Can the Oregon State Treasurer factor social or political concerns (like Sudan divestment or in-state venture capital) into how the public employees' pension fund is invested?
Subject
Office of the State Treasurer
Plain-English summary
State Treasurer Ted Wheeler asked the Oregon Attorney General two related questions about the public employees' pension fund (OPERF). First, could the Oregon Investment Council and the Treasurer take social or political factors into account when deciding how to invest the money? Second, could the legislature compel them to consider those factors even when doing so would conflict with their fiduciary duty to the pension's beneficiaries?
The AG concluded that "social factors" were permissible only as a tie-breaker. If two investments were economically indistinguishable in terms of expected return and risk, the Treasurer could choose between them based on a social factor (for example, divestment from companies doing business in Sudan, or favoring Oregon venture capital opportunities). But the Treasurer could not pick a worse-performing investment over a better one to advance an unrelated objective. The reason: ORS 238.660(2) imposes an "exclusive benefit" rule requiring OPERF to be used solely for PERS members and their beneficiaries, and that rule mirrors the federal tax-qualification requirement in IRC § 401(a)(2).
On the second question, the AG concluded the legislature had limited room to maneuver. Because the exclusive benefit provision was a term of the statutory PERS contract, an attempt to alter it as to past contributions and earnings would impair an obligation of contract under Article I, section 21 of the Oregon Constitution. Even if the legislature directed the Treasurer to ignore the rule without changing it, beneficiaries could sue for breach. Either path also threatened the fund's federal tax-exempt status, which would expose employer contributions and fund earnings to taxation.
Currency note
This opinion was issued in 2010. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.
Common questions
Could the Treasurer divest from a company because Oregonians objected to its conduct?
Only if doing so did not cost retirees money. The opinion read the Sudan divestment statute (ORS 293.814) as conditional: the Treasurer was supposed to "try to ensure" no OPERF dollars went to companies doing business in Sudan, but only by reinvesting in alternatives generating "comparable" returns. So divestment was permitted when the Treasurer could find equivalent investments. It was not permitted when divestment would mean accepting a worse return.
Why is the "exclusive benefit" rule so important here?
Two reasons. First, it tracks the federal tax code requirement (26 USC § 401(a)(2)) that lets the pension fund and employer contributions go untaxed. Drop below that standard and the IRS could disqualify the plan, with potentially massive tax consequences for the state and beneficiaries. Second, the AG concluded the rule is a term of the statutory contract between Oregon and PERS members, so altering it raises constitutional impairment-of-contract problems.
What about investing in Oregon companies to boost the local economy?
ORS 293.733 told the Treasurer to "look first" at Oregon venture capital opportunities for diversification, "unless, under the circumstances, it is not prudent to do so." The AG read that statute the same way: it was a tie-breaker, not a mandate to make worse investments. Oregon-first applied only when an Oregon investment was equal to or superior to alternatives on prudent-investor grounds.
Can the legislature just override the exclusive benefit rule?
Not without consequences. The AG concluded that as to past contributions and the earnings on them, an override would impair the PERS contract under Article I, section 21. As to future contributions, prospective changes would not impair the existing contract, but could still imperil the fund's tax-qualified status. Members could sue for breach if the legislature directed the Treasurer to act inconsistently with the rule without formally changing it.
Did the AG opinion settle this?
It settled the AG's view at the time. AG opinions are persuasive but not binding precedent, so a later court or AG could reach a different conclusion. The federal landscape around ERISA-style fiduciary duties and ESG investing has continued to shift. Treat the framework here as a snapshot of how Oregon's exclusive-benefit and prudent-investor rules interlocked in 2010.
Background and statutory framework
OPERF is the trust fund for the Oregon Public Employees Retirement System. ORS 238.660(1) makes the Public Employees Retirement Board its trustee, but the Oregon Investment Council formulates investment policy and the State Treasurer serves as investment officer. ORS 293.726 imposes prudent-investor standards: the funds must be managed as a prudent investor would, with a duty to diversify, conform to the duty of loyalty, and incur only reasonable expenses.
ORS 238.660(2) adds the exclusive benefit rule: OPERF "may not be diverted or otherwise put to any use that is not for the exclusive benefit of members and their beneficiaries." That rule mirrors the federal requirement at 26 USC § 401(a)(2), which is what keeps OPERF tax-qualified under sections 401(a), 414(d), and 414(k) of the Internal Revenue Code.
