In the outcry about the recent merger mania to take advantage of the tax avoidance transactions known as inversions, certain key players have been notably silent: public pension funds.Not one to shy away from controversy, let me give you my take on corporate tax inversions and what U.S. public pension funds should be doing. Absolutely nothing! The reality is U.S. corporate taxes are too high relative to the rest of the world, including Canada, which is why this debate is best left for Congress and the President to tackle.
Many of the nation’s largest public pension funds — managing trillions of dollars on behalf of police and fire departments, teachers and others — have major stakes in American companies that are seeking to renounce their corporate citizenship in order to lower their tax bill.
While politicians have criticized these types of deals — President Obama has called them “wrong” and he is examining ways to end the practice — public pension funds don’t appear to be using their influence as major shareholders to encourage corporations to stay put.
In the past six months, some of the nation’s largest companies have announced plans to move abroad. AbbVie, a pharmaceuticals company based in Illinois, has agreed to acquire a smaller British rival, Shire, so the combined company can relocate to Britain for tax purposes. Another drug company, Mylan, which is based outside Pittsburgh, has proposed buying the international generic drug business of Abbott Laboratories so the company can relocate to the Netherlands. Medtronic, a medical device company based in Minneapolis, has agreed to acquire Covidien of Ireland. Applied Materials has agreed to buy Tokyo Electron so it, too, can move to the Netherlands. And last week, Burger King announced it was buying Tim Hortons, the Canadian chain of coffee-and-doughnut shops, in a deal that would make Burger King a corporate citizen of Canada.
The California Public Employees’ Retirement System, the nation’s largest public pension fund and typically one of the most vocal, has remained silent.
“We don’t have a view on this from an investor standpoint — we’re globally invested, as you know, and appreciate that tax reform is a government role,” Anne Simpson, Calpers’s senior portfolio manager and director of global governance, told me. “We do expect companies to act with integrity, whatever the issue at hand — that goes without saying. We also want to see a focus on the long term.”
When I pressed for more, her spokesman wrote to me, “We’re going to have to take a pass on this one.”
Public pension funds may be so meek on the issue of inversions because they are conflicted. On one side, the funds say they care about the long term and the implications for their state. Calpers’s “Investment Beliefs” policy states that the pension system should “consider the impact of its actions on future generations of members and taxpayers,” yet most pension funds are underfunded and, frankly, desperate to show investment returns. Mergers for tax inversion can prop up share prices of the acquirers and clearly help pension funds, at least in the short term, show improved performance.
Some pension managers say that their job is strictly about generating cash for pensioners and that they shouldn’t take other issues into consideration. Ash Williams, the executive director and chief investment officer of the Florida State Board of Administration, which manages more than $150 billion, explained it to me this way: “If you’re in my seat, you’re thinking about it not only as an investor, but you’re thinking about it as a fiduciary, which sort of walls out a lot of the political considerations that might otherwise be there.” He went on: “You just have to think, ‘O.K., so I’m guarding the economic interest of my beneficiary. That is my duty, and that’s the start, the middle and the end of it.’ ”
When I pressed him about whether he felt he needed to consider the impact of these deals on the American tax base, which would affect pensioners, he said, “I guess I’d have to say what’s best for the company, what therefore maximizes the value of the ownership relationship I have to the company.” He added, “I mean, my gut is, as an American you’d like to keep businesses here.”
Mr. Williams’s approach appears to be the norm among most investors. However, Mark Cuban, the investor and owner of the Dallas Mavericks, took to Twitter with the kind of view you’d expect from a public pension fund, not a free-market evangelist.
“If I own stock in your company and you move offshore for tax reasons, I’m selling your stock,” Mr. Cuban wrote on Twitter in July. “When companies move offshore to save on taxes, you and I make up the tax shortfall elsewhere,” he said, encouraging investors to “sell those stocks and they won’t move.”
Last month, Shirley K. Turner, a Democratic New Jersey state senator, introduced a novel piece of legislation in an effort to make inversion deals less attractive. She proposed that the state’s pension board be forbidden to invest in companies that are involved in inversion deals. She said the state of New Jersey “ranks sixth among public pension funds investing in corporate inverter AbbVie, holding more than 1.5 million shares of the company’s common stock, valued at $81.9 million.”
It is unclear how such legislation would work. For example, would the state immediately be forced to sell its holdings in a company involved an inversion?
Not all officials who oversee pension funds are focused only on the immediate bottom line.
