Posted June 6, 2003 This letter was mailed to the governors, state treasurers, and key members of the legislatures of all 50 states.

June 6, 2003

Global Security Risk Update

Dear ____:

Earlier this year I contacted you about how your state's pension funds relate to the financial war against terrorism. This issue has two sides: 1) the moral and national security dimensions of investing in companies that choose to do business with regimes that sponsor terrorism and build weapons of mass destruction; and 2) the possible loss of value of state investments stemming from such corporate activities, or so-called "global security risk."

The Claremont Institute is a public policy research institute that addresses many policy issues, none more serious than threats to our national security. Over the past seven years, we have focused on the proliferation of weapons of mass destruction by rogue nations and the need for a national missile defense. We have also followed how these rogue nations finance their weapons build-up and their terrorist activities. The central area we identified was the revenue these rogue nations receive from foreign corporations that do business in their countries. We then began a special project we called our "Investment Security Program" that would encourage state legislators and state officials to examine their state pension funds and to see whether they were invested in such corporations.

Today I would like to update you on our progress and explain where we think this new policy issue is headed. Since our last communication, both New York City and the state of Pennsylvania have taken concrete action. New York City's Firefighters and Police Pension Funds, under the leadership of City Comptroller William Thompson, have sent shareholder resolutions directed at three of America's largest companies due to their involvements with the terrorist-sponsoring states of Iran and Syria. (See attached press release.) We understand that New York City is in the process of communicating with as many as 200 other companies in the City's pension fund portfolios, and will likely file additional resolutions with the SEC this fall.

New York City has taken what we would call the "corporate governance" approach. The comptroller is using his authority to ascertain whether New York City is investing in corporations doing business in these terrorist-sponsoring countries and whether that could harm the share values or reputations of those companies and therefore the value of New York City's pension fund. This important issue is being addressed in New York City because the comptroller sees the harm that can be done both to America and to the pension system of New York City's policemen and firemen.

In Pennsylvania, the State Assembly passed unanimously (198-0) a well-argued and detailed resolution on the need to assess this global security risk to the state's pension funds, just last month (attached). It is a non-binding resolution but it is an important first step in addressing this critical issue at the state level. Its success will be determined by vigilant state legislators who will continue to ask for basic transparency, disclosure, and reporting when it comes to these types of foreign investments.

Regrettably, most state pension systems and asset managers continue to resist steps to identify the exposure of state's public retirement portfolios to these types of foreign investments.

For example, the Arizona State Retirement System vigorously opposed legislation introduced this spring that would have required state pension systems and their asset managers to identify such holdings and report on their activities and risk mitigation strategies. Similar opposition has surfaced in Colorado, California, Florida and Maryland. Some of these state pension systems claim to already account for global security risk. Nevertheless, it is our understanding that very few state retirement systems can even identify those companies in their portfolios that have business ties to terrorist-sponsoring countries, let alone implement risk mitigation procedures or investment policy adjustments.

The reason we believe is simple: state pension funds typically resist legislative oversight. There is a reasonable concern that state legislatures will pass restrictions on pension funds that limit their investment practices. We think this concern is misplaced, however, in this new era of terrorism, the proliferation of weapons of mass destruction, and integrated global capital markets. We have from the beginning encouraged simple transparency and disclosure so that the facts would be known to state legislators, the general public--and especially those public employees who have their retirement dollars in these pension systems.

Accordingly, a more binding legislative route--possibly based on the Pennsylvania template--may prove necessary in those states where pension systems and asset managers actively resist even this modest type of reporting measure.

Let me be clear: it will be impossible for you and other state officials to chart a prudent course of action without this type of transparency and disclosure on the part of your public pension systems and the investment firms charged with managing the assets of your state employees' retirement funds.

I attach opinion editorials by Arizona Treasurer David Petersen and nationally-recognized corporate governance expert Nell Minow, which dispute the arguments put forth by Arizona's retirement system in the effort to defeat their disclosure legislation. It is our understanding that new legislation will be introduced in Arizona in the coming session.

We think it a matter of sound public policy and corporate governance for states to take immediate steps to identify the risk exposure of their firefighters, police officers, teachers and other public employees to companies doing business with terrorist sponsoring governments. Such a prudent first step will not only help protect the retirement dollars entrusted to public pension systems, but will provide the type of information required for you and other public officials to take appropriate action.

The Claremont Institute stands ready to assist you in any way we can. Please feel free to contact Tom Karako or myself at the Institute if you have any questions or would like more information on this important matter.

Best personal regards.


Sincerely,




Brian T. Kennedy

President