This is the fourth and final lecture I recorded for my education law class, part of a series called “The Law of Green Fiscal Mutualism” (first, second, third).

I finish up the lecture series in this video, wrapping up my review of the possibilities for green fiscal mutualism in New York City public school financing. The first three lectures are in the three preceding newsletter posts.

Here are the readings associated with the day:

Boyd, D., Chen, G., & Yin, Y. (2020). THE NEW YORK CITY TEACHERS’RETIREMENT SYSTEM.

 “The Micro-Implications of a Disintegrating Social Contract: Public Pension Funds and Community Investing in New York City.” Masters in City Planning, Massachusetts Institute of Technology, 2013. PDF

Carter, H. (2024). ESG and ERISA's Fiduciary Duties: Past and Future Evolution of the Statute's Requirements. Bus. & Fin. L. Rev., 7, 132.

Sec. 401a of the Internal Revenue Code

NYC Comptroller site. “Pension Assets Under Management.” Government web site. Accessed October 1, 2024.

https://comptroller.nyc.gov/services/financial-matters/pension/asset-under-management/.

NOTES

ERISA, TRS, Pension Law

The final piece of the puzzle of GFM is pension investment, which is governed by a series of statutes at the federal, state, and sometimes, like with the NYC teachers retirement system, at the local level.

Today, I'd like to focus on the dialectic that pension managers find themselves within given the erratic whiplash of interpretations that have emerged of ERISA's section 404, obligating pension managers to invest pension funds for the sole benefit and interest of the beneficiaries.

Looking at the situation of NYC's TRS, we can see how further embattled the pensions have become in the years after the turn of the millennium, and what this all means for what Salazar calls the social contract at large.

In general, I'd like to make the point that law isn't a cold, technical set of propositions that we have to know and follow and that's that, but rather, they're living things that are subject to vast changes depending on their interpretation and the material realities happening elsewhere in society. This is true for all education law, which can sometimes be understood as just the rules we have to follow to protect people and not get sued, but beyond that, are subject to change, both in how they're used and understood.

Sec 404 Whiplash

"Solely in the interest of the plan's participants and beneficiaries" and what concerns us here is what counts as a breach of fiduciary duty: when do we break the law that says investment has to happen solely in those interest?

Federal government puts out guidance for how to interpret these laws, through the Dept of Labor, but this story is one of whiplash and vacillation as soon as the question of multi-criteriality was broached in 1994.

The big question where is whether an ESG investment, like an ETI, etc., violates or comports with section 404: does investing in stuff that isn't just about pecuniary returns in the sole interest of the pension beneficiaries? What's a collateral benefit, how can they be used in pension investment, and when do they pose a threat of breach? Different administrations have answered this question differently, sometimes in opposite ways, and it really gives a unique look into the incoherence and division of our

The way this works is the Department of Labor issues guidance in the form of interpretation briefs, rules, and field assistance bulletins, consistent with executive orders made by the presidents in charge of that branch of government. There are also regulations that come from the Securities Exchange Commission on naming, disclosure, and reporting, but I'm not going to focus on these as much.

1975 (IB75-2): conflict of interest

1994 (IB94-1): ETIs are economically viable (all things being equal test + tie-breaker test)

2008 (IB2008-01): raised minimum requirements for collateral benefits, need to be "economically indistinguishable"

2015 (EO 13,693): clean energy economy

2015 (IB2015-01): collateral benefits are permissible, broadens range of benefits, broadens stage of investment analysis, ETIs become proper components of investment such that not doing them is a breach of fiduciary duty. Expands ESG. No ESGs are a breach.

2018 (FAB2018-01): be careful of ESGs, they're bad, could be inappropriate (but lesser guidance)

2021 (E013,868; 2021 Final Rule): DOL says managers have to use a "single eye" for pecuniary returns, ESGs are a breach. Plans may "never" be enlisted in pursuit of other social or environmental objectives.

2021 (EO13,990): Reverse Trump's reversal of Obama

2023 (2023 Final Rule): returning to 2015 settings from IB2015-01, taking even a step further in encouraging ESG investment. A class action of more than 20 state attourneys general file a lawsuit, also saying that the position on pensions investing in crypto is wrong.

2025 (CAR 2025-01): A compliance assistant release from the DOL reverses Biden's reversal of Trump's reversal of Obama on ESG in pension, but also lets in crypto, ending that lawsuit.

So over these years, thing about being a pension manager. This question of multi-criteriality emerges and you get conflicting messages, vacillating guidance, a whiplash of interpretations of ERISA, such that you're always wondering if you're going to be in breach. Literally, there's a moment where you might be in breach if you don't do ESG, and then a moment where you're in breach if you do ESG, while you can always be sued by beneficiaries for potential breaches, be investigated by the FBI. It seems really awful.

Meanwhile, between 2000-2020, when the back and forth gets going, pensions take huge losses. And here I'm going to focus on the TRS report. In the dotcom bubble, this pension was at negative 8% returns for a couple years. It recovers, but then 2008 hits. It loses 3.2bn in 2008, 8bn in 2009, going from negative 6.2 to negative 18.1 percent in that time.

They had to increase the discount rate in 2011, increasing the city's contributions to the pension by almost $400m. Employer contributions went from 4.3% of payroll in 2000 to 27.4% in 2008 to 44.1% in 2017. It goes up 40%. We're talking 3.7bn of city money, or 6% of revenue. Money that could go to schools.

This all has huge implications for the beneficiaries. The managers change a bunch of policies making it less attractive: they create Tier VI, where members joining after 2012 contribute 3-6% of earnings, don't retire until 63, and don't vest until 10 years have passed--all with a different multiplier. Their salaries are five year averaged calculations, rather than their final year. This is all overseen by the law.

This has big implications for education. Will there be as many teachers applying for jobs? Staying with the district? How much money could be going to schools but instead goes to contribute to the pension?

In general, these two pressures: the whiplash of interpretation around serving the interests of the beneficiaries and then suffering huge losses in a market crash not of their making, I have to imagine pension managers are tired. I don't know if GFM would be just some more bullshit, or if it would make things more stable...