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State Investments: Higher Returns vs. Other Benefits

When states invest money, whether for their pension plans or other purposes, to what extent is it sensible for them to trade potentially better returns on their money in exchange for other benefits, including social good or economic development?

We’ve heard arguments on both sides of this discussion and have come to the conclusion that there may be no simple answers, and that this question may likely best be considered on a case-by-case basis.

We first began to think about this issue in the early 1990s, when we had a discussion about this with Ed Schafer, the governor of North Dakota, the only state that owns its own bank, which is used as a repository for the state’s investments.

We suggested to him, at the time, that perhaps the state could get higher returns on its cash with other venues for investment. His response was that, even if this was the case, the ability of North Dakota to make sure its farmers were able to borrow at affordable rates, through the state’s bank, more than offset any potential diminution of return.

The governor’s long-ago sentiments were buttressed recently by an article written by Robert Chirinko, a Professor in the Department of Finance at University of Illinois at Chicago for the Government Finance Research Center there.

That conversation emerged from the depths of our memories just last weekend, when the Anchorage Daily News ran an editorial about the Alaska Permanent Fund’s in-state investment program, which, according to the editorial, “carves out $200 million for private equity investments in businesses with Alaska ties.”

The editorial complained that this was bad policy for several reasons the first of which was that “The Permanent Fund’s mission is maximizing returns above almost all other considerations.” In addition, the editorial stated that “The Permanent Fund wasn’t established to be an economic development agency.”

After reading that editorial, we did a little Internet searching to see what had been written about the biggest cash hoard many states have available for investment, pension funds. There’s been a trend in places like California to turn to so-called ESG investing *for environmental, social and governance.”

A well-researched piece, released in October 2020, by the Center for Retirement Research at Boston College, came to the conclusion that running investment plans with an eye on the environment or social benefits “does not appear to be costless—plans earn less in returns and fail to capture beneficiaries’ interests.”

So, without enough independent research for us to form an opinion on this issue, we turned to a Government Accountability Office report from 2018, which stated that; “Fiduciaries may have difficulty determining appropriate issues to consider in investment management involving ESG factors. Fiduciaries that decide to pursue using ESG factors may face difficulty identifying and evaluating available options. Lastly, without additional information plans may be reluctant to pursue ESG strategies because they do not understand risks that could be considered material and they may not be able to effectively select and monitor an ESG strategy.

As we do more research about this topic, we invite readers of the B&G Report to send us their opinions and comments at


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