The opinion drew on three lines of authority. The first was IRS guidance interpreting the federal exclusive-benefit rule, which has long permitted some collateral benefits to other parties as long as fair market value, prudent diversification, and adequate liquidity safeguards are met (Rev Rul 69-494). The second was U.S. Department of Labor guidance under ERISA, especially Interpretive Bulletin 2509.08-01 (2008), which permits "economically targeted investments" as long as the fiduciary determines they are "truly equal" to alternatives in risk and expected return. The third was prior Oregon AG opinions: a 1978 opinion (38 Op Atty Gen 2017) read the duty of loyalty more strictly, but a 1989 opinion (46 Op Atty Gen 143) and a 1993 opinion (46 Op Atty Gen 506) recognized that legislative directives could permit consideration of social factors so long as statutory investment standards were met.
The contracts-clause analysis followed Hughes v. State, 314 Or 14 (1992), which had already held that PERS itself constitutes a statutory contract between the state and its employees. Strunk v. PERB, 338 Or 145 (2005), provided the test for identifying which statutory provisions are contractual terms.
Citations
- ORS 238.660; 238.600(1); 293.721; 293.726; 293.731; 293.733; 293.811-293.817
- 26 USC § 401(a)(2); 29 USC § 1104(a)(1)
- Oregon Constitution, Article I, section 21
- Hughes v. State, 314 Or 14, 838 P2d 1018 (1992)
- Strunk v. PERB, 338 Or 145, 108 P3d 1058 (2005)
- Eckles v. State, 306 Or 380, 760 P2d 846 (1988)
- 38 Op Atty Gen 2017 (1978); 46 Op Atty Gen 143 (1989); 46 Op Atty Gen 506 (1993)
Source
- Landing page: https://www.doj.state.or.us/oregon-department-of-justice/office-of-the-attorney-general/attorney-general-opinions/
- Original PDF: https://www.doj.state.or.us/wp-content/uploads/2010/08/op2010-3.pdf
Original opinion text
JOHN R. KROGER
MARY H. WILLIAMS
Attorney General
Deputy Attorney General
DEPARTMENT OF JUSTICE
GENERAL COUNSEL DIVISION
August 5, 2010
Ted Wheeler, State Treasurer
Office of the State Treasurer
159 State Capitol
900 Court St., NE
Salem, OR 97301-4043
Re: Opinion Request OP-2010-3
This opinion addresses the factors that the Oregon Investment Council (OIC) and the Oregon State Treasurer (Treasurer) may consider when establishing and implementing investment policies for the Oregon Public Employees Retirement Fund (OPERF). The principal focus of the opinion is the extent to which the OIC and the Treasurer may constitutionally accommodate so-called "social factor" instructions from the Legislative Assembly.
FIRST QUESTION PRESENTED
May the OIC or Treasurer consider statutory investment factors other than those directed by their fiduciary obligations, particularly as set forth in ORS 293.721 and 293.726, when establishing and implementing investment policy for OPERF?
SHORT ANSWER
Yes, provided the OIC and the Treasurer do not subordinate the interests of Public Employees Retirement System (PERS) members and their beneficiaries in their retirement income to unrelated objectives, such as social investing. The OIC and the Treasurer may consider statutory social factors in making an investment decision, but the OIC and Treasurer may select or reject an investment based on such factors only if the investment is equal to or superior to alternative investments when judged solely on the basis of its potential economic value.
SECOND QUESTION PRESENTED
May the Legislative Assembly require the OIC or Treasurer to deviate from their fiduciary duties when establishing and implementing investment policy for OPERF?
SHORT ANSWER
Yes, but only with significant consequences.
ORS 238.660(2) establishes a statutory contractual obligation to use OPERF for the exclusive benefit of PERS members and their beneficiaries. If the legislature changes that obligation as to prior employer or employee contributions and the earnings thereon, then this action would impair an obligation of contract in violation of Article I, section 21, of the Oregon Constitution.
The legislature may unequivocally direct the OIC or Treasurer to ignore the exclusive benefit obligation in ORS 238.660(2) in making OPERF investment decisions, but that action would breach the statutory PERS contract and provide a basis for a breach of contract action by PERS members and their beneficiaries. The action also would imperil the tax-exempt status of OPERF.
