LEGISLATIVE FISCAL ESTIMATE

SENATE, No. 3044

STATE OF NEW JERSEY

216th LEGISLATURE

 

DATED: AUGUST 20, 2015

 

 

SUMMARY

 

Synopsis:

Prohibits investment by State of pension and annuity funds in companies that boycott Israel or Israeli businesses.

Type of Impact:

Potential expenditure decrease or increase to the State and local governments.

Agencies Affected:

Department of the Treasury.

Local Subdivisions of State Government.†

 

 

Office of Legislative Services Estimate

Fiscal Impact

Fiscal Year 2016

Fiscal Year 2017

Fiscal Year 2018

 

State Employer Contributions

Potential Decrease or Increase

Depending on Investment Performance

 

Local Employer Contributions

 

 

 

 

         The Office of Legislative Services (OLS) cannot reliably assess the ramifications on State and local government finances of prohibiting investments of pension and annuity funds in companies that boycott the goods, products or businesses of Israel.† The bill has the potential to directly alter pension and annuity fund investment returns either positively or negatively.† If it does, it could, in turn, indirectly affect the amount of actuarially determined employer contributions to the funds by the State and local governments.

         On three grounds the OLS cannot determine the difference between future pension and annuity fund investment returns with and without the billís prohibition.† First, for reasons stated below, it is unclear to what extent pension and annuity funds are currently placed in investments prohibited by the bill.† Second, it is equally unclear when the Division of Investment in the Department of the Treasury would sell any prohibited holdings, as the bill allows an 18-month period for the divestment.† Third, it would be highly speculative for the OLS to make assumptions on future gyrations in financial markets and the divisionís future investment decisions with and without the billís prohibition.†


BILL DESCRIPTION

 

††††† Senate Bill No. 3044 of 2015 prohibits the State of New Jersey from investing any assets of any pension or annuity fund under the management of the Division of Investment in the Department of the Treasury in companies that boycott the goods, products or businesses of Israel.† The prohibition does not apply to the activities of any company providing humanitarian aid to the Palestinian people through either a governmental or non-governmental organization.† The division has up to 18 months to disengage from any existing investment that violates the prohibition.†

 

 

FISCAL ANALYSIS

 

EXECUTIVE BRANCH

 

††††† None received.

 

 

OFFICE OF LEGISLATIVE SERVICES

 

††††† The OLS cannot reliably assess the ramifications on State and local government finances of prohibiting investments of pension and annuity funds in companies that boycott the goods, products or businesses of Israel.† The bill has the potential to directly alter pension and annuity fund investment returns either positively or negatively.† If it does, it could, in turn, indirectly affect the amount of actuarially determined employer contributions to the funds by the State and local governments.

††††† Conceptual Considerations:† The billís fiscal impact will equal the difference in the pension and annuity fundsí future investment performance with and without the billís prohibition on investments in companies boycotting the goods, products or businesses of Israel.†

††††† The bill will have no impact if investment returns remain identical with and without the billís prohibition.† This scenario might materialize, for example, if the division never intended to invest pension and annuity funds in companies boycotting the goods, products or businesses of Israel with or without the billís prohibition.

††††† In contrast, the bill will generate a gain to the pension and annuity funds, and potentially a reduction in State and local government employer contributions thereto, if investment returns are greater with the billís prohibition than without it.† This scenario would materialize if absent this bill the division were to invest pension and annuity fund resources in companies boycotting the goods, products or businesses of Israel, and if the ensuing returns were to be inferior to the returns of other investments the division would make with the prohibition.

††††† Conversely, the bill will produce a loss to the pension and annuity funds, and potentially an increase in State and local government employer contributions thereto, if investment returns are smaller with the billís prohibition than without it.† This scenario would materialize if absent this bill the division were to invest pension fund resources in companies boycotting the goods, products or businesses of Israel and if the resultant returns wound up superior to the returns of other investments the division would make with the prohibition.

††††† Impediments:† Three unknown variables preclude the OLS from quantifying the difference between future pension and annuity fund investment returns with and without the billís prohibition.†

††††† First, it is unclear to what extent pension and annuity fund resources are currently placed in investments outlawed by the bill.† It may even be impossible for the State to identify all investments in prohibited companies with absolute certainty.† This is so because of the vagaries of investing in hedge funds and private equity firms, which generally treat their investments and investment strategies as proprietary information that they do not share with investors. †It is therefore possible for the division to unwittingly place pension and annuity fund moneys indirectly in companies boycotting the goods, products or businesses of Israel through the conduit of its hedge fund and private equity holdings. †Irrespective of this source of uncertainty, Illinois may provide a rough indication of the number of investments New Jersey may find to be in violation of this bill. †In July 2015, Illinois became the first State to enact legislation similar to this bill.† The Executive Director of the Illinois State Board of Investment preliminarily estimated that Illinoisí State-funded retirement systemsí existing placements in some 25 to 30 companies could run afoul of the prohibition on pension fund investments in companies boycotting Israel (ďIllinois Passes Bill for Pension Funds to Divest from Companies Boycotting Israel.Ē Pensions & Investments, May 19, 2015.).

††††† Second, it is equally unclear when the division would divest from any prohibited holdings, as the bill allows an 18-month window for the divestment.†

††††† Third, it would be highly speculative for the OLS to make assumptions on future gyrations in financial markets and the divisionís future investment decisions with and without the billís prohibition.

 

Section:

Revenue, Finance and Appropriations

Analyst:

Thomas Koenig

Lead Fiscal Analyst

Approved:

Frank W. Haines III

Legislative Budget and Finance Officer

 

This fiscal estimate has been prepared pursuant to P.L.1980, c.67 (C.52:13B-6 et seq.).