According to articles in Pensions & Investments and Barrons, the American Federation of Teachers has a solution for investment firms run by people who, in their personal lives, don’t toe the union’s political line on public employee pensions: We may try to get your firm fired or never hired by pensions. Though a few financial journals covered this story as it came out in April, its real implications were overlooked.
Public pensions are typically defined benefit funds, controversial because they promise fixed benefits for life to retirees — a promise that turned out to be far more expensive for taxpayers than understood.
Pension funds are run by managers with a fiduciary duty to pensioners to maximize their fund’s return. They invest pension money in the best performing funds they can find — increasingly, hedge funds. That’s how it’s supposed to work.
Some of the individuals running those hedge funds think, as many of us do, that defined benefit pensions are inherently flawed and ought to be modified or replaced with something else. Other individuals support school choice. So, some have personally supported advocacy groups like Students First, the Show-Me Institute and the Manhattan Project that oppose defined benefit pension plans and support school reform.
The AFT’s response last month, reportedly, was to publish a list of 33 hedge fund managers tied to organizations advocating things they didn’t like , such as elimination of defined-benefit pensions, and it is allegedly telling the pensions to fire those funds or never hire them in the first place. The AFT represents 1.5 million members enrolled in $800 billion worth of pension funds, according to a Barron’s piece on the list. You can see the AFT’s list here along with the reasons for inclusion.
The First Amendment issue is obvious. As government instrumentalities, state and municipal pensions should not punish firms based on what advocacy groups some of the firm’s people support. But that’s exactly what the AFT has government pensions do. Coverage of this story so far has been in financial journals, and they focus on how the AFT’s actions compromise the duty of the pension managers to pick the best managers. That’s bad, too, but the bigger story is the First Amendment issue. If the reports are correct, the AFT is brazenly clouting government to punish speech the AFT does not like.
And it’s reportedly working quite well for the AFT. Illinois, as you might guess, is among the places where the state appears to have obliged the AFT. The state, allegedly, asked fund-of-fund managers whose portfolios include one or more of the blacklisted managers “what they plan to do about it,” according to Pensions & Investments, a publication of Crains Communications. That publication also put it this way: “The list serves as an implied threat that the managers who speak out about the problems with defined benefit plans should not receive business.” Some firms have caved to the pressure to stay off the list, according to Pensions & Investments. In short, the AFT reportedly succeeded.
The AFT says it’s perfectly appropriate for pension trustees to banish defined benefit opponents because, as fiduciaries for the pension, they would be protecting the very life of the pension.
It doesn’t take much for a fund to make the AFT enemies list, based on a recent Barron’s article. “What landed KKR on the list was a donation made to the Manhattan Institute by co-founder Henry Kravis’s foundation, which hardly indicates a KKR agenda. Of the more than $14.3 million the foundation distributed in its 2011 fiscal year, according to that article, it gave $25,000 to the Manhattan Institute.”Reportedly, KKR later wrote letters detailing its support for defined benefit plans, which got it off the list. They will no doubt not repeat the mistake of getting involved in pension reform.
It’s not as if those hedge fund managers are corrupted by self-interest. On the contrary, pensions are a major source of the money they manage. Shifting from defined benefit plans to 401(k)-type plans, a commonly discussed alternative, would dry up a large source of their capital.
If you find it difficult to find the opinions you really want on pension reform, this shameful chapter may be one reason why. The people in a great position and with real expertise to give us the hard, inside perspective — fund managers — apparently have been bullied into silence by the AFT. Plenty of Americans on the left and the right are rightfully sickened by the IRS scandal. State suppression of opinions a teachers’ union doesn’t like should be no different.