Government Unions Attack Free-Market Nonprofits via Pension Funds

Edward Ring

Director, Water and Energy Policy

Edward Ring
April 8, 2014

Government Unions Attack Free-Market Nonprofits via Pension Funds

“The AFT will be looking more closely at those who are supporting the dismantling of defined benefit plans at the state and municipal level.”

–  Ranking Asset Managers, A Retirement Security Report on Money Managers for Pension Fund Trustees, March 5, 2014

As reported in a Washington Examiner editorial on April 4th, the American Federation of Teachers – that’s “teachers union” in plain English – has circulated a pamphlet that:

“Calls on pension fund trustees to drop any investment managers that are tainted by connection to free-market nonprofits. They also want those same trustees to force any potential new managers to have to disclose any donations they may have made to the groups on AFT’s blacklist.”

That the AFT can circulate a document like this without generating an uproar in the media reflects a monstrous and tragic double-standard. Money supporting “free-market non-profits” is tainted, which – not entirely logically – also taints any analysis they may produce, or policies they may advocate. But the money supporting public sector unions, involuntarily and automatically taken from their paychecks, ultimately funded by taxpayers, is pristine. Whatever analysis or policies they come up with, including “blacklists,” are beyond criticism.

What the AFT just did may be more explicit than usual, but it’s nothing new. In states like California, politically dominated by public sector unions, almost no businessperson or financial professional is going to identify themselves as supporting a free-market candidate or free-market nonprofit that dares criticize public sector unions or question the sustainability of public sector pensions. They risk retaliatory legislation, official harassment, strikes or “slowdowns,” character assassination, sit-ins and other orchestrated protests, shareholder revolts and boycotts. And if they represent a sufficient threat, their partners, customers, investors and vendors will get similar treatment.

In the financial community, as AFT’s document verifies, union critics stand to lose their biggest customers – the government agencies who come to them to underwrite bonds, and the pension funds whose investments fuel their fees and commissions. Just in California, billions are at stake every year.

Since the American Federation of Teachers fired this latest salvo against the free market, here are a few facts about CalSTRS, the California State Teachers Retirement System:

Three of the nine current CalSTRS board members are union officials:  The Chairperson of CalSTRS, Dana Dillon, “has been active in the California Teachers Association for more than 26 years… and was recently elected to the board of directors.” Their Vice Chair, Harry M. Keiley, is “chair of the California Teachers Association Political Involvement Committee.” Another board director, Sharon Hendricks, “also serves as president of the American Federation of Teachers, local 1521 chapter at Los Angeles City College.”

Most of the remaining six active CalSTRS board members are beholden to unions:  Tom Torlakson serves while also serving as California’s Superintendent of Public Instruction, an office he was elected to with substantial support from public sector unions. Two more board members come from the financial community; Paul Rosenstiel from a municipal bond investment bank, Thomas Unterman from a venture capital firm. Three other members come from government, Michael Cohen from the California Dept. of Finance, John Chiang, the State Controller, and Bill Lockyer, the State Treasurer.

Would it be more than reckless speculation to say the unions have four votes locked, and only need one of the other five in any given decision they make? And who is going to support Lockyer or Chiang if they run for another political office if they cross the unions? The financial community? Unlikely, given the pressure they’re under from the unions.

At this point the reader may be reminded that without reform, without tough, responsible decisions, public sector pension funds are going to crash, and when they do they’re going to take down with them entire cities and states, if not the global economy. The obliteration of defined benefits will be a mere footnote.

CalSTRS pays hundreds of millions each year to financial professionals:  Take a look at page 83 of CalSTRS Annual Report for the fiscal year ended June 30, 2013, under the bland heading of “Other Supplemental Information.” Here’s what’s on the table for the financial community, every year, from a fund that only represents about 30% of the public sector pension fund assets under management in California:  Administrative expenses, $139 million (page 84). Investment expenses including management fees, advisors, consultants, research services, risk management systems, trading systems, etc., $310 million (pages 85-88). Don’t forget “Global Equity Broker Commissions” whose payees include the infamous Goldman Sachs, $25 million (page 104).

CalSTRS invests in companies and financial instruments they supposedly detest:  Skip along in the CalSTRS Annual Report to page 101 and take a look at their “largest equity holdings.” They include Exxon Mobil Corp at the #1 position, and Chevron Crop at #5.  Go back to page 45 to see where CalSTRS has $22 billion in “Private Equity Investments.” How many Wall Street wolves fatten themselves on that rather substantial hunk of fresh meat?

What more does it take to make clear there is a phony war going on between public sector unions and the financial community? This isn’t an ideological battle, it’s an intramural struggle for dominance between two groups who are both elitist and privileged, who need each other far more than they need taxpayers.

“Dark money,” or money that doesn’t pass the “smell test,” seems to be a favored meme of public sector unions these days. Especially if that money is used to fund challenges to their interests, hence, a new “blacklist.” But why does public sector union money, sourced involuntarily, falling into their accounts automatically by the millions and billions, emanating directly from taxpayers, used to intimidate opponents, fund political campaigns and academic studies, organize activist groups, and feed Wall Street financiers, get a pass?

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Ed Ring is the executive director of the California Policy Center

Editor’s Note:  Since this was posted on April 8th, the list of CalSTRS board members, as posted on their website, has been updated to include Joy Higa, appointed by Gov. Brown on January 27, 2014. Here is her biography:

“Joy Higa is the vice president, regulatory affairs, for UnitedHealthcare, where she manages federal health reform policy and implementation. She previously served as deputy chief of staff to the State Controller from 2004 to 2006 and chief deputy cabinet secretary in the Office of the Governor during 2003. She received her bachelor of arts degree from Cornell University.”

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