As to future employer and employee contributions to OPERF and earnings on those contributions, the Legislative Assembly may alter the exclusive benefit obligation in ORS 238.660(2) or require the OIC and the Treasurer to act inconsistently with their duty to manage OPERF for the exclusive benefit of PERS members. But this action would also imperil the tax-exempt status of OPERF.
DISCUSSION
I. Statutory Framework for OPERF Investments
OPERF is a trust fund. ORS 238.660(1). It is for the "uses and purposes set forth" in [ORS chapters 238] and 238A and ORS 237.950 to 237.980 and for "no other use or purpose * * *." Id. Neither the state nor any other contributing public employer has any "proprietary interest" in OPERF or in the contributions made by them to OPERF. ORS 238.660(3).
The Legislative Assembly expressly intends PERS to be "qualified and maintained under sections 401(a), 414(d) and 414(k) of the Internal Revenue Code as a tax-qualified defined benefit government plan." ORS 238.600(1).
OPERF "may not be diverted or otherwise put to any use that is not for the exclusive benefit of members and their beneficiaries" until all liabilities to PERS and their beneficiaries are satisfied. ORS 238.660(2). This restriction satisfies one of the requirements for a tax qualified plan under Internal Revenue Code (IRC) section 401(a)(2): It must be "impossible" under "the trust instrument," at any time "for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of [an employer's] employees or their beneficiaries * * *." 26 USC § 401(a).
The Public Employees Retirement Board (PERB) is the trustee of OPERF. ORS 238.660(1). But PERB neither establishes OPERF investment policy nor invests OPERF. Instead, the OIC is responsible for formulating OPERF's investment polices. ORS 293.731 (policies for "investment funds"); ORS 293.701(2)(a) (defining OPERF as "investment funds"). In developing these investment policies, the OIC is subject to its obligations under ORS 293.721 to "make moneys as productive as possible" and to the duties imposed by ORS 293.726(1)-(4) to act as a prudent investor, invest in accordance with the laws governing OPERF, employ an overall investment strategy, diversify investments, conform to the fundamental fiduciary duties of loyalty and impartiality, make prudent delegations, and incur only reasonable and appropriate expenses.
The Treasurer is the investment officer for the OIC. ORS 293.716(1). For the sake of brevity, this opinion refers simply to the Treasurer below when discussing investment duties related to OPERF, but those duties also apply equally to the OIC and to those performing investment duties for the OIC pursuant to a contract in accord with ORS 293.736(2).
In addition to the directions provided to the Treasurer in ORS 293.721 and ORS 293.726(1)-(4) mentioned above, the Legislative Assembly has enacted several additional investing instructions applicable to OPERF investments, which include:
"[N]ot more than 50 percent of the moneys contributed to the [OPERF] may be invested in common stock * * *." ORS 293.726(6).
"[N]otwithstanding any other general or specific law, moneys in the [Variable Annuity Account] shall be invested primarily in equities, including common stock, securities convertible into common stock, real property and other recognized forms of equities, whether or not subject to indebtedness." ORS 238.260(6).
In making venture capital investment decisions, "look first at Oregon opportunities for diversification unless, under the circumstances, it is not prudent to do so." ORS 293.733(1).
"[A]ct reasonably and in a manner consistent with ORS 293.721 and 293.726 to try to ensure that subject investment funds are not invested in any company the council knows is doing business in Sudan * * *," but divest and reinvest without "monetary loss to the fund[]." ORS 293.814(1), (2).
The latter two instructions involve in part what are commonly referred to as "social factors," i.e., factors considered to achieve a social as well as an investment objective.
II. Oregon Legislative Power and Impairment of Statutory Contracts
The lawmaking authority of the Oregon legislature is plenary, subject only to limitations in the state constitution or from federal law. See, e.g., Kellas v. Dept. of Corrections, 341 Or 471, 478, 145 P3d 139 (2006). One such limitation is the Contracts Clause of the Oregon Constitution, Article I, section 21, which provides in pertinent part that "[n]o * * * law impairing the obligation of contracts shall ever be passed * * *." This provision applies to contracts made by the state as well as to contracts between private parties. Eckles v. State of Oregon, 306 Or 380, 390, 760 P2d 846 (1988), appeal dismissed 490 US 1032 (1989).
