sudan.
And renewed attempts to pass divestment legislation come amid financial uncertainty responsible for decreasing the value of state funds. The Pennsylvania State Employees’ Retirement System reported a nearly 29 percent loss in 2008 after five years of growth and fund managers have reported negative returns through the first quarter of 2009.
But the divestment legislation also contains internal timing challenges.
Under the terms of the Protecting Pennsylvania’s Investments Act, a bill re-introduced by Rep. Josh Shapiro on July 1, it could take as much as three years for the state to fully divest its investment funds of a company with undesired business ties to Iran or Sudan.
Shapiro believes the terms of the bill only set out a two-year timeline.
Either way, the timeline is designed to prevent mistakes. It lets fund managers find the best moment to slough off assets. It gives flagged companies a chance to change business practices. And it guarantees no asset gets missed in the divestment process.
But, most likely, it also prevents a divestment bill from taking full advantage of the current political unrest in Iran.
The legislation from Shapiro, a Philadelphia-area Democrat, would apply to the State Employees Retirement Fund, the Public School Employees’ Retirement Fund, the Pennsylvania Municipal Retirement Fund and any fund managed by the State Treasurer.
Shapiro is optimistic about the prospects of the bill this time around. He said while the budget is using “most of the bandwidth in the capital” there has still been time for other legislation. And while he thinks world markets have stabilized some since the uncertainty of last fall, he said he also believes divestment is a financially wise decision.
Shapiro and other proponents of divestment make both moral and practical arguments, saying the state shouldn’t invest in countries with a record of terror or genocide, and also that investments in those countries are inherently riskier than those in other countries.
“Investing in Iran at this time is a risky investment and the riskier the investment the lower the return for retirees,” Shapiro said.
Shapiro’s bill applies mainly to investment in oil companies — a sector important to the economies of Iran and Sudan — although the bill also covers companies that sell military equipment, provide government services or violate U.S. exports controls.
It does not apply to humanitarian, educational, medical, agricultural or religious organizations, or to companies that sell “food, clothing or general consumer goods.”
The bill sets up a process for divestment.
Once the law goes into effect, fund managers would have 120 days to notify the companies in each portfolio that meet the qualifications for divestment. The notice is meant to give companies a chance to change their business practices in Iran or Sudan.
After being notified, companies would have 90 days to announce “substantial” changes.
If a company doesn’t announce changes, or announces changes but fails to follow through within one year, a state fund would then have 15 months to divest the asset.
These deadlines could all be beaten. But under the maximum timeline allowed by the bill, the divestment process could take up to 34 months.
That timeline lets fund managers minimize losses by replacing assets wisely — for instance: when the market favors one sector over another — according to Hank Butler with the Pennsylvania Jewish Coalition, an advocacy group pushing for divestment.
“They have an obligation by law to invest in the best faith effort possible,” Butler said.
Butler said the timeline is not unusual for divestment bills in other states.
This timeline isn’t new. It existed in a previous, and very similar, version of the bill Shapiro introduced in 2007, during the last regular session of the General Assembly.
That bill passed the House by a vote of 185 to 15 in June 2008, but ultimately died in a Senate committee last fall and never made it to the Senate floor for a full vote.
Shapiro announced plans to re-introduce the legislation this past April.
The legislation appears to be gaining popularity in the House. The previous version of the bill drew around 70 co-sponsors, while this current version is starting out with more than 80 co-sponsors.
Rep. Dan Frankel, D-Squirrel Hill, co-sponsored both versions of the bill.
In April, Majority Leader Todd Eachus said he wanted the bill to get a quick vote. Shapiro expects increased momentum in the Senate as well. He said he has already discussed the bill with Senate leadership, including the President Pro Tempore and the chairs of the Appropriations and Finance committees.
“These types of conversations, that occurred before the bill was introduced, never happen last time around,” Shapiro said.
That additional support could signify new momentum, according to David Steinbach, co-chair of the Iran Task Force at the United Jewish Federation of Pittsburgh.
Steinbach believes the earlier bill failed to reach the Senate floor because it arrived amid a global economic meltdown that created an unwillingness to tinker with investments.
“The sky was falling and nobody knew what to do,” he said. “Everybody was ducking.”
While Butler called the on-going budget issue, “the only elephant in the room,” Steinbach believes any delays caused by the as-yet-approved budget would be temporary.
“The budget bill at some point is going to get resolved,” he said, at which point the focus in Harrisburg will shift to other pieces of legislation like the divestment bill.
Shapiro introduced the bill less than three weeks after a disputed presidential election in Iran led to protests across that country. Steinbach said he wished the bill proposed a quicker timetable for divestment to take advantage of those political vulnerabilities in Iran, but he understood the reluctance of fund managers make major changes too quickly.
“I think it’s wrong, but there are political realities,” he said, adding, “It’s better than not having a bill.”
Shapiro has been one of the leaders in promoting divestment in recent years. He made some headway in February, when the Pennsylvania Tobacco Settlement Investment Board adopted his resolution to divest itself of companies with ties to Iran or Sudan.
The effort in Pennsylvania is part of a larger trend in state government across the country.
At least 10 states already have divestment laws, according to the Iran Task Force. And on June 30, New York announced it would divest its state retirement fund of nine companies doing business in Iran, a total of $86.2 million in investments.
The push for divestment on a state level is bolstered by efforts on the national stage.
Rep. Barney Frank, D-Mass., co-sponsored the Iran Sanctions Enabling Act of 2009 in March. The bill offers federal support to states that divest public funds of companies with investments in the Iranian energy sector, but does not require states to make divestments.
In mid-May, Sen. Robert Casey, D-Pa., co-sponsored a similar bill. As of late June, the bill remained in the U.S. Senate Banking, Housing and Urban Affairs Committee.
(Eric Lidji can be reached at email@example.com.)