Government employee pensions are in crisis. They face a $3 trillion funding shortfall. A new Wall Street Journal article sheds light on one reason why: Unions use government pension investments as political weapons.
The Employee Retirement Income Security Act (ERISA) makes private-sector pension managers fiduciaries. They must manage the pensions for the sole benefit of the pensioners. They cannot use pension investments for their own benefit. Congress imposed these rules to protect retirees.
But ERISA doesn’t cover government pensions. In many states, government unions manage these pensions directly. The Journal article reveals that a major government union uses these investments to push its own agenda.
Randi Weingarten runs the American Federation of Teachers (AFT), the second largest education union in America. AFT strongly opposes public charter schools. Studies find these schools significantly improve disadvantaged children’s academic performance. But since charter schools are largely non-union, their expansion reduces AFT’s membership and clout. Weingarten also opposes proposals to shift government employees to 401(k)-style defined contribution plans.
Several hedge-fund managers in New York donate to public charter schools. Others have donated to conservative groups (such as the Manhattan Institute) that support charter schools and pension reform. Randi Weingarten wants these donations to stop. So she is pulling investments from fund managers who donate to these causes. As the Journal explains:
She [Weingarten] instructed investment advisers at the federation’s Washington headquarters to sift through financial reports and examine the personal charitable donations of hedge-fund managers. She says she focuses on groups that want to end defined benefit pensions. Many of the same entities also back charter schools and overhauling public schools.
In early 2013, the union federation published a list of roughly three-dozen Wall Street asset managers it says donated to organizations that support causes opposed by the union. It wanted pension funds to use the list to decide where to invest their money.
The article examines how AFT has done exactly that. It threatened to pull pension investments from one fund unless its manager quit the board of the Manhattan Institute. He quit soon after. The union gave a similar ultimatum to Daniel Loeb, another hedge-fund manager. Mr. Loeb donates to the Manhattan Institute. He also chairs the Board of Success Academy, a network of New York City charter schools. His fund has averaged 21 percent annual growth for the past 18 years. That wasn’t good enough for ATF. They wanted Loeb to stop donating to groups they dislike. When he refused, ATF pulled their investments.
These hardball tactics endanger teachers’ retirements. Investing for political reasons reduces investment returns. AFT now shuns high-performing investments if they dislike the managers’ politics. This adds to the chronic underfunding facing government-employee pensions. ATF undoubtedly expects taxpayers to make up any funding shortfall. However, union pensions cannot count on a taxpayer bailout—as Detroit demonstrated. AFT’s political gamesmanship may permanently shrink their members’ retirement checks.
States should stop these abuses. State legislatures can pass their own version of ERISA for government pensions. Union pension managers should have to act as fiduciaries. They shouldn’t get to risk others retirements to advance their political agenda.
Originally published in National Review