Making money, raising eyebrows

Steve Kanigher and Alex Richards

Sunday, July 15, 2007 | 2:28 a.m.

Gov. Jim Gibbons and top Nevada legislators may have failed last week to persuade the state public employees' pension fund to dump its investments in Sudan, but the complaint they lodged is just the beginning.

An examination by the Sun shows that the pension fund's $23 billion portfolio contains investments in companies that do business with rogue nations or whose practices contribute to social or environmental ills in direct opposition to United States and Nevada policies.

Gibbons and other state officials asked the Public Employees' Retirement System to divest its investments in companies with interests in Sudan because of genocide in the Darfur region. One-third of state governments have done so.

Nevada's PERS declined.

The amount involved in Sudan-related companies is small, $1.3 million. That is far less than the amounts the Sun found invested in other companies that governments across the United States have found objectionable enough to warrant divestiture.

Some of those investments surprised state officials, who told the Sun that Nevada needs to review those holdings.

For example, PERS has hundreds of millions of dollars invested in companies that do business in Iran, which the United States accuses of sponsoring terrorists. The fund invests in firms accused by critics of war profiteering (Halliburton), using child labor (Nestle) and furthering toxic pollution (Newmont Mining Corp.).

Although Nevada has waged a lengthy battle to prevent a nuclear waste repository at Yucca Mountain, PERS invests in companies that want to ship nuclear waste to the state.

Some of those same investments also can be found in two smaller state pension funds for Nevada judges and state legislators, a Sun analysis of pension records as of June 8 shows.

As with private investments, public investments sometimes pose difficult decisions weighing economic returns against moral or social considerations. To frame the quandary: If a company offers the prospect of 20 percent annual returns, but does so by relying on environmentally questionable methods, should an investment in it be judged by pocketbook or by conscience?

PERS covers state and local government workers, teachers, professors and some hospital employees. By law, the system must follow financially prudent investment strategies for its 98,000-plus active members and more than 33,000 retirees and beneficiaries. It is overseen by a seven-member board appointed by the governor but operated as an independent agency.

The system has not blacklisted any stocks based on politics, social causes or other reasons - even if some investments run counter to Nevada's interests.

Dana Bilyeu, the pension fund's executive officer, said she is aware of competing objectives involved when sound investments are weighed against socially responsible ones. She and others say forcing state investments to pass through a prism of politics or social concerns is problematic, among other reasons because it can create a subjective and shifting standard.

Even if such judgments are to be made, many think they should be made by legislators, not pension-fund managers.

Divestment is financially risky, Bilyeu said, especially if it involves a profitable stock that is difficult to replace. California, for example, lost hundreds of millions of dollars after dumping tobacco stocks and other objectionable holdings, she said.

"There are a lot of worthy social causes, but we cannot substitute our judgment on social issues for the fiduciary duties we have to our members and beneficiaries," Bilyeu said.

Others, however, do not see the social and financial questions as separate.

Missouri Treasurer Sarah Steelman last year persuaded that state's employees' pension board to limit international investments to companies without ties to terrorist regimes.

"This is about the safety of our families and our country, and there is no effort that should be spared from those causes," Steelman said. "I fought my hardest for nine months and finally the strength of the argument won out.

"We should not fund terrorism with our tax dollars. It's that simple."

Among the investments dropped was one in the Arab Bank of Jordan, which had been "paying suicide bombers' life insurance policies," said Kelly Gunderson, a spokeswoman for Steelman.

"We wanted to make sure our state's money wasn't involved in that."

To date, Missouri's position has not had an economic downside. During its first eight months, Missouri's "terror-free" investment fund posted an enviable 27 percent return - more than three times the Nevada fund's fiscal 2006 performance.

Nevada Treasurer Kate Marshall is looking at the possibility of instituting a similar policy. Although the pension fund may not have taken action on the investments in Sudan, Marshall said she wants to pursue a terror-free investment policy. She has directed her staff to develop rules to ensure that state treasury funds are not invested in governments engaged in terrorist activities.

