City Advised It Can’t Divest South African Investments

The City Council cannot require the city’s Retirement Board to dispose of its investments in corporations that do business in South Africa, according to an opinion issued Wednesday by the city attorney’s office.

But although the council cannot order the board to withdraw the $35 million it has invested with six such firms, it can proscribe the board from making future investments in such companies as a statement against apartheid, that nation’s formal policy of racial segregation, the opinion said.

Council members “cannot direct the Retirement Board to dispose of what (investments) they currently have, but they can establish the guidelines within which the Retirement Board can invest,” said Chief Deputy City Atty. John Katz, who wrote the opinion.

Under the City Charter, the Retirement Board is required to act as a “prudent investor” in handling the money paid into the city employees’ pension plan. This means that board members must consider only an investment’s financial risk and potential return, and not be influenced by the “social statement” made by the investment, providing the investment does not violate the board’s guidelines. All of the board’s investments in firms that do business in South Africa are legal, Katz said.

Katz added that the council could amend the guidelines to prohibit investment in firms with ties to South Africa. However, he cautioned that the city could be held liable if a ban on future investments caused the city employees’ retirement fund portfolio to become less profitable.

“The Retirement Board has an obligation to maximize return,” Katz said. “If the city comes along and restricts (investment) opportunities, it puts a constraint on the board. If that leads to the Retirement Board being unable to meet its obligation (to pay the pensions of retired city employees), the city would be liable for the shortfall. Not the board, not the retirement system, but the city.”

Katz’ opinion was in response to a request made March 11 by the council’s Rules Committee for information on the legality and feasibility of divestment. At that committee meeting, Councilman William Jones said that investing in firms that do business in South Africa places the city “in partnership with an evil system.”

According to aides of Mayor Roger Hedgecock and Councilman Uvaldo Martinez, Wednesday’s legal opinion limits, but does not preclude, the city from making a philosophical and financial statement against apartheid. Hedgecock aide Kevin Sweeney said the council’s action on this issue will depend to a large degree on the findings of a report from the city manager’s office--expected to be released today--examining the impact of divestment on the city employees’ retirement fund.

“The main thing the city manager was directed to look at was ‘Could a South Africa-free portfolio be put together? Could (the money) be reinvested in areas where it would keep the portfolio stable?’ ” Sweeney said.

He said that at Monday’s Rules Committee meeting, committee members will discuss the alternatives to mandatory divestment.

Although the Retirement Board issued a statement in January opposing mandatory divestment, secretary Robert Logan said the board may be willing to offer a compromise at Monday’s meeting.

“In all probability, they may have some suggestions, though I don’t think they’ve been formalized, as to what we could do to resolve the situation,” Logan said.

The $35.48 million invested in six firms (Avery International, Dun & Bradstreet, Times Mirror, IBM, Minnesota Mining & Manufacturing and Phillips Petroleum) is only 8.8% of the retirement system’s $378-million portfolio. However, Retirement Board President Jerald Lewis has countered that firms dealing with South Africa make up 38% of the “market value” of America’s top 500 firms.

Sweeney agreed that although a “South Africa-free” portfolio could be equally or more profitable than the Retirement Board’s current investment plan, it may be less secure.

“We could yank our money out of IBM and make more money somewhere else,” Sweeney said. “Especially in high tech, there are a lot of rapidly expanding companies who, if you invested in them, could give you a better return. But there’s the question of risk. You need to keep the portfolio stable across the board.”