There are two principal steps to analyzing an impairment of contract claim under Article I, section 21: (1) Does "a contract exist[] to which the person asserting an impairment is a party?" and (2) Has "a law of this state * * * impaired an obligation of that contract"? Hughes v. State, 314 Or 14, 17, 838 P2d 1018 (1992). In the case of an alleged impairment of a statutory contract, the first step may be broken into three subcomponent inquiries: (1) is there a state contract?; (2) if so, what are its terms?; and (3) what obligations do the terms provide? Strunk v. Public Employees Retirement Bd., 338 Or 145, 170, 108 P3d 1058 (2005).
In the case of PERS, the Oregon Supreme Court already has answered the first subcomponent inquiry in the affirmative: PERS is a statutory contract. See Hughes, 314 Or at 20, 25.
III. PERS' Exclusive Benefit Provision
The exclusive benefit provision in ORS 238.660(2) is an essential term of the PERS contract and limits the legislature's ability to require consideration of social factors in OPERF investment decisions. This provision is the functional equivalent of a trustee's common law fiduciary duty of loyalty. While the exclusive benefit provision does not preclude consideration of social factors, it relegates such factors to a tie-breaker status. Investments supported by a consideration of social factors are permitted only insofar as they are equal to or superior to alternative investments, when judged solely on the basis of their economic value.
The OPERF "exclusive benefit" provision in ORS 238.660(2) was enacted in 1999. The OPERF "trust fund" language now found in ORS 238.660(1) originally was enacted in 1953. Before 1999, the AG had interpreted the trust fund language to satisfy "the requirement stated in Treas. Reg. § 1.401-2(a)(1)" that OPERF be used for the exclusive benefit of employee members and their beneficiaries. 46 Op Atty Gen 180, 203 (1989). Subsection (2) of ORS 238.660 thus makes explicit what had been implicit. In 2005, the legislature expressly declared its intent that PERS comply with the tax-exemption requirements for qualified government plans and trusts under relevant sections of the IRC.
ORS 238.660(2) expressly requires OPERF assets to be used exclusively for the benefit of PERS members and their beneficiaries: OPERF "may not be diverted or otherwise put to any use that is not for the exclusive benefit of members and their beneficiaries" until "all liabilities to members and their beneficiaries are satisfied." That requirement is not conditioned on the legislature's ability to authorize or mandate specific investments. The language is unambiguously promissory and, on its face, binds subsequent legislatures as it endures until all PERS liabilities are satisfied.
Moreover, complying with the exclusive benefit requirement is essential to avoiding taxation of both employer and employee contributions to OPERF and the interest earned on them. The following consequences potentially could flow from the loss of tax-qualified status: (1) employer contributions could become currently taxable to employees as income; (2) the earnings on the fund could become taxable, probably as capital gains; (3) the state might be required to pay income tax withholding, FICA, and FUTA taxes on that income; and (4) the tax liabilities might be assessed retroactively to the date on which it was determined that OPERF no longer qualified for tax exemption.
We conclude that the exclusive benefit provision in ORS 238.660(2) establishes a contractual obligation because of: (1) the unambiguously promissory language; (2) the long duration of the requirement; (3) its appearance in the PERS statutes; (4) the context of OPERF's trust status and the state's declaration that it has no proprietary interest in the fund; and (5) the longstanding interpretation of ORS 238.660(1) to implicitly contain this requirement to make the fund tax-exempt qualified under federal law.
The pertinent Treasury Regulation, 26 CFR § 1.401-2(1)(3), provides that as used in section 401(a)(2), the phrase "purposes other than for the exclusive benefit of his employees or their beneficiaries" includes all objects or aims not solely designed for the proper satisfaction of all liabilities to employees or their beneficiaries covered by the trust. But, according to the IRS, the "exclusive benefit" requirement does not preclude investment in the employer as long as the following safeguards are met: (1) the cost must not exceed fair market value at the time of purchase; (2) a fair return commensurate with the prevailing rate must be provided; (3) sufficient liquidity must be maintained to permit distributions in accordance with the terms of the plan; and (4) the safeguards and diversity that a prudent investor would adhere to must be present. Rev Rul 69-494, 1969-2 CB 88. Rev Proc 72-6, 1972-1 CB 710 subsequently confirmed that it applied to any pension fund investments.
In other words, the IRS has not interpreted the federal requirement literally to require that investments "exclusively benefit" pension members to the exclusion of all others. Instead, the federal requirement has been interpreted to permit an investment that would achieve benefits for the employer or other benefits, provided that "adequate safeguards that a prudent investor would adhere to" are present.