“Our fiduciary duty to our members is to vote our economic interest — and that means making an individualized determination of whether a given transaction is in our best interests as long-term share owners,” said Scott M. Stringer, the New York City comptroller. “As a result, we don’t merely look at the offer price on the day of closing but instead take into consideration everything from potential influence on shareholder rights to whether a merger places short-term gain over long-term growth.” Still, as Pfizer, one of the largest companies in New York, has continued to contemplate a merger with AstraZeneca that would make the combined corporation a British entity, neither Mr. Stringer nor any other investor acting on behalf of pensioners has spoken out. Perhaps not surprisingly, the only people who appear to be concerned are a small but growing group of politicians in Washington.
After Burger King announced its deal with Tim Hortons, Senator Carl Levin, Democrat of Michigan, declared, “If this merger goes through, there could well be a strong public reaction against Burger King that could more than offset any tax benefit it receives from a tax avoidance move,” suggesting customers take up the cause.
Indeed, the Walgreen Company, which had been considering a tax inversion transaction with Alliance Boots of Britain, voted against changing its corporate citizenship because the American pharmacy chain’s board and management worried about an outcry from customers, according to people close to the board, and were concerned that pressure from customers could spill over to the government.
Where are the investors? Happily watching their returns rise. When I asked Mr. Williams, the Florida pension manager, what he would do if he had to vote on a deal involving a Florida company pursuing an inversion that would hurt the state’s tax base, he sighed and said: “This issue is new enough — and fortunately, at this point, it’s small enough — that it hadn’t reached those dimensions. And I would just hope that we can get something done at the policy level to resolve it. That’s the best outcome.”
Having said this, the public needs to be informed of a few giveaways to corporations that is going on right under their noses. For example, in my comment last week on what will derail the endless rally, I wrote:
Of course, nobody really knows where the stock market is heading. A million things can derail this rally and cause jittery investors to pull the plug and sell their stocks. But with pension deficits rising as bond yields fall, pensions will be forced to take on more, not less risk. And where will they be taking that risk? Stocks, corporate bonds and alternative investments like real estate, private equity and hedge funds.I also provided a clip where Charles Biderman, TrimTabs Investment Research CEO, analyzes current market conditions saying the market is essentially rigged and you have to "ride the tide and hope to get out before it ends."
In that clip, Biderman explains why corporations are buying back their shares. With interest rates at zero, it pays to borrow and buy back shares. While this is true, he ignores another aspect of share buybacks which I've discussed on my blog, namely, it helps corporations boost the bloated pay of their senior executives further exacerbating inequality that Thomas Piketty has brought to the world's attention.
(Also see Profits Without Prosperity, an incredible article at the Harvard Business Review which shows exactly how corporate share buybacks have gotten out of control in the last decade. It then goes on to point out the various ways in which buybacks-gone-wild are killing the capital formation process in America, holding back the investments needed to keep the country competitive and decimating the middle class workforce. For more on this article, read How corporate share buybacks are destroying America).
In fact, while I am in the camp that the Fed did the right thing to move quickly and forcefully to lower interest rates to zero and engage in quantitative easing, I was also conflicted because it was a dead giveaway to banks and the alternative investment industry.
Why? Because a zero interest rate policy (ZIRP) spells disaster for U.S. pension funds teetering on collapse, as their liabilities explode up, forcing them to invest in riskier alternative investments like private equity and hedge funds to meet their actuarial target rate of return.
Importantly, ZIRP is a boon for the alternative investment industry and big banks collecting big fees from hedge funds and private equity funds.
But if the Fed didn't lower interest rates to zero and engage in QE, it would have been a disaster for the global economy, virtually ensuring a protracted period of virulent deflation and high and unacceptable unemployment.
Public pension funds have a role to play on the bloated compensation of U.S. corporate titans and they need to bring the issues I discuss above out in the forefront. Sadly, everyone is staying mum on these issues because discussing inequality is perceived as being "anti-American," which is total bullocks!
Below, my favorite economist, Michael Hudson, unzips America in the latest installment of the Hudson-Keiser interview series where they discuss Russian sanctions and the affect on the US dollar subsidy (fast-forward to minute 14). I don't agree with everything Michael says but listen to his comments on the bubble and the aftermath and how share buybacks and corporate buyouts are enriching corporations, banks and LBO funds.
And don't forget, as I've previously discussed, big banks have aided hedge funds avoid taxes, and many public pension funds stayed mum on that scandal too. It's high time Americans take a closer look at what is driving inequality and start implementing sensible and fairer tax policies (like reducing corporate taxes but closing other loopholes favoring hedge funds and private equity funds).