Cities’ pension dollars are not for building affordable housing

During a campaign debate, incoming D.C. Mayor Janeese Lewis George announced her plan to spur the construction of affordable housing by “leveraging” billions of dollars from the city’s pension funds. While she did not provide further detail, she likely means steering the investments of the city’s pensions to D.C.-based housing investments, loans, or securities.

The political temptation to use pension assets to address policy priorities, like housing, is not exclusive to D.C. New York City, for example, has a $4 billion initiative to finance more local housing through its five public pension funds.

But public pension assets are not a discretionary city fund. They are accumulated savings, set aside over decades, earmarked for one purpose: paying the retirement benefits promised to city workers. Pursuing investments that satisfy policy goals rather than maximize returns adds complexity, risk, and costs to public pensions—and ultimately, this plan is unlikely to fulfill a city’s housing needs.

In traditional defined benefit pension funds—like the ones cities often offer to teachers, police, and firefighters—retirees are promised a benefit that is insulated from investment risk. If investments underperform, the city must make up for the losses. Therefore, if a city’s pension funds accept lower returns to satisfy a policy initiative, the cost of that initiative is ultimately just shifted to future taxpayers, who will have to make up for the forgone investment earnings, either through higher taxes, worse public services, or both. This is why pension funding and investment risk are such important factors in a city’s credit rating.

Investment earnings account for about 60% of public pensions’ revenue. Therefore, even marginal reductions in returns in the name of pursuing a policy goal can lead to substantial increases in costs, as they slow the exponential growth of investments, which cities are counting on to meet their obligations. 

Local housing investments would also introduce concentration risk, augmenting a city’s financial exposure to its own economy: In a time of economic downturn, a city could simultaneously face lower tax revenues—from lower sales and property taxes—as well as higher pension contributions due to the underperformance of its local housing investments.

What’s worse is that lawmakers would be imposing these additional risks on a scheme that is unlikely to work. Capital is not what is missing to make housing more affordable. Investors across the world are more than willing to finance housing when projects can be easily built, leased, and sold at a return that compensates them for risk. The constraint is not a lack of interest; it’s zoning, political opposition to new development, and permit bureaucracy.

If a city’s pension plans invest in local housing incidentally, under the same risk-return standards as any other institutional investor, then the investment may be perfectly defensible—but that would not meaningfully impact the housing market. It will simply replace one source of capital with another. To add new investment, the pension fund must be willing to accept a lower return, higher risk, weaker liquidity, or another trade-off that private capital would not accept. Therefore, for the investment to move the needle, it must be a subsidy.

And subsidies should go through the budget process. Elected officials should openly make the case for them. They should not be quietly folded into the investment mandate of their pension fund, where taxpayers and other stakeholders may not understand the long-term risk their policymakers are exposing them to.

Cities have real tools to facilitate more housing, but pension assets are not one of them. They are not a convenient pool of capital for the policy issue of the moment. To preserve public services and protect taxpayers from additional costs, pension assets should be invested where they are most productive, not where they are most politically convenient.

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