Our view of the IRS interpretation is consistent with the United States Department of Labor's more detailed interpretations under ERISA. ERISA's exclusive purpose rule provides that "a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and (A) for the exclusive purpose of: (i) providing benefits to participants and their beneficiaries; and (ii) defraying reasonable expenses of administering the plan." 29 USC § 1104(a)(1).
In a 1998 advisory opinion, USDOL stated: "The Department has expressed the view that the fiduciary standards of sections 403 and 404 do not preclude consideration of collateral benefits, such as those offered by a 'socially-responsible' fund, in a fiduciary's evaluation of a particular investment opportunity. However, the existence of such collateral benefits may be decisive only if the fiduciary determines that the investment offering the collateral benefits is expected to provide an investment return commensurate to alternative investments having similar risks."
In a 2008 Interpretive Bulletin, "Supplemental guidance relating to fiduciary responsibility in considering economically targeted investments," the USDOL advised that ERISA fiduciaries may make such investments if they conclude that an ETI is "truly equal" to alternative investments. 29 CFR § 2509.08-01 (2008). The bulletin explains: "ERISA's plain text does not permit fiduciaries to make investment decisions on the basis of any factor other than the economic interest of the plan. Situations may arise, however, in which two or more investment alternatives are of equal economic value to a plan. The Department has recognized in past guidance that under these limited circumstances, fiduciaries can choose between the investment alternatives on the basis of a factor other than the economic interest of the plan."
Three prior Attorney General opinions discuss the issue of social factors and Treasurer-invested trust funds. While the first opinion (1978) appears to exclude the Treasurer from considering any social factors, the latter two opinions (1989 and 1993) permit consideration of social factors so long as any investment or divestiture in the end also accords with the applicable statutory standards for investments.
IV. Current Social Factor or Economic Target Legislation
A. Sudan Divestments
In 2005, the legislature enacted the Oregon Human Rights and Anti-Genocide Act of 2005. ORS 293.811 to 293.817. ORS 293.814(1) requires the OIC and Treasurer to "act reasonably and in a manner consistent with ORS 293.721 and 293.726 to try to ensure that subject investment funds are not invested in any company that the council knows is doing business in Sudan for as long as the Sudanese government's campaign of human rights violations, atrocities or genocide continues in Sudan." Subsection (2) of ORS 293.814 requires divestment and reinvestment to be accomplished "without monetary loss to the funds through reasonable, prudent and productive investments in companies and institutions generating returns that are comparable to the returns generated by companies subject to divestment."
In brief, under ORS 293.814, the Treasurer must avoid those investments or divest and reinvest if he can do so in accordance with ORS 293.721 or 293.726 and without monetary loss to the funds. Given these conditions, ORS 293.814 does not impair or breach the "exclusive benefits" term of the PERS statutory contract.
B. Oregon Venture Capital
A second social investment statute imposes a duty on the Treasurer "[i]n making and implementing investment decisions related to venture capital * * * to look first at Oregon opportunities for diversification, unless, under the circumstances, it is not prudent to do so." ORS 293.733. Under ORS 293.733, the Treasurer must consider Oregon venture capital investments "first" only if it is prudent and in accordance with ORS 293.721 and 293.726.
V. Compulsory Disregard of Exclusive Benefits Obligation
ORS 238.660(2) establishes a statutory contractual obligation not to use OPERF for anything but the exclusive benefit of PERS members and their beneficiaries. As to prior employer and employee contributions to OPERF and the earnings on those contributions, if the Legislative Assembly altered the exclusive benefits obligation, then that action would impair an obligation of the PERS contract and violate Article I, section 21, of the Oregon Constitution. If the legislature did not alter the exclusive benefits obligation in ORS 238.660(2), but instead unequivocally required the Treasurer to act inconsistently with that obligation as to prior contributions and earnings thereon, then PERS members and their beneficiaries could bring a cause of action for breach of the PERS contract. This action also would imperil the federal tax-exempt status of OPERF under IRC § 401(a).
But the legislature likely could change the exclusive benefit obligation found in ORS 238.660(2) prospectively without impairing a contract in violation of Article I, section 21. In this context, such a change could apply only to employer and employee contributions and earnings thereon made or earned after the statute's effective date. In effect, those contributions and earnings would have to be segregated from earlier funds. Such an action also would imperil the tax-exempt status of at least this portion of OPERF.
Sincerely,
David E. Leith
Associate Attorney General and
Chief General Counsel
General Counsel Division
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