A Community Solidarity: Public Pension Fund Investment in Community Development

Abstract

Squeezed between increasing entitlement expenditures and static or declining real revenues, state-funded urban development is increasingly an unaffordable luxury. At the same time, the power and significance of the banking sector is giving way to new kinds of financial institutions that have little interest in community development. Not surprisingly, it is often argued that pension funds ought to be more sensitive to community needs. But some analysts argue that pension funds are properly the agents of plan beneficiaries; any investment that took into account community needs would be, in effect, an unjustified tax on individuals' future welfare. Furthermore, analysts are very doubtful about the integrity of public pension plan investment decision making. In this paper, I set out a two-pronged justification of public pension plan investment in community development. In the first instance, I dispute claims that market agents are necessarily the best representatives of beneficiaries' interests. In the second instance, I develop a contractarian model of community development that stresses the reciprocal nature of the obligations embedded in the relationship between the community and pension plan beneficiaries. I hope to show that this two-pronged approach has significant implications for a wide variety of sponsored private plans. To give the analysis empirical relevance I refer to the much disputed decision of the West Virginia legislature to require their public pension funds' Investment Management Board to invest in the state government's corrections authority. The paper begins with an assessment of pension fund decision making and the practices of the investment management industry, drawing upon related research on pension fund capitalism. It goes on to theoretical issues of social obligation, referencing recent research on the nature of social contracts. These threads of argument are then drawn together to consider the more general issue of pension fund community investment.