TX State Lawyer: Divestment Bills are Unconstitutional

April 18, 2007 (PLANSPONSOR.com) - Forcing Lone Star State pension funds to dump holdings because of social investing issues violates the state constitution's requirement that public pension money be managed with "ordinary prudence, discretion and intelligence."

David Mattax, chief of the attorney general’s financial litigation division told lawmakers that initiatives such as requiring public funds to sell off investments connected to Sudan-linked companies would violate the requirement that pension administrators’ actions must be for the workers’ and retirees’ benefit, according to an Austin American-Statesman news report.

Mattax made the comments during testimony before the state House Pensions and Investments Committee, according to the newspaper.

The state lawyer said the Legislature can limit investments – ordering a fund to switch to investment-grade debt from “junk” bonds, for instance – but it cannot make trustees violate their fiduciary duties by selling certain stocks or other securities. Divestment legislation generally “makes the board imprudent,” Mattax asserted. “That’s sort of what is raised by these divestiture bills.”

Mattax also said the constitution is “very clear” that after state money or member contributions go into a pension system, “the Texas Legislature has no authority over that money.”  Pension fund assets are “solely for the benefit of members,” Mattax said, “and any divestiture bill runs the potential of being unconstitutional because it is in effect a diversion of funds,” according to the news report.

State Senator Rodney Ellis, author of this session’s most comprehensive divestment legislation, which targets Sudan, said Mattax’s testimony reminds him of what a judge told him when he served a clerkship: “That is why we call it a damn opinion, not a decision.”

The state’s two major pension funds, which together total $132 billion, hold about $700 million in shares in companies on various Sudan watch lists. The pension fund would have to begin “engagement” with a company on the list, and if that dialogue doesn’t result in the company leaving Sudan, the fund would have to sell its shares, the news report said.