Trustees of the Oklahoma Public Employee Retirement System voted Wednesday to take a financial exemption from a new law forbidding state pension systems from doing business with banks perceived to be hostile to oil and gas companies.
Taking the exemption means the pension system, which has more than $10 billion in assets for retirees, won’t have to divest more than 60% of its holdings from BlackRock Inc., one of the six remaining banks on a list of restricted companies put out by state Treasurer Todd Russ. The system’s staff and outside investment advisors said it may cost an estimated $10 million to divest from holdings invested with BlackRock and other banks on the list.
The trustees voted 9-1, with Russ casting the lone no vote. He said the system may be opening itself up to legal challenges by taking a fiduciary duty exemption under the Energy Discrimination Elimination Act. Russ said that exemption didn’t cover trading losses or brokerage fees, which he said made up most of the estimated losses.
“The letter of the law is very explicit,” Russ said after the vote. “It says for loss of asset value. I think the Legislature was wise enough to assume there would be administrative costs and those types of costs weren’t enough of a barrier to keep us from divesting from these companies that are discriminating against the energy industry.”
Other trustees said they thought presentations by the pension system’s staff and its outside financial advisor, Verus, were persuasive enough to take the exemption. In a separate vote, trustees approved a contract change with BlackRock that would lower its management fees by an estimated $75,000 a year.
The pension system put out several requests for proposals in July to get bids for other financial companies to take BlackRock or State Street’s place should the system have to divest. Various financial and legal advisors all recommended taking the fiduciary duty exemption. More than 50 firms responded to the request for proposals.
“The opportunity for fee savings for the impacted mandates were uncertain, extraordinarily long-tailed for the system to derive any benefit, or simply did not exist,” said a pension system staff memo to the board and its investment committee. “The opportunities for performance enhancement without materially changing the mandates proved elusive as well.”
During the meeting, Russ said the evaluation process was incomplete and designed to stay with the status quo. He said the law requires clear and convincing evidence to take a fiduciary duty exemption.
“Until we finish that negotiation process, that’s how we get those costs down,” he said. “If we claim these assumptions wildly, you get stuck on those. I’ve got people behind me who are saying there’s a lot more to this than what we’re seeing.”
Russ said trustees should instead ask Attorney General Gentner Drummond to give a legal opinion on what kind of investment losses would trigger the fiduciary duty exemption. Russ said his office has not asked for a formal opinion from the attorney general on that issue.
“I would be very interested in knowing what the AG’s opinion is,” Russ said after the meeting. “And I may not ask for that, but I’m highly suspicious that there’s going to be some people out there who are going to want to know why we’re not willing to divest from these bad actors.”
Russ said outside interest groups or the energy industry might be interested in filing a lawsuit to force pension systems to follow the banking law.
“My remedy would be just follow the law and base it on whether there’s any loss in actual asset value, which would be the portfolio,” Russ said.
Russ, whose office released the first version of the restricted financial company list in May, has had policy and media support in implementing the law from a Kansas-based nonprofit, the State Financial Officers Foundation. It provides Republican state treasurers and financial officials with talking points and opinion columns targeting what they perceive to be out-of-control climate policies approved by shareholders of publicly traded banks and financial companies.
Oklahoma is among dozens of Republican-led states that have passed anti-energy-industry discrimination laws in the past several years. Lawmakers claim the climate policies of some large banks discriminate against oil and gas interests, which are major contributors to Oklahoma’s economy and tax base.
Apart from state pension systems, cities and counties are covered by the energy discrimination elimination law if they have contracts in excess of $100,000 with banks on the restricted list.
The city of Stillwater put a project on hold after Bank of America was put on the list. Attorney General Gentner Drummond sent a letter to city officials last month saying the city could exercise an exemption in the law because the next-best bank loan offer would have cost the city an extra $1.2 million.
Paul Monies has been a reporter with Oklahoma Watch since 2017 and covers state agencies and public health. Contact him at (571) 319-3289 or firstname.lastname@example.org. Follow him on Twitter @pmonies.