Politically Correct Investments

April 16, 1993

With some $2 billion in its coffers, the Baltimore City municipal employees' pension system is a mighty financial powerhouse. It exercises its clout. Since 1986, when the City Council ordered the system to sell its holdings in companies doing business with South Africa, political and social considerations have increasingly become factors in its investment decisions.

For example, the council is currently considering a bill which would direct the pension system to sell stakes in companies active in Northern Ireland, if they don't abide by a set of principles aimed at eliminating discrimination against Roman Catholics.

Meanwhile, the fire and police employees' pension systems want to invest up to $10 million in the Chapman Co., a minority-controlled Baltimore investment banking firm.

The Board of Estimates has given conditional approval for the move, provided the pension system develops guidelines for such alternative investments. "Because of the high-risk nature of direct investments generally, and investments other than mature companies in particular, prudence dictates that guidelines be in place before the systems' funds are exposed," an outside legal opinion advised the city solicitor.

We see nothing particularly alarming in such small-scale investments in riskier ventures as long as clear and explicit guidelines are in place. In fact, we recommend that the guidelines state that no more than 1 percent of the pension funds could be channeled to high-risk investments.

The 1 percent figure may be conservative but it is conservative for a good and compelling reason. The money in pension funds is not a pool to be gambled with. It is to be conserved so that city employees reaching retirement age are guaranteed a financially worry-free life.

The 1980s economy may have spoiled many pension fund managers. In those go-go years, the stock market produced results that were historically exceptional. Today's yields -- which reflect not only the anemic economy but low interest rates and low inflation -- look positively puny by comparison. Not surprisingly, many hucksters are approaching multi-billion dollar pension funds with all kinds of get-rich-quick schemes.

We urge the city's pension mangers to err on the side of caution. Prudence is the best policy.

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