The Fiduciary Case for Divesting from Israel Government Bonds

In April, I wrote an essay in the Jewish publication, The Forward, arguing to divest New York’s state and local public pension fund — the third-largest pool of public capital in the United States — from financing Prime Minister Benjamin Netanyahu’s government. It was a moral argument inspired by my Jewish values.

At such a polarized moment, I wasn’t surprised that people took issue, claiming moral arguments are subjective and have no business in the business of investing.

What was surprising were the critics who argued that divestment is at odds with the state comptroller’s fiduciary duty to the pension fund and ultimately to the millions of New York taxpayers who pay into the fund. Because, while moral questions may be subjective, fiduciary questions can be objectively evaluated. And by any objective evaluation, it couldn’t be clearer that the current state comptroller, Thomas DiNapoli, has breached his fiduciary duty.

Put simply, New York’s public pension fund has invested far too much of New Yorkers’ tax dollars in a single country’s debt and is getting far too little in return on a risk-adjusted basis.

First, New York’s investment of $368 million in Israel’s sovereign bonds is a clear concentration risk, representing nearly 80 percent of the pension fund’s investment in foreign sovereign debt. In contrast, Israel’s sovereign debt represents just 0.4 percent of the global investment-grade sovereign debt market, which is why sovereign debt index funds have an allocation to Israel’s government bonds at roughly the same amount: 0.3–0.4 percent. Speculative hedge funds may seek exposure to an asset that is 20,000% higher than the asset’s own benchmark, but public pension funds should not.

Second, of the $368 million of Israel government bonds that New York’s pension fund owns, more than $330 million are in bonds that are not tradeable. They are illiquid. You read that right.

It turns out, the government of Israel actually issues two types of bonds. The first are traditional sovereign bonds and can be freely traded between investors on “secondary” markets. These bonds comprise 10 percent of our pension fund’s holdings. The second type, which represent 90 percent of our pension fund’s holdings, cannot be traded without the express permission of Israel’s government and thus must be held to maturity.

This second type of sovereign bond is nearly unheard of in capital markets because the credit risk an investor takes on is total. If Israel’s finances begin to erode, if its credit rating falls, or if New York’s pension fund simply needs to raise cash to pay beneficiaries, unlike similarly-rated bonds from Ireland, Japan, Spain and the like, there is no getting out of this position. New York is stuck.

This is not your average fixed-income investment — not even close. Is it possible that New York taxpayers are compensated for this unique risk? Is the return on this special class of bonds so enticing that it is worth owning such a disproportionate amount?

Not even close.

Since Mr. DiNapoli took office, the average yield New York taxpayers received on these illiquid bonds was a paltry 2.9%, significantly lower than their freely tradeable counterparts, which earned an average yield of 4.4%. An investor would expect precisely the opposite. In short, the yield New York’s pension fund earns on this special class of bonds, which makes up 90% of its Israel government bond holdings, fails to compensate the fund for the risk it takes on.

This amounts to a subsidy to Israel’s government through cheaper credit than what the market would otherwise charge. In this sense, New York’s comptroller has unilaterally decided to take money from New York taxpayers and pensioners and deliver it to Israel’s government as a giveaway or, more charitably, as foreign aid. What’s more, the comptroller’s purchases of these illiquid bonds have accelerated, increasing by more than $100 million in the past two fiscal years alone.

Most states do not invest a penny in Israel’s government, much less nearly 80% of their foreign government bond exposure. The massive concentration of Israel government bonds that New York’s comptroller has amassed is reckless. And Mr. DiNapoli’s unilateral, de facto decision to subsidize Netanyahu’s government through the purchase of a special class of risky, illiquid bonds is the opposite of fiduciary duty.

I happen to believe that there is a line that should not be crossed when it comes to investing, regardless of financial outcome. If not, we would elect AI bots to invest our pension funds. But we don’t. We elect humans. Moral lines aside, even in the most antiseptic, coldly calculated investment world, Mr. DiNapoli’s financial case for investing in the government of Israel simply isn’t there.

For the last 20 years, Comptroller DiNapoli has put politics before his fiduciary duty — amassing an outsized concentration in the debt of one single country in the worst possible way — with debt that is uniquely risky, illiquid, and poorly yielding. And he has done so on the back of New York taxpayers and public employees. That must end. When I am state comptroller, it will.

A lifelong New Yorker, Drew grew up with his two sisters (he is a triplet) in Manhattan. Drew is running for office for the first time after spending a career leading organizations across government, nonprofit and private sectors taking on entrenched challenges and fighting for working families and vulnerable communities.

About Drew:

Drew Warshaw is a Democratic candidate for New York State Comptroller.

For the last five years, Drew has taken on the affordable housing crisis, as Chief Operating Officer and then as co-CEO of Enterprise Community Partners, the largest housing nonprofit in the county that has created and preserved more than 1 million affordable homes.

Drew started his career in government, working as a policy aide to the Governor of New York. In the face of powerful opposition from the Bush Administration, Drew fought on the frontlines to provide drivers’ licenses to undocumented New Yorkers.

In the wake of 9/11, as Chief of Staff of The Port Authority of New York & New Jersey, playing a central role in reviving the rebuilding of the World Trade Center. He stood up to powerful interests — transforming a symbol of dysfunction into one of resilience.

For nearly a decade Drew worked in the renewables sector. Drew led a community solar business, helping build an industry from scratch, putting more than $1 billion of steel in the ground, and democratizing access to renewable energy for Americans all across the country.

Drew earned a BA from Cornell University and an MBA from Columbia Business School. He and his wife, Charlotte, live in Lower Manhattan with their two sons, Benjamin and Jacob.