Public Pension Funds are Paying President Trump’s Hotel Business, and it Probably Violates the Constitution

A recent investigative report by Julia Harte at Reuters reveals that several major public employee pension funds are making regular fee payments to a real estate fund that in turn pays President Trump’s hotel management company. The facts reported in the article, and other information which Free Speech For People has learned, reveal an arrangement that appears to violate the Domestic Emoluments Clause of the U.S. Constitution, and may implicate the First Amendment rights of state workers.

Why public pension funds are paying President Trump’s company

CIM Fund III is a real estate fund operated by the CIM Group. In 2015, CIM Fund III acquired the Trump SoHo hotel in New York, NY.

About half of the total $2.37 billion investment in CIM Fund III comes from public pension funds. (The other half are private investors.) The California Public Employees’ Retirement System (CalPERS) is by far the largest public pension fund investor, with an initial commitment estimated at approximately $700 million. The next largest public pension funds invested in Trump SoHo are the New York State Common Retirement Fund and the Teacher Retirement System of Texas, at $225 million each.

While CIM Fund III has apparently not made a capital call from investors since 2014, the funds must pay management and performance fees to CIM Fund III, with the most recent quarterly payment due on January 31, 2017. Over the past several years, for example, CalPERS has paid $6 to $9 million per year in management and performance fees to CIM Fund III—about half of the total fees paid by all public pension funds.

CIM Fund III in turn reportedly has a contract with President Trump’s hotel management company, Trump International Hotels Management LLC (part of a larger network known as the Trump Organization), to manage the hotel. Under this agreement, CIM Fund III pays President Trump’s company 5.75% of gross hotel operating revenue. Furthermore, CIM Fund III pays operating and overhead charges on the unsold hotel suite units (about two-thirds of the total units). In 2015, CIM Fund III paid President Trump’s company $3.16 million under this contract. It appears that CIM’s fees may be what keep the hotel solvent.

Potential constitutional violations

Based on initial reporting, it appears that these ongoing payments to CIM Fund III, which CIM Fund III in turn relays in part to President Trump’s company, may violate the U.S. Constitution.

The arrangements between the public pension funds and CIM Fund III, and between CIM Fund III and Mr. Trump’s company, may have been entirely lawful and appropriate before January 20, 2017. But the situation has changed since the inauguration of Mr. Trump as president. The Constitution’s Domestic Emoluments Clause provides: “The President shall, at stated Times, receive for his Services, a Compensation, which shall neither be encreased nor diminished during the Period for which he shall have been elected, and he shall not receive within that Period any other Emolument from the United States, or any of them.” This provision prohibits any state from providing additional sources of income to the President.

At the Founding, the term “emolument,” from the Latin emolumentum (profit), was understood broadly. For example, Samuel Johnson’s influential 1755 dictionary defined “emolument” as “Profit; advantage.” Unfortunately, the public pension funds’ ongoing payments to CIM Fund III are giving President Trump a “profit” from these states—more specifically, from their workers.

Of course, these funds made their capital investments in CIM Fund III well before President Trump was elected, and this investment was lawful at the time. And payments made by the public funds to CIM Fund III before President Trump’s inauguration certainly do not raise any constitutional questions. However, ongoing regular payments of millions of dollars to a real estate fund that transfers a significant portion of those fees to President Trump’s company may constitute an unconstitutional emolument from these states.

These facts may be distinct from a previous Domestic Emoluments Clause question regarding pension fund payments: President Reagan’s state pension from his service as governor. In 1981, the U.S. Department of Justice’s Office of Legal Counsel opined that President Reagan’s receipt of his California pension did not violate the Domestic Emoluments Clause. There, President Reagan’s California retirement benefits were not compensation. Furthermore, President Reagan was being treated no differently than any similarly situated private citizen who had worked for the state of California.

Here, it appears that President Trump’s company is being actively compensated for managing a hotel.

There may also be First Amendment issues. Public workers have a First Amendment right against compelled political speech that limits the political uses of mandatory salary deductions. And under the law of most states, state workers are required to participate in the state employees’ retirement system, with mandatory salary deductions being subtracted from their compensation to fund that system. Workers do not have the ability to select the funds in which their mandatory salary deductions are invested. These workers are thus forced to indirectly subsidize President Trump’s company (and therefore President Trump) beyond the Constitution’s mandate of a fixed salary, and have not been given the opportunity to decide whether they wish their paychecks to contribute to this scheme.

Indeed, given serious allegations that the Trump Organization violated federal campaign finance law by making corporate contributions to the 2016 presidential campaign, ongoing mandatory employee subsidization of President Trump’s company and its corporate political activity may implicate the First Amendment rights of state workers against compelled political speech.

Next steps

Many public pension funds prefer corporate engagement as a first approach to dealing with problematic investments such as tobacco and fossil fuels.

However, whatever merits this approach may have in other scenarios, it does not apply as simply here. A state entity using its business relationship with a company owned by the President as leverage to “engage” is one of the very dangers that the Domestic Emoluments Clause was designed to prohibit.

It is also important to note that, at least for the major pension funds involved in this scheme, such as CalPERS, their position here is more akin to a principal than a mere passive investor. CalPERS, for example, has worked closely with CIM Group on other business projects, such as the development of a new tower on Capitol Mall in Sacramento, and is here more akin to an owner of Trump SoHo than a mere investor in a fund.

The flow of money and value from the public pension funds through CIM Fund III to Trump International Hotels Management LLC to President Trump cannot continue. The funds need to either cause CIM Fund III to divest its ownership in Trump SoHo, or alternatively, divest from CIM Fund III.

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