In the past, anti-smoking organizations and other advocacy groups have tried to persuade Nevada's pension board to divest from certain companies.

Those efforts included a proposal by former Sen. Joe Neal, a North Las Vegas Democrat. In the 1970s and 1980s Neal wanted the state to prohibit the pension fund from investing in businesses with ties to South Africa because of its apartheid policies.

The pension board voted in 1986 to restrict investments in South Africa. But the policy was nullified by then-Nevada Attorney General Brian McKay, whose office issued an opinion saying that divestment in South Africa would not be financially prudent and that, in any event, such sanctions were the purview of the Legislature.

Today, about 45 percent of Nevada's pension fund is invested in U.S. stocks, 10 percent invested in foreign stocks and the balance in domestic and foreign bonds and other investments. The pension board sets investment policy such as profit goals, but the individual stocks are selected by 19 fund managers.

In its report for fiscal 2006, the fund recorded an 8.8 percent return on its investments and boasted that its performance ranked among the top 10 percent of public pension funds.

The Sudan issue arose June 7. Gibbons, Senate Majority Leader Bill Raggio, R-Reno, and Assembly Speaker Barbara Buckley, D-Las Vegas, asked the pension fund to divest itself of $1.3 million in French power-generation company Alstom and Swedish oil-and-gas company Lundin Petroleum. The companies do business in Sudan, where government troops and ethnic militia have killed at least 200,000 people and displaced at least 2 million others since 2003.

The request followed actions by other states. In September, California became the first of 18 states to divest from companies that do business in Sudan, according to the Sudan Divestment Task Force, a Washington-based Genocide Intervention Network project.

But Wednesday, Ken Lambert, PERS investment officer, said that although the group is "sensitive to the issue," it will not divest .

That decision, Gibbons said, could spawn legislation in 2009 requiring the pension system to shed investments in companies that do business in countries that support terrorism or commit human rights violations.

"We would like for them to do it voluntarily ... rather than have it dictated," the governor said. Raggio said , despite signing the Sudan divestment letter, he would prefer Congress handle the issue.

Raggio and Buckley said they would not try to change other PERS investments. "The priority needs to be the fiscal soundness of the investment," Raggio said.

Making value judgments, Buckley said, puts the state in the position of making "investment decisions based on whichever way political winds are blowing." In part because of the prevalence of that attitude, few questions have been raised - at least not through official channels - about other state investments that also raise flags.

Aside from Alstom and Lundin Petroleum, the Sun identified nearly $156 million that the pension fund has invested in foreign corporations or their subsidiaries with ties to Iran and other rogue regimes.

Florida this year became the first state to divest from publicly traded companies doing business in Iran. Six of those companies are part of Nevada's pension portfolio.

The Wall Street Journal reported that at least 14 states are considering similar actions. Such efforts are opposed by the Bush administration on the grounds that the states would be interfering with diplomatic efforts to isolate Iran.

The conservative-leaning Center for Security Policy in Washington, which specializes in national security issues, has been leading the effort to encourage divestment in companies that do business with Iran and other rogue nations.

The center has developed a "dirty dozen" list of foreign companies, and Nevada's pension plan includes nine of them.

Bilyeu's response is that none of the companies shows up on the U.S. Treasury Department's list of terrorist-related businesses. All American citizens and pension funds are barred from investing in any of the companies on the list, greatly expanded by an executive order signed by President Bush shortly after the 9/11 terrorist attacks.

Because the pension fund's foreign investments are largely in Japan and Europe, and with most of the banned companies in emerging Third World markets, Bilyeu said the fund never invested in any of the firms since blacklisted by the federal government. The pension board should not make judgments about companies purportedly tied to terrorist regimes if the federal government has not blacklisted them , Bilyeu said.

"Those are foreign policy issues," she said. "Those are the kinds of things where we as a nation need to speak with one voice."

Nevada, however, has more than one voice on the controversial nuclear waste issue.

As of June 8 the pension fund held $259.45 million in 19 corporations that, either directly or through subsidiaries, operate nuclear power plants in the United States.

All 19 are members of the Nuclear Energy Institute, the leading industry advocate of the federal plan to ship high-level nuclear waste to Yucca Mountain, 90 miles northwest of Las Vegas. Combined, the companies operate 83 of the nation's 104 commercial nuclear reactors.

The investments in those companies represent slightly more than 1 percent of the $22.8 billion in the pension fund's assets.

The fund's holdings include $41.2 million in Exelon Corp., $22.7 million in Dominion Resources Inc. and $19.5 million in TXU Corp., which control nuclear power plants from Texas to the Northeast. Closer to home are investments in PG&E Corp. and Edison International, which operate nuclear power plants in California , and Pinnacle West Capital Corp., which oversees plants near Phoenix.

In addition, the fund's single largest stock holding is $278.2 million in General Electric Co., which builds nuclear reactors and is a member of the Nuclear Energy Institute.

Separately, the Judicial Retirement System had almost $400,000 invested in nuclear power companies and the Legislative Retirement System has slightly more than $60,000.

Because of Nevada's two-decade battle against efforts to turn Yucca Mountain into a nuclear waste dump, there is an unmistakable dissonance to those investments.

Gibbons, like most of the state's leaders, opposes the dump. Melissa Subbotin, Gibbons' press secretary, took questions from the Sun on the pension fund investments but did not call back with answers.

Bob Fulkerson, director of the Progressive Leadership Alliance of Nevada, a liberal political group, called the investments in Nuclear Energy Institute members disappointing.

"We should not be aiding and abetting our enemies," Fulkerson said.

Similarly, Yucca Mountain critic Bob Loux, executive director of Nevada's Agency for Nuclear Projects, said the holdings underline "a disconnect between the investment strategy of the PERS board and Nevada policy."

"I had no idea it was occurring," Loux said. "It does help the companies pay their dues to the Nuclear Energy Institute, and the NEI has lobbyists, although they have not been effective on Capitol Hill. If I didn't think Yucca Mountain was on its last legs, I'd be a little more concerned."

Buckley, while noting that Congress, not the utilities, designated Yucca Mountain as the nation's nuclear waste dump site, said the investments are "definitely worthy of review by the Legislature."

With mining being a prominent industry in Nevada, it is no surprise that mining companies are represented in the state's portfolio.

But three holdings - Newmont Mining ($9.7 million), Rio Tinto Group ($8.3 million) and Barrick Gold ($1.5 million) - own six of the nine top polluting mines in the nation in terms of pounds of toxic chemicals released, according to the Environmental Protection Agency's latest toxic release inventory in 2005. Combined, those mines released 424.8 million pounds of toxic chemicals that year, including arsenic and heavy metal compounds.

"It's disgusting that our state is investing in companies that are wrecking the world," Fulkerson said. "Ideally, investments should bring in a high rate of return but involve companies that are socially responsible."

Nevada Center for Public Ethics President Craig Walton said he thinks PERS should meet with its members to consider establishing a socially responsible fund.

When Walton taught at UNLV , he invested in a socially responsible fund with the Teachers Insurance and Annuity Association, a nationwide pension plan for professors.

"The whole practice of socially responsible investing has been around for decades," Walton said. "You invest in companies that aren't exploiting workers or companies that are environmentally responsible, such as those that have policies of reforestation so that when they cut down trees they replant."

Walton also has a ready answer for those who argue that introducing social concerns into investment strategies could put the state on a slippery slope.

"Nevada's public employees have consciences," Walton said. "They shouldn't be told by anyone that their consciences are irrelevant to the investment packages."

Sun reporters Mary Manning and Cy Ryan contributed to this story.