L.A. Legal Opinion Gives Cautious OK to Divestment Policy

In a formal opinion, the Los Angeles city attorney’s office said Tuesday that it believes the city can legally divest its funds from firms that do business in South Africa, but warned that such a venture risks a court challenge and an uncertain legal outcome.

“No appellate court has ruled on the matter. . . ,” concluded the opinion written by Assistant City Atty. Siegfried O. Hillmer. “Under these circumstances we must point out the speculative nature of much of the advice given in this opinion. The law on this subject has yet to be made.”

In a cautiously worded letter to Mayor Tom Bradley and City Councilman Zev Yaroslavsky, the city attorney’s office said the city could proceed with divestment of its pension funds if the funds remained prudently managed.

Under various laws, pension system assets must be invested for the exclusive purpose of providing benefits to beneficiaries with a “care, skill, prudence and diligence” that will lead to maximized returns.

The city attorney’s office said that as long as these “prudent investor” rules are followed, the city can tailor its investments to “fulfill socially responsive goals.

“In practical application, this would mean that so long as the fiscal well-being of the system would not be impaired, then socially responsive investment or divestment decisions may be made,” the opinion said. “Whether such is the case in any instance depends largely on the view of investment experts.”

In an interview, Hillmer explained: “We say that (divestment) is likely to be legal. We also say emphatically at the conclusion of our opinion that this is a completely untested area. . . . We are not saying that this is categorically legal, period.”

The city’s pension funds total nearly $4 billion, and almost $700 million of that money is invested in companies that do business in South Africa, according to officials who administer the funds.

The legal opinion was sought after Bradley and a City Council committee called for an abrupt change in the city’s investment policy to divest pension funds and remove city deposits from banks that lend money to South Africa because of that country’s apartheid policy.

The city attorney’s office would represent the city in any lawsuit challenging the legality of divestment. Such a suit could be filed by any dissatisfied pensioner.

The council is expected to consider the divestment issue in June.

Tax on Krugerrands

The mayor’s proposal also calls for a tax on local sales of South African gold coins, known as Krugerrands, and for setting up a nonprofit corporation to fight the country’s policy of racial discrimination. The city attorney’s office already has said it believes the Krugerrand tax is illegal.

The city has about $67 million invested in banks, some of which may do business with South Africa, according to City Treasurer Robert M. O’Dell.

The city attorney’s opinion said it believes that a standard looser than the so-called “prudent investor” rule would apply to a city decision to transfer those funds.

The letter said the city attorney could see no legal impediments in “avoiding banking institutions that do business in South Africa. Even if some economic price were paid, in effect, by virtue of such socially responsive decisions, we think that a public purpose would be served.”

‘Didn’t Think We Could Do It’

Critics of the divestment proposal have questioned whether divestment could harm pension funds by restricting investment opportunities.

But despite caveats and guarded language, the city attorney’s opinion contained enough assurances for such divestment supporters as Yaroslavsky.

“If we can find a way to do it prudently, it can be done legally,” said Yaroslavsky, who chairs the City Council’s Finance and Revenue Committee. “Six months ago, people didn’t give a damn whether it could be done prudent or not prudently, they didn’t think we could do it.”

Three city commissions with jurisdiction over various pension funds also must approve divestment. And, Yaroslavsky said, the council will press “negative nabobs” on those commissions who are resisting divestment to change their minds.

Last week, Bradley warned that he would replace any pension fund commissioners who oppose divestment.

Testifying before the council’s finance committee Tuesday, O’Dell said his office already has taken steps to stop depositing idle funds from various city departments into time-bearing deposits until financial institutions respond to a questionnaire that will be sent out this week exploring their ties to South Africa.

O’Dell said the funds deposited in banks that have links to South Africa could be shifted into other types of interest-bearing accounts, such as federal treasury notes, as allowed by law.