Public Pension Systems Wield Clout to Twist Government, Corporate Arms

Published March 1, 2006

This past winter, the New York news media fixed its attention on public employee pensions when New York City transit workers went on strike and crippled the city’s economy for three days in December. The strikers walked off the job to make sure the state-run Metropolitan Transportation Authority didn’t alter pension terms for new employees.

Because of the spotlight the strike put on the subway and bus workers’ pensions, many citizens realized for the first time that their tax dollars subsidize the type of defined-benefit pensions–work 25 years and retire at age 55–that have been rapidly disappearing from the private sector.

But citizens should keep their eyes on public-sector pensions for another reason: Unions are using the massive public-pension assets they control to alter corporate and government policies from within the boardroom.

Assets Climb Sevenfold

They certainly have the clout to do it. The public-sector funds are huge, accounting for an ever-greater share of the 20 to 25 percent of investments in the U.S. equity markets that pension funds–both public and private–constitute.

Public-pension assets have grown sevenfold in the past 20 years, to $2.3 trillion. Corporate assets have crept up more slowly, to $4.2 trillion–only about twice as big as the public funds, compared with three times as big two decades ago.

The reason, of course, is that private-sector America largely has ceased to offer its employees traditional, corporate-controlled, “defined-benefit” pension plans. Instead, employers make “defined contributions” to each employee’s retirement account, or 401(k). The 401(k) immediately becomes the employee’s property and the employee’s responsibility for investing.

California, NY Flex Muscles

But public-sector America, as a result of the political power of its unions, has retained defined-benefit plans. Nearly one-fourth of these public pension fund assets are concentrated in two states: Some $300 billion in California’s Public Employees’ Retirement and State Teachers’ Retirement Systems (Calpers and Calstrs), $85 billion in New York City’s funds, and $200 billion in New York state funds.

This more than half-trillion dollars is the largest single special-interest bloc of money in the U.S. capital markets.

New York City’s pension funds first discovered their political heft when they teamed up with Ivy League and church endowments in the mid-1980s to pressure companies with business in South Africa either to lobby against apartheid or to withdraw investments from that nation. When apartheid collapsed, the funds took much credit for the change.

More recently, since the collapses of Enron and WorldCom, public-sector pension funds have taken advantage of a hospitable political climate to push for even more shareholder activism. “Shareholders should start acting like the owners they are,” California treasurer and Calpers board member Phil Angelides said in 2002. “The age of investor complacency must be replaced by a new era of investor democracy.”

Trustees Beholden to Unions

It’s no mystery what issues public pension-fund trustees, most of them unionists or politicians beholden to unions, deem ripe for shareholder attention.

This is true of Calpers, for instance, whose board of directors was until December 2004 headed by Sean Harrigan, the regional executive director of the United Food and Commercial Workers Union, one of California’s most powerful private-sector unions. This tie got Calpers enmeshed in a hopeless fiduciary tangle in 2004 when the fund mounted a corporate proxy fight against the Safeway supermarket chain right after Safeway resolved a four-month strike by Harrigan’s union at its California supermarkets.

Calpers, coincidentally enough, decided this was an auspicious time to take up the cause of “shareholder value” against Safeway’s board of directors. The fund mounted an unsuccessful campaign in mid-2004 to oust Safeway’s chairman and CEO, purportedly to safeguard the pension fund’s shareholder interests.

It’s true Safeway stock was a dog at the time–but that’s partly because of an untenable labor-cost structure due in part to Harrigan’s union.

A rational investor with no confidence in Safeway’s board of directors simply would have sold Safeway stock … and a graph of Safeway’s downward price trajectory over the time period shows investors sold in droves. But if Calpers didn’t own a large amount of Safeway stock, Harrigan (who says he recused himself from the fight) wouldn’t have had a platform on which to stand and fight management. In the end, California’s taxpayers end up bearing the risk of Calpers’ continued investment in the dismally performing Safeway, because they must guarantee the public-sector workers’ pensions.

Fighting Social Security Reform

Last year, the major labor unions (including the Service Employees International Union; American Federation of Government Employees; American Federation of State, County and Municipal Employees; American Federation of Teachers; and United Mine Workers, to name just a few) threw their money behind one key political objective: Ensuring major banks and investment firms didn’t push too hard for Social Security reform. In the spring, many Americans remained in the dark about what Social Security reform would have meant for them–and some pension-fund trustees wanted to keep it that way.

Three union trustees of the main New York City pension fund–from the local chapters of the American Federation of State, County, and Municipal Employees (AFSCME), the Teamsters, and the Transport Workers Union–issued a threat to six top Wall Street firms. They warned in a letter that if JPMorgan Chase and its competitors supported private Social Security accounts or kept contributing to lobbying groups that did, the firms risked losing the hundreds of millions of dollars in fees they earn each year from managing public-pension funds.

Nicole Gelinas is a contributing editor to City Journal, from whose Winter 2005 issue this article was adapted